In Insurance Institute of Michigan, et al. v. Commissioner, No. 262385, 2008 WL 190394 (Mich. Ct. App., Aug. 21, 2008), the appellate court opinion of Presiding Judge Helen N. White vacated a lower court’s permanent injunction against regulations prohibiting the use of credit scores in home and auto insurance.
In 2005, a coalition of insurers successfully sued the Michigan Commissioner of the Office of Financial & Insurance Services (“OFIS”) to prevent implementation of rules barring the use of credit scores as a rating factor in issuing personal insurance. Last month, the appellate court found in a 2-1 decision that the lower court failed to base its review on the administrative record, accepted additional evidence, and remanded for further review.
The appellate court’s opinion states that over the past five years, insurers in Michigan gradually implemented a rating system for personal lines insurance that classified consumers in part by use of information contained in the consumers' credit reports. Through data calls, filings, public hearings, consumer complaints, and research on this subject, the OFIS gathered information that established that insurers in Michigan increased their base rates over the same period of time in part to provide a discount for consumers with particular credit scores. However, during the same time period the total premium charged and the total losses experienced did not change even though the base rate had increased.
To arrive at the premium charged to a policyholder, insurers typically use a good credit score to grant a larger percentage discount from the base rate, while a poor credit score results in a much smaller discount or no discount at all from the base rate. The OFIS alleged that consumers with poor credit and consumers without current credit records, often the young and the old, find themselves charged more for personal lines insurance because they do not qualify for the good credit discount.
Under the Michigan Insurance Code, premium discounts must be uniformly applied and reflect reasonably anticipated reductions in losses or expenses. Evidence presented showed that insurers typically grant premium discounts for safety equipment such as anti-lock breaks, smoke alarms, or security systems (i.e., items designed to reduce losses). The court found that there is a correlation between low credit scores and increased frequency of claims and that, on occasion, there is a correlation between low credit scores and the increased cost of claims. But, according to the court’s majority opinion, there was no data proving that the use of credit scoring by insurers resulted in a reduction in losses.
With no proof in the reduction in losses, Presiding Judge White agreed with the OFIS in that the insurance credit score discount was merely a shifting of premium cost from persons with better credit scores to persons with worse credit scores, and therefore should be prohibited. However, the judge was unable to create a consensus as to whether the use of credit scoring was illegal, and remanded the case back to the lower court for further review based on the record. The rehearing has yet to be scheduled.