In a positive development for insurers, the United States Supreme Court recently removed a significant obstacle to proper application of its "willfulness" analysis for violations of the Fair Credit Reporting Act (FCRA). That obstacle was the Third Circuit's holding in Radian Guaranty, Inc. v. Whitfield, 501 F.3d 262 (3d. Cir. 2007). In Radian, despite the Supreme Court's holding to the contrary in Safeco Insurance Co. v. Burr, 127 S. Ct. 2201 (2007), the Third Circuit held that whether an insurer's FCRA violation was "willful" was a fact question for the jury.
At issue in both Radian and Safeco was whether a willful violation of FCRA arose if an insurer failed to send "adverse action" notices, as required by FCRA, when insureds were charged premiums based on their credit scores in their initial placement with the insurer less favorable than would have been charged had credit scores not been considered.
For willful violations of FCRA, the plaintiffs could obtain statutory damages of between $100 and $1000 for each individual violation, as well as punitive damages and attorneys fees. In a class action setting, the exposure can be very substantial.
The insurers in both cases had interpreted the "adverse action" definition as not requiring notices in connection with initial premium charges. Plaintiffs sued to challenge that interpretation, alleging willful violation of the statute. In Safeco, the Supreme Court held last year, that Safeco's interpretation was erroneous, and therefore, that Safeco had violated the FCRA. However, the Court then turned to the "willfulness" question and set out a two-step analysis for determining willfulness.
First, a court must determine, as a matter of law, whether the failure to comply was based on an "objectively unreasonable" reading of the FCRA. If the court determines that the insurer's reading of FCRA is not objectively unreasonable, the analysis ends and there is no possibility of a willful violation.
Second, if, and only if, the court determines that the failure was objectively unreasonable, it must then determine whether "the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless." Id. at 2215.
The Court identified three considerations relevant to making the "objectively unreasonable" determination: whether (1) the insurer's reading had "a foundation in the statutory text," (2) the statutory language was amenable to more than one reading, and (3) any authoritative case law or guidance from the FTC construed the language at issue. Answering the first two questions in the affirmative as to Safeco, and the last in the negative, the Court held that Safeco's reading of FCRA, "albeit erroneous," was not "objectively unreasonable," and, therefore, that there was no need to undertake the second part of the analysis.
The relevant facts and issues in Radian were virtually identical to those in Safeco. Radian, like Safeco, had interpreted the FCRA not to require adverse action notices to initial insureds. The district court agreed with Radian, but the plaintiffs appealed to the Third Circuit. While the Radian appeal was pending, the Supreme Court ruled in Safeco. Despite that, the Third Circuit held that the entire willfulness question was factual, for determination by the fact-finder. Radian petitioned for certiorari.
Rather than oppose the petition, the Radian plaintiffs sought, and were granted, dismissal of the case. As a result, the Court granted Radian's petition for certiorari, vacated the judgment, and remanded to the Third Circuit with instructions to dismiss the case as moot. Thus was the Third Circuit opinion neutralized—it is a nullity. For insurers, this is possibly a better outcome than an outright reversal.
A lower court had relied on the Radian Third Circuit opinion to hold that the second step of the Safeco two-step willfulness analysis is a question of fact—an issue expressly not addressed in Safeco. See Ashby v. Farmers Ins. Co., No. 01-CV-1446-BR, 2008 U.S. Dist. LEXIS 48104 (D. Ore. June 20, 2008). With Radian vacated rather than reversed, presumably it cannot be cited for this proposition under the rationale that it was reversed on other grounds.
Insurers are well advised, in relation to their FCRA obligations, to become familiar with the limited Federal Trade Commission (FTC) guidance and to stay abreast of FCRA case law, as future determinations of objective unreasonableness will look carefully at these factors. As the case law develops, the question of objective unreasonableness may become grayer—but it may be black or white in some circumstances.