Ban on Insurance Credit Scoring

Earlier this month, the Michigan Office of Financial and Insurance Regulation (“OFIR”) announced that it would reject, on a case-by-case basis, all new homeowner’s insurance rate filing that use insurance credit scoring as a factor in setting premium discounts. The OFIR has taken the position that basing rates on consumer credit scores is unfairly discriminatory and does not result in reasonably anticipated reductions in losses or expenses.

The OFIR points to the Michigan Insurance Code’s list of approved rating factors that an automobile or homeowner insurer may use to set premiums, which does not include the use of insurance credit scoring. The OFIR states that even though an insurer may offer a premium discount plan if the plan reflects reasonably anticipated reductions in losses or expenses, insurance credit scoring does not reflect reasonably anticipated reductions in losses or expenses because it is not associated with a reduction in aggregate losses. Rather, the OFIR contends that credit score discount programs place a disproportionate burden on those with lower credit scores to cover the cost of anticipated losses. The OFIR also takes the position that insurers are relying on consumer credit information that is inaccurate and unreliable, as insurance credit scoring is based on behavior, such as bill payment history, that is unrelated to increasing or reducing insurance risk. Lastly, the OFIR takes exception with the huge weight placed on insurance credit scoring, as the OFIR believes it is more an indicator of a policyholder’s likelihood of filing a claim than an indicator of experiencing a loss.

As we previously reported here, the OFIR has taken a similar position in regard to automobile insurance, even though the regulations the OFIR has promulgated to take such action have been stayed while a lawsuit against the OFIR, brought by a coalition of insurers in 2005, is on appeal to the Michigan Supreme Court.

Injunction on Ban

On April 10, 2009, the coalition of insurers that had brought the original action in 2005, as we previously reported here, successfully filed for an injunction on the current case-by-case ban against the OFIR pending the results of their appeal to the Michigan Supreme Court. The OFIR took the position that its current case-by-case ban was allowable under the 2005 injunction, as it was not a broad prohibition against credit scoring. However, Judge James Fisher of the Barry County Circuit did not agree, and expanded his earlier 2005 injunction to prohibit a case-by-case ban by the OFIR.