Poor credit rating ups cost of auto insurance

Decisions of the U.S. Supreme Court rarely make it to this column. That’s because they tend to deal with matters outside the column’s scope (import duties on polar bear fur, conjugal rights of convicted ax murderers, etc.).

Earlier this month, however, the court handed down an opinion dealing with when, under the Fair Credit Reporting Act, auto insurers are required to notify people that their insurance premiums have been adversely affected by their credit reports. The decision arose out of two pending class action lawsuits — one against Geico and one against Safeco.

The court didn’t weigh in on the question whether insurance companies can use credit reports in making decisions. That’s for state legislatures to decide. (And a hotly debated topic it is, since insurance companies are convinced poor credit predicts a higher incidence of claims, whereas skeptics ask how being late on a payment can possibly relate to how one drives an automobile.) Colorado permits insurance companies to use credit information, but they must give notice they are doing so.

Instead, the court focused on what auto insurers must do to comply with a provision of the Fair Credit Reporting Act that says a written notice has to be given any time an insurance company takes “adverse action” based on a credit report. For an insurance company, “adverse action” includes a rate increase.

The problem the court struggled with had to do with the fact that, based on information in a credit report, new applicants for insurance would be assigned an initial rate that was not the insurer’s lowest rate. So, is that rate assignment due to a credit score an event of adverse action requiring notice?

Safeco came to the conclusion that the assignment of an initial rate couldn’t possibly be adverse action because there was no increase from a prior rate. Relying on that analysis, Safeco never gave an adverse-action notice to any new applicant who was offered coverage.

Geico, on the other hand, took a more cautious approach. It asked itself if the initial rate assigned to an applicant that was less than its lowest rate would be the same if no credit information at all was used in the rate determination. If the answer was yes, no notice of adverse action was sent. If the answer was no — that is, the applicant's credit report was what pushed the applicant into a higher rate category — then a notice of adverse action was given. Geico did not, however, give a notice of adverse action to new applicants who, with a better credit report, would have qualified for its lowest rate. Therefore, these applicants were never told that an improvement in their credit score could save them money on car insurance.

After speculating a good bit about what Congress thought it was doing when it enacted the Fair Credit Reporting Act, a majority of the justices decided Geico’s approach was acceptable.

Safeco, however, didn’t get it right. Adverse action could occur, said the court, when a new applicant for insurance was offered coverage at other than the company’s lowest rate if the factor that pushed the applicant into the higher rate category was a less-than-stellar credit report (as opposed to, say, 15 speeding tickets).

The court nonetheless threw Safeco a bone by ruling that its violation of the law was not intentional or reckless. This spared Safeco from having to pay big bucks in damages in the class action lawsuit brought against it.

Contact Jim Flynn c/o The Gazette, P.O. Box 1779, Colorado Springs 80901; fax 578-8836 or e-mail jtflynn325@hotmail.com. Not all questions can be answered.