Pyrrhic Victory? Insurers Face FCRA Liability When Rating Consumer Policies
The US Supreme Court unanimously ruled this week that insurers can be liable for damages and penalties under the Fair Credit Reporting Act (FCRA) for failing to notify applicants for personal lines policies that the offered rate is higher because of the applicant's credit report. Safeco Ins. Co. of Am. v Burr, __ U.S. __ (No. 06-84, June 6, 2007).
Although reversing the Ninth Circuit and effectively exonerating two large automobile insurers sued in class actions, the Court held that insurers are liable not only for knowing, but also for reckless, FCRA violations. Construing FCRA in a way that affects all personal lines insurers' marketing and underwriting, the Court held that insurers must notify consumers in writing whenever, because of their credit reports, the premium quoted for a new policy is higher than if the insurer had ignored the consumer's credit report. Based on FCRA's reference to an "increase" in insurance "charges," the insurers argued that no "increase" can occur when a policy is first applied for or purchased. The Court disagreed.
Thus, an FCRA notice must be sent to a consumer applying for a new policy if the insurer uses a credit report to charge a higher rate than it would have charged with "neutral" data or no report. Even if an insurer uses credit reports, no notice is required if the rate actually set is no higher than the credit-neutral rate. In this case, one of the insurers was not liable because it followed this approach, sending notices only if it charged a higher rate based on credit data. For policy renewals, a notice must be sent if the premium is increased from the prior period based on a consumer's credit report. The second insurer was found not liable because, although the Court decided FCRA notice obligations apply to initial applications, the insurer's contrary reading was reasonable, not "reckless," when made in the absence of controlling authority. That holding illustrates the recklessness standard, but insurers clearly may no longer take that position.
Complying with FCRA on new policy applications may increase underwriting costs for many insurers. Still, the Court's decision gives some comfort – comparing offered rates to credit "neutral" rates appears safe; the criteria for reckless disregard of FCRA obligations seem fairly strict; and, rejecting the position the federal government supported, a FCRA notice need not be sent merely because a consumer might hypothetically qualify for the insurer's lowest rate.