THE USE OF CREDIT-SCORING IN THE INSURANCE INDUSTRY

Written by Attorneys Michael R. Nelson, Erin Nulty, Craig Cohen, and Matthew Stool

A credit score is the interpretation of credit reports and other data about an individual using a predictive scoring model or formula known as an algorithm.  Software vendors and insurers develop scoring models by using the policy records of a variety of insurance companies that represent the industry as a whole.  The scoring model uses an individual’s specific credit information -- such as credit reports, payment patterns, collection actions, bankruptcy, outstanding debt, length of credit history, types of credit in use, and number of new credit applications -- and compares it to that of millions of other people.  What emerges from the statistical analysis is a three-digit ranking that is used as a predictor of an individual’s risk of loss.  Since each insurance company uses its own scoring model that weighs various credit factors differently, an individual’s credit score may differ from company to company.

Insurance companies use credit scores in underwriting personal lines of insurance and in determining the rating tier for individual applicants.  Credit scores are one of the factors that assist an insurance company in determining whether to provide or renew coverage to an applicant and in deciding what premium an applicant should pay.  Insurers use credit scores in this manner because they believe there is a statistical relationship between financial responsibility and risk of loss.

The Controversy Surrounding the Use of Credit Scores in the Insurance Industry

Proponents of the use of credit scores in underwriting and rating personal lines of insurance include insurance companies, property and casualty trade associations (National Association of Independent Insurers, Alliance of American Insurers, National Association of Mutual Insurance Companies), and credit scoring/credit reporting agencies such as Fair Isaac and the Associated Credit Bureau.  These groups contend that the use of credit scores is beneficial to consumers in the marketplace.  The insurance industry views credit scores as an objective and efficient way to provide consistent, accurate and more complete underwriting and pricing.  Companies contend that credit scores provide a fair pricing structure by matching rates with the risk of loss.  Since most customers have good credit, insurance companies assert that they are able to offer the majority of policyholders lower premiums.  Thus, the insurance industry contends that most consumers are in favor of the use of credit reports.  A brochure distributed by the National Association of Independent Insurers references a Harris Poll that concluded that nearly 70% of the public supports the use of credit information.  (See NAII Brochure, attached at tab “1.”)

To the insurance companies, a credit score reflects how responsibly an individual manages income.  The theory is that financially responsible individuals are more likely to be responsible in all other areas of life -- including driving -- and thus less likely to pose a risk of loss to insurers.  To support this view, the insurance industry points to a number of studies completed by Arthur Anderson, Fair Isaac, and the Insurance Research Council, which concluded that credit reports are a more reliable predictor of risk of loss than motor vehicle records.  In addition, a Tillinghast-Towers Perrin Study demonstrated that there was a 99% probability of a relationship between a person’s credit rating and the likelihood of that person filing an insurance claim.  Further, as discussed below, a 2003 study conducted at the University of Texas also determined that a relationship exists between credit score and loss history.

Critics of the use of credit scores include consumer advocates (the Consumer Federation of America and the Center for Economic Justice), some auto insurance agent associations (the National Association of Professional Allstate Agents), and various commissioners of state insurance departments, including John W. Oxendine of Georgia, Steven Larsen of Maryland, Linda Watters of Michigan, Jose Montemayor of Texas and Merwin Stewart of Utah.  The critics assert that the use of credit scores disproportionately discriminates against poor and minority consumers, who have little or no credit history, by placing them in higher rating tiers and requiring them to pay higher rates.  Critics further contend that these same consumers are also forced to pay their entire premium in one payment, since their credit scores do not allow them to qualify for installment payments.  Insurance companies are also criticized for setting credit score ranges for determining the premiums that consumers have to pay.  The ranges of acceptable credit scores can be increased or decreased, depending on whether the insurance company wants to increase or decrease the amount of policies it issues.  Thus, an insured can maintain the same credit score over a number of years, but still receive a premium increase or non-renewal notice because of the insurance company’s business decision. 

Another major argument against the use of credit scores involves the credit scores themselves.  Since insurance companies use different proprietary insurance scoring models, there is no way for a consumer to know exactly how the information on a credit report is used in the underwriting and rating process.  In addition, consumer advocate groups criticize the reliance of credit scoring models on credit reports, which have been shown to be inaccurate or incomplete, depending upon which credit reporting service is used.

