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Court backs insurers in credit scores case

Summary

Learn how insurers do not need to notify you if poor credit is affecting your rates.

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The U.S. Supreme Court unanimously backed two insurance companies in a case dealing with violations of the Fair Credit Reporting Act. In its ruling, the court decided that Geico Insurance did not violate the law and that Safeco might have done so, but did not break the law recklessly.

Compare Credit Cards for Bad CreditRepresenting a victory for those insurers and other financial services firms, the ruling frees insurers from the risk of class-action lawsuits on charges they failed to send required notices to million of consumers.

While the ruling clarifies the circumstances under which insurance firms must alert customers that a bad credit score will affect the cost of insurance, the Supreme Court also said a stricter standard of recklessness applies to FCRA violations that the industry had hoped for.

The Fair Credit Reporting Act requires firms to notify consumers when they take an “adverse action,” such as raising rates, based on credit reports. Such notification enables customers to examine their credit reports and contest inaccurate items that could impact their credit score.

Justice David Souter explained that a notification each time a consumer is not offered the lowest possible premiums would become mere formalities, which would tend to be ignored by consumers.

Insurers defend their use of credit reports by stating that bad credit often coincides with being a poor driver. The trade group Property Casualty Insurers Association of America stated that credit reports are incredibly accurate as an underwriting tool.

The court found that Geico’s use of credit scores did not violate the Fair Credit Act. Geico basically calculates a customer’s rate without a credit score, the recalculates it considering the score. Afterward, Geico notifies a customer about looking at their credit report only if it results in a higher rate.

Therefore, Justice Souter wrote that both the company and consumer are in the same position they would have been in had the report never been considered.

Meanwhile, Safeco argued in its case that the original applications were not covered by the credit-reporting act since it could not take an “adverse action” against a consumer who was not yet a policyholder.

Although the justices disagreed with that view, Justice Souter wrote that Safeco’s reading was not “objectively unreasonable,” since the issue had not been clarified by either the Federal Trade Commission or the appellate courts.

Safeco’s portion of the decision could impact separate, related lawsuits, wherein retailers are challenging suits that allege they knowingly broke part of the law by printing unnecessary account information on customer receipts.

What’s up next?

In Legal, Regulatory, and Privacy Issues

Know your rights under the Fair Credit Reporting Act

The act and its amendments give consumers powerful rights in credit reporting, guaranteeing free access to the credit data and the right to fix errors

Published: May 25, 2007

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