Long-awaited rulings today by the U.S. Supreme Court in consolidated cases resolved crucial disputes about how the "adverse action" notifications provision of the federal Fair Credit Reporting Act (FCRA) applies to personal lines underwriting actions. The High Court rejected some of the most expansive views of what that statute might require of insurers but, equally, imposed significant and sometimes uncertain compliance requirements on carriers. Any insurer writing personal lines coverage will need to review today's decision immediately and may need to adjust its practices to conform to its requirements.
Today's opinion, Safeco Insurance Co. of America v. Burr, No. 06-84 (decided together with GEICO General Insurance Co. v. Edo, No. 06-100), contained four key determinations:
1. "Willfulness" under the FCRA.
The Court held that actions taken in "reckless disregard of statutory duty" as well as "acts known to violate the Act" give rise to liability for "willfully failing to comply" with the FCRA. Safeco v. Burr, at 6. The Court held that a company does not act in reckless disregard of the statute unless the company not only follows an unreasonable interpretation of the statute, but does so in a manner greater than mere negligence. "[A] company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless." Id. at 19. The Court held that Safeco had not acted recklessly in the past because its reading of FCRA, "albeit erroneous," "has a foundation in the statutory text." Id. at 20. The Court implied that if a court of appeals or the Federal Trade Commission has taken a position on the terms of FCRA, failure to comply with that guidance could be reckless. Id. Certainly, a failure to conform promptly to the holdings of today's decision will be "willful."
2. New policyholders are entitled to notification.
The Court held that if an insurer raises the initial rate offered to a new policyholder because of a credit score, it must provide that policyholder with an adverse action notice. "[T]he 'increase' required for 'adverse action,' 15 U.S.C. § 1681a(k)(1)(B)(i), speaks to a disadvantageous rate even with no prior dealing; the term reaches initial rates for new applicants." Id. at 13. In other words, an adverse action notice is required if the new policyholder receives a higher rate based on his credit score than he would have received without consideration of his credit score. The Court rejected the argument made by insurers that "increase" necessarily implied that the notification requirement only applied if a rate was raised on renewal. Although the Court often uses the term "applicant," it does not squarely address the issue of whether notification is required for an applicant who receives a quote but not does purchase a policy.
3. The notification requirement only applies if the quoted rate exceeds the rate that would have been computed on a "credit neutral" basis.
The Court refused to apply the "best possible rate" standard adopted by the court of appeals; that court had required notification whenever the quoted rate was higher than the best rate quoted to any customer. Instead, the Supreme Court held that GEICO's approach in comparing a "credit neutral" rate analysis to the rate determined with consideration of credit information was appropriate and did not violate the FCRA. Under the GEICO approach, if, and only if, the rate based on credit information is higher than the credit neutral rate, then an adverse action notice is required.
The Court specifically held that a customer does not suffer an increase if the rate would have been the same if the insurer had not considered the consumer's credit score. "[A]n increased rate is not 'based in whole or in part on' the credit report unless the report was a necessary condition of the increase." Id. This reading rejects the Government and the plaintiff's argument that notification should be required so long as the consumer could have achieved a better rate with better credit. Id. at 15. GEICO's practice of comparing the rates it set with credit reports to the rates it would have set had it used a "neutral score rate" to decide if notice was required was allowed. Id. Interpreting the central concept of "credit neutral" may not always be straightforward in the future under the Court's very general guidance.
4. Renewals at the same rate do not require another adverse action notice.
The Court held that "[o]nce a consumer has learned that his credit report led the insurer to charge more, he has no need to be told over again with each renewal if his rate has not changed. . . . after initial dealing between the consumer and the insurer, the baseline for "increase" is the previous rate or charge, not the "neutral" baseline that applies at the start." Id. at 17.
Insurers will also need to be aware of one point not squarely addressed by the Court that could spawn continued private FCRA litigation. The Court refers simply to the availability of a private cause of action "against businesses that use consumer reports but fail to comply" [with the FCRA disclosure requirements]. Id. at 3. In 2003, Congress amended the FCRA and abolished a private right of action for violations of § 1681m on a prospective basis (which would not apply to the Edo and Burr litigants). However, there is a conflict in authority as to whether the amendments to the FCRA abolished all private rights of action under § 1681m, or whether Congress intended to limit the scope of the statutory provision eliminating private rights of action to subsection § 1681m(h), which applies to entities who use a consumer report in connection with a grant or denial of credit. Compare Barnette v. Brook Road, Inc., 429 F.Supp.2d 741 (E.D.Va. 2006) (limiting the abolition to § 1681m(h) only) to Murray v. GMAC Mortgage Corp., 434 F.3d 948, 950 (7th Cir.2006) ("A recent amendment to the Act abolishes private remedies for violations of the clear-disclosure requirement, which in the future will be enforced administratively, but that change does not apply to offers made before its effective date [and thus does not moot claims relating to earlier conduct]."). The Court did not explicitly address this issue. Because the Court references the availability of a private cause of action without any suggestion that the amendments have since limited that remedy, plaintiffs' lawyers are likely to argue that this opinion supports the conclusion that the private cause of action was foreclosed only as to subsection 1681m(h).
Safeco v. Burr provides important guidance to personal lines insurers. However, at the same time, it does not close off all potential future challenges, at least by regulators, to the use of credit information in the determination of insurance rates. Moreover, the Court's interpretation of the willfulness standard may encourage litigation by consumer advocates under a variety of FCRA provisions.