While some critics of credit scoring would like to see the practice completely banned, others concede the need for the use of scores, but would like more uniform regulation of the practice.  According to a 2002 task force report issued by the Professional Insurance Agents Association of Pennsylvania, Maryland, and Delaware, “there is a lack of uniformity in the way credit scoring is approached from a regulatory perspective.”  In the report, the task force assigned to study the matter issued a number of recommendations to the Professional Insurance Agents Association that address the lack of regulatory uniformity and the necessity for the fair use of credit scores.  Chief among these recommendations is a prohibition on the use of credit scores as the sole factor in underwriting; instead, the task force believes that credit scores should only be allowed for rating and tiering purposes.  Some of the other recommendations call for full disclosure by insurers on the use and application of credit scores, annual re-underwriting/re-rating for individuals receiving adverse underwriting or rating decisions, prohibition of the use of credit scores for individuals with little or no credit history, and more uniformity in the marketplace as to the form of the credit score.

State Laws and Regulations Regarding the Use of Credit Scores

Under the federal Fair Credit Reporting Act, insurers are permitted to use credit information in making underwriting and rating decisions.[1]  State statutes and regulations govern the specific use of credit reports and scores in the individual states.  In 2002, a sampling of existing statutes and regulations from across the country demonstrated that most of the laws focused on regulating the use of credit reports, not credit scores, and that there was no uniform approach being taken by the states to regulate credit scoring.  In November of 2002, however, the National Conference of Insurance Legislators (NCOIL) adopted a model act relating to the use of credit information.  (See Model Act Regarding Use of Credit Information in Personal Insurance, attached at tab “2.”)  A significant number of states have adopted legislation regarding credit scoring based upon the NCOIL Model Act. 

Between 2002 and 2003, 29 states enacted legislation regarding the use of credit information and credit scores in underwriting and rating personal lines insurance.  Of these, nine states have followed the NCOIL Model Act.  In addition to legislation, during the past two years, state insurance departments in at least 10 states have issued regulations and bulletins governing the use of credit information by insurers.  (See Appendix.)

Investigations by Regulators and Legislators into the Use of Credit Scores

In recent years, credit scoring has become an area of concern for state departments of insurance.  Reflecting this concern, in December of 2001, the National Association of Insurance Commissioners (NAIC) held public hearings on the use of credit scores in underwriting and rating.  After receiving testimony from consumer representatives, insurance regulators, credit scoring companies, credit reporting agencies, and representatives from the property and casualty insurance industry, the NAIC decided to study the use of credit scores in more detail to determine whether a model act or regulation would be necessary.  To aid in the development of such an act or regulation, the NAIC requested the American Academy of Actuaries to devise a method for insurance commissioners to study whether insurers use of credit scores has more of a negative effect on low-income and minority applicants.  However, on September 18, 2003, the NAIC decided to table the study to allow the states to act individually.

Alaska

On February 21, 2003, the Alaska Division of Insurance published a study entitled “Insurance Credit Scoring in Alaska.”  The study was based upon the results of surveys sent to all insurers licensed to write homeowners or personal automobile insurance in Alaska.  The insurers were asked to provide information regarding zip codes, age, marital status, sex, and tier.  The zip code data was used in conjunction with census data to identify urban and rural areas, income distribution, and the ethnic composition of policyholders.  The survey also focused upon three broad risk categories: preferred, standard, and nonstandard business.  In general, the survey found that consumers residing in higher income and predominately Caucasian areas appear less affected by credit scores than other consumers.  Also, consumers in rural areas are more likely to be paced in nonstandard markets than urban residents.  Finally, older consumers tended to be placed in standard or nonstandard markets.  The study concluded that restrictions on the use of credit scores are desirable since “insurers have the burden of justifying that the use of credit history does not violate Alaska’s laws.”  (See Report, attached at tab “3.”)

