WASHINGTON–The U.S. Supreme Court today unanimously backed the disclosure policies of two insurance companies when they don't give a consumer the best possible rate based on a credit report.
Insurers had argued for a flexible standard on such "adverse action notices." Had their position been rejected by the high court, the industry could have faced a new wave of class-action lawsuits from consumers who were not told they weren't getting the best possible rate based on a poor credit score.
The case involved a decision last January in the 9th U.S. Circuit Court of Appeals–Safeco Insurance Co. of America, et al, v. Burr, et al, No. 06-84–that insurer defendants acted "in willful disregard" of the Fair Credit Reporting Act in not disclosing that the best rate was not charged a consumer, and as a result, the consumers involved have the right to recover damages.
In oral arguments in January on the issue, Maureen Mahoney, of Latham & Watkins in Washington, D.C.–representing GEICO and Safeco, two of the defendants–told Justice Ruth Bader Ginsburg that if the law was read as plaintiffs wanted it to be interpreted, insurers could be liable for "tens of billions of dollars" in claims.
Ms. Mahoney noted that two class-action lawsuits had already been filed in the case, and under the law as proposed in the decision of the 9th U.S. Circuit Court of Appeals, consumers could be awarded $1,000 each if an adverse action notice was not sent in each case where an applicant for insurance was not given the lowest possible rate.
In its decision, the Supreme Court said GEICO did not violate the law and that while Safeco might have, it did not do so recklessly.
Joseph Annotti, senior vice president of public affairs for the Property Casualty Insurers Association of America, said the bottom line is that we are "extremely pleased with the decision."
He added that PCI thinks the decision "clarifies many of the issues surrounding when adverse action notices must be distributed and what constitutes such a notice."
David Snyder, vice president and assistant general counsel of the American Insurance Association, added that "the court's ruling provides guidance moving forward, and makes clear that good-faith efforts by insurers to comply with the law will not be punished as willful violations."
He also noted that the decision rejects the notion of a "best rate" argument, thereby avoiding "hyper-notification" of consumers that would have denigrated the value of an adverse action notice.
The central issue before the Supreme Court was the meaning of the terms "willfully" and "adverse action" in the Fair Credit Reporting Act.
The insurance industry had argued in a lengthy case from Oregon that prompted three separate decisions by a panel of the 9th U.S. Circuit Court of Appeals.
Under the final appellate court decision, even inadvertent and unintended errors would be deemed "willful" and "reckless," and thus subject to severe penalties.
According to Mr. Snyder, the Supreme Court rejected this argument, instead finding that a company subject to FCRA does not act in reckless disregard of the law unless the action is not only a violation under a reasonable reading of the terms, but that the company ran a risk of violating the law substantially greater than the risk associated with a cursory reading.
Mr. Snyder added that in another part of the ruling, the Supreme Court held that an adverse action may be triggered for new insurance policies if the first-time rate is a "disadvantageous increase" from a rate otherwise offered when not considering credit–a so-called "neutral score."
"By limiting the scope of adverse action notices to when they are legally necessary and beneficial to consumers, the court is clearly helping consumers by making sure such notices do not turn into 'junk mail,'" Mr. Snyder said.
Justice David Souter wrote the decision for the court. Chief Justice John Roberts and Justices Anthony Kennedy and Stephen Breyer joined him. Justices Clarence Thomas and Antonin Scalia filed a concurring opinion, while the other justices joined in most part of the opinion by Justice Souter.
In his majority opinion, Justice Souter said that: "If the statute has any claim to lucidity, not all 'adverse actions' require notice, only those 'based…on' information in a credit report."
He concluded that, "it makes more sense to suspect that Congress meant to require notice and prompt a challenge by the consumer only when the consumer would gain something if the challenge succeeded."
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