Florida

The state of Florida held a series of four public meetings from October 2001 through January 2002, to gather information regarding the issue of credit scoring.  The Florida Insurance Commissioner appointed an eight member task force, comprised of legislators, consumer advocates, insurance company representatives, agent representatives, and concerned citizens, to hear testimony and receive documentary evidence from individuals and groups on both sides of the credit scoring issue. 

On January 23, 2002, the task force issued a report of its findings, including a list of nine recommendations the Department of Insurance should follow to address the controversy surrounding the use of credit scores.  These recommendations can be categorized into three types: the prohibition of certain insurer conduct, the requirement of certain insurer conduct, and the continuance of further study by the Department of Insurance.  The task force suggests that insurers be prohibited from using credit reports as the sole basis for underwriting and rating decisions and from drawing negative inferences from bad credit scores due to medical bills, little or no credit information, or other special circumstances.  It also recommends that insurers be required to provide information to the Department to verify their use of credit reports, to send applicants a copy of their credit report and a letter of explanation when the applicant’s credit information results in an adverse decision by the insurer, and to offer premium payment plan options without denying or conditioning the option on anything other than the insured’s payment history with the insurer. 

In addition, the task force advocates further study and investigation into the correlation between credit information and risk of loss and into the effects of the use of credit reports by the insurance industry.  (See Report, attached at tab “4.”)  A number of these recommendations were incorporated into SB 40A, discussed herein, which was enacted on June 26, 2003.

Michigan

During the summer of 2002, the State of Michigan held a series of hearings to receive comments from the public and members of the insurance industry.  In December, the Michigan Commissioner of the Office of Financial and Insurance Services released the findings from these statewide hearings and other investigations in a report entitled “The Use of Insurance Credit Scoring in Automobile and Homeowners Insurance.”  (See Report, attached at tab “5.”)  As a result of this report, three bills regarding credit scoring were introduced in the Michigan legislature: HB 4268, SB 191 and SB 473.  To date, none have become law. 

The report identified a number of concerns expressed by Michigan consumers and insurance agents, including: consumers were not notified that credit information would be used in underwriting and rating; consumers found it difficult to discover the factors in their credit history that resulted in adverse actions by insurers; insurers did not provide adequate opportunity to review or dispute a credit score before adverse actions were taken; insurers did not adequately consider changes in credit status of consumers over time and insurers did not review credit histories or credit scores after the time of the initial application for insurance.

To address these concerns, the Commissioner offered a number of administrative and legislative recommendations.  The administrative recommendations include: insurers must file credit scoring models with the Commissioner; insurers must recalculate credit scores annually; insurers must provide actuarial certification of the use of credit scores to provide discounts; and insurers must recalculate credit scores if the insured successfully disputes credit information used by the insurer.  The Commissioner also proposed a number of recommendations that would require legislative action.  These recommendations include: insurers must review the credit scores of all policyholders and apply credits to the premiums of those with the highest scores; insurers must notify applicants of the reasons an adverse decision is made based upon a credit score or credit history; insurers are prohibited from using certain credit information, for example, medical collection accounts, as negative factors in determining a credit score; and funding a study to determine whether an insurance credit score is a predictor of loss.  A number of these recommendations were incorporated into Bulletins 2003-01-INS and 2003-02-INS issued in 2003 by the Michigan Office of Financial and Insurance Services. 

Texas

At the request of Texas Lieutenant Governor Ratliff in 2002, the Bureau of Business Research examined the relationship between credit history and insurance losses in automobile insurance.  The study, entitled “A Statistical Analysis of the Relationship Between Credit History and Insurance Losses” was completed in March of 2003.

The research tested whether the credit score for the named insured on a policy was significantly related to incurred losses for the policy and whether the credit score added new information not contained in existing underwriting variables.  The research team found that there was a significant relationship between credit history and insurance losses and that credit score did yield new information not contained in existing underwriting variables.  The study concluded that the lower a consumer’s credit score, the higher the probability that the insured would incur losses on an automobile insurance policy, and the higher expected loss on the policy.

The study did not attempt to explain why credit scoring adds significantly to an insurer’s ability to predict insurance losses, or examine variables such as race, ethnicity, and income.  The study did not speculate about the possible effects that credit scoring might have in raising or lowering premiums for specific groups of people – minorities or the poor.  The study did not verify the accuracy of the credit information supplied by the three main credit bureaus, TransUnion, Experian, and Equifax, nor did it take into account the different credit scoring models used by different insurers.  (See Report, attached at tab “6.”)

On October 23, 2003, Peter Molinaro, Deputy Superintendent of Insurance for New York testified before the New York State Assembly.  Molinaro criticized the above-mentioned studies, contending that while the studies may demonstrate a correlation between credit history and risk of loss, the studies do not demonstrate a causal relationship between credit scoring and prediction of loss.  Molinaro also criticized the use of credit scores because credit scores are often based upon models and methods that are proprietary.  The lack of information regarding exactly how credit scores are established makes it difficult for a department of insurance to discharge its rate approval responsibility.

Recent Litigation Involving the Use of Credit Scores

While insurance legislators and regulators have focused on the regulation of credit scoring through statutes, rules and bulletins, individual plaintiffs concerned about the use of credit scores have brought their grievances to the judiciary.  Recent litigation in four states - Hawaii, Illinois, Rhode Island and Texas - exemplifies the different legal arguments plaintiffs are advancing to attack the use of credit scores.  (See Complaints, attached at tab “7.”)

Hawaii

Miprano v. Progressive Hawaii Insurance Corp., et al.
Litigation Involving the Use of Insurance Scores in the Rating of Policies

Filed on September 12, 2001 in the First Circuit Court of Hawaii, this class action attacks the use of credit scores in determining policyholder rates.  The plaintiff seeks to represent a class of all automobile insurance policyholders who have been injured by Progressive’s alleged violation of Hawaii Revised Statute Section 431:10C-207, which prohibits establishing insurance rates on the basis of “credit bureau rating.”  This statute prohibits basing “any standard or rating plan, in whole or in part, directly or indirectly, upon a person’s race, creed, ethnic extraction, age, sex, length of driving experience, credit bureau rating, marital status or physical handicap.”  In the Complaint, plaintiffs allege that the defendant insurance companies charged unjustifiably higher premiums as a result of the violation of this statute and contend that the insurers are liable for bad faith, unfair and deceptive business practices, and punitive damages.  In defense of this claim, the defendants have filed a motion to dismiss, arguing that plaintiffs lack standing and cannot assert a private cause of action for two reasons: (1) Section 431:10C-207 does not provide consumers standing for such an action, and (2) the state insurance commissioner has the power to regulate insurance rates and thus would be the proper party to bring suit for a violation of those laws.  The Court denied defendants’ motion to dismiss. 

In 2002, the Court certified the matter as a class action.  Progressive’s motion for permission to file an interlocutory appeal was denied.  The parties are now litigating whether notice of the pendency of a class action should be published.  The Court has scheduled a settlement conference for March 29, 2004 and trial for May 10, 2004.

Illinois

Hoffman v. State Farm Mutual Automobile Insurance Co., Inc.
Litigation Involving the Use of Insurance Scores in the Underwriting of Policies

This class action was filed June 3, 2002 in the Third Judicial Circuit of Madison County and attacks the use of insurance credit scores in the underwriting of insurance policies.  The plaintiff seeks to represent a class of all Illinois residents who have been denied the issuance or renewal of an insurance policy solely on the basis of a credit report since October 1, 2001.  Plaintiffs allege that Section 215 ILCS 5/155.37 of the Illinois Insurance Code prohibits an insurer from utilizing a credit report as the sole underwriting basis when denying or non-renewing coverage.  Plaintiffs allege that their damages are to be calculated as the difference between the premium they would have paid to State Farm and the higher premium they in fact paid because State Farm improperly rejected their applications for insurance based upon credit reports.

As in the Hawaii class action, one of the insurer’s first defenses will include an argument against plaintiffs standing under the Illinois Insurance Code provision at issue.  In the recent past, the Illinois judiciary has decided this question in favor of the insurer.  For example, the Appellate Court of Illinois dismissed plaintiff’s claim brought for violation of the Insurance Code in Weis v. State Farm Mutual Automobile Insurance Co., 2002 WL 31080694 (August 29, 2002), holding that “[T]he enforcement of insurance rules was clearly delegated to the Department of Insurance and, as such, we conclude that a plaintiff cannot plead or pursue a private cause of action based on an insurer’s violation of these rules.”  Id.  The Hoffman class action is still being litigated.

Rhode Island

Leibold et al. v. Amica Mutual Insurance Co.
Litigation Involving the Use of Credit Scores in Underwriting and Rating

This class action was brought in federal court before the United States District Court for the District of Rhode Island and alleges that Amica violated both federal and state law through its use of credit scores in underwriting and rating.  The plaintiff sought to represent a class of all persons insured by an Amica automobile insurance policy -- or who applied for an Amica automobile insurance policy -- whose rates were increased or who were denied insurance, based upon information in a credit report or resulting from a credit check since April 26, 2000.  Plaintiff alleged that Amica violated the Fair Credit Reporting Act and the Rhode Island Deceptive Trade Practices Act when it failed to disclose to its insureds that premium increases were due to adverse credit information and that premiums would increase at renewal based upon credit scores.  Plaintiffs voluntarily dismissed the case after Amica demonstrated that it had, in fact, provided policyholders with all required notices.

Texas

DeHoyos v. Allstate Corporation et al.
Litigation Involving the Discriminatory Use of Credit Scores

On November 2, 2001, a class action was filed against Allstate Insurance in the United States District Court of the Western District of Texas, stemming from Allstate’s practice of using credit scoring as a factor in determining an individual’s insurability.  The suit, captioned Jose C. DeHoyos, et al. v. Allstate Corporation, et al. alleges that Allstate raised plaintiffs’ auto insurance premiums or assigned them to a higher-cost subsidiary, Allstate Indemnity Co., based on race, due to Allstate’s use of geographical redlining.  The suit also alleges that despite having good credit, Allstate used plaintiffs’ credit information as a pretext to charge them more in premiums on auto and home insurance policies.  The case alleges racial discrimination in violation of 42 U.S.C. §1981, 42 U.S.C. §1981 and 42 U.S.C. §3604.  The plaintiff seeks to represent a class of all non-Caucasian persons who have (or had at the time of the policies’ termination) an ownership interest in one or more policies issued, serviced or administered by Allstate based upon the common course of conduct described herein and who were thereby harmed.

In defending this action, Allstate filed a motion to dismiss, arguing that the McCarran-Ferguson Act precludes the application of federal law where the states have enacted statutes and regulations related to the “business of insurance” and where the federal law would impair, invalidate or supercede state laws.  The Court rejected Allstate’s argument and determined that the states at issue (Texas and Florida) have not yet enacted regulations governing credit scoring in such a way that the application of federal anti-discrimination statutes would displace the state’s decision about the proper conduct of the “business of insurance.”  In other words, the states have not decided that Allstate’s credit scoring system is proper or required.  The states have not decided that credit scoring is a practice to be left to insurers without any court interference.  In addition, most federal courts have held that the McCarran-Ferguson Act does not preclude racial discrimination suits, even where states have enacted insurance and anti-discrimination statutes.

Allstate also argued that a federal court should abstain from issuing an opinion on the merits of the case when the issues are a matter of state concern and are capable of resolution by the states.  In response to this argument, the Court ruled that, in this case, the states cannot resolve the matter because the state insurance statutes do not allow for a private cause of action.  Since federal anti-discrimination law is the only vehicle that provides plaintiffs with the relief they seek, the Court denied Allstate’s motion to dismiss.  In its opinion the Court invited Allstate to file an interlocutory appeal of its decision; Allstate accepted this invitation.  On September 3, 2003, the United States Court of Appeals for the Fifth Circuit affirmed the decision to deny Allstate’s motion to dismiss.  Plaintiffs’ attempt to certify a class is proceeding.

Owens v. Nationwide Mutual Insurance Co.
Litigation Involving the Discriminatory Use of Credit Scores

Plaintiffs filed a class action suit alleging that Nationwide uses racially discriminatory credit scoring practices to deny applications for homeowners insurance and to underwrite more expensive, but substandard, insurance for minority homeowners.   On July 18, 2003, Nationwide filed a motion to dismiss and alternative motion for summary judgment.  Nationwide contended that since Owens was refused coverage, she could not represent a class of persons who were charged excessive premiums for their policies based upon credit scores.  On October 1, 2003, the district court agreed with Nationwide that the plaintiff lacked standing to bring a class action on behalf of all minority applicants who were overcharged for substandard homeowners insurance – Owens was refused coverage and never charged any amount for a policy.  On the other hand, the Court rejected Nationwide’s contention that Owens had failed to state a claim for intentional discrimination under 42 U.S.C. §§ 1981, 1982 and 3604.  Owens alleged that she was denied coverage on the basis of a credit scoring system that would allow coverage to be provided for non-minority members who were similarly situated.  The Court found these allegations sufficient to state a claim for intentional discrimination.  Discovery is ongoing.

State of Texas v. Farmers Group, Inc.
Farmers Insurance Exchange v. Texas Commissioner of Insurance
Litigation Involving the Discriminatory Use of Credit Scores

Two actions involving a dispute between Farmers Insurance Company and the Texas Commissioner of Insurance were filed in the District Court of Travis County, Texas.  The first suit was initiated by the Insurance Department in August of 2002 and sought to enjoin Farmers’ allegedly improper practices and to compel reimbursement of purportedly excessive premium amounts charged by the insurer.  Farmers’ responsive action, filed in September of 2002, requests an injunction against a “cease and desist” order issued by the Insurance Commissioner.

Among many other alleged violations of Texas law, the Texas Department of Insurance alleges that Farmers improperly used credit scores to establish premium levels and did not disclose this practice to policyholders.  The Department claims to have discovered these problems in the course of a market conduct study.  The Department argues that Farmers’ use of credit scores unfairly discriminates among policyholders with identical loss histories, resulting in the payment of different premium amounts based on credit scores, not loss histories.  The Complaint also alleges that Farmers is deceptively issuing renewal policies containing substantially less coverage than the expiring policy.  The Department issued an emergency “cease and desist” order requiring, inter alia, Farmers to refrain from using credit scores to increase premiums for homeowners’ insurance.  The Department also threatened disciplinary action, including imposition of monetary damages.  In response, Farmers filed suit against the Commissioner of Insurance and the Texas Department of Insurance seeking a permanent injunction against implementation of the “cease and desist” order.  Farmers denies that credit scores are discriminatory and maintains that they are legitimate underwriting tools and accurate predictors of loss.  Farmers alleges that the “cease and desist” order is illegal and exceeds the Commissioner’s authority.  In October of 2002, Farmers prepared to withdraw from the homeowners insurance market in Texas.  However, on November 30, 2002, Farmers announced an agreement with the Texas Department of Insurance to resolve this litigation, in addition to other disputes, and to continue to provide homeowners insurance in Texas.  The settlement included refunds, estimated at $5,000,000, by Farmers to Texas policyholders whose credit scores were incorrect.

Re-Evaluation of Underwriting and Rating

Decisions Based Upon Updated Credit Information

A number of states include in legislation relating to insurance credit scoring requirements that decisions, especially those unfavorable to consumers, based upon credit reports and credit scores must be reevaluated at certain intervals.  Many of these requirements are adapted from the Model Act Regarding the Use of Credit Information in Personal Insurance prepared by the National Conference of Insurance Legislators (NCOIL) in November of 2002.  (See Model Act, attached at tab “ 2.”)

The NCOIL Model Act includes a requirement that an insurer re-calculate the credit score or obtain an updated credit report not later than 36 months after first obtaining credit information about the insured.  In addition, at renewal, the insured may request that the insurer re-underwrite and re-rate the policy based upon a current credit report or credit score.  An insurer need not recalculate an insurance score or obtain current credit information more often than once per year.  According to the Model Act, however, an insurer need not obtain current credit information if one of the following applies:

a.   The insurer is treating the insured as otherwise approved by the Commissioner of Insurance;

b.   The insured is in the most favorably priced tier of the insurer, within a group of affiliated insurers;

c.   Credit information was not used when the policy was originally underwritten and rated; or

d.   The insurer reevaluates the insured no later than 36 months after initial policy inception  and thereafter based upon underwriting and rating factors that do not include credit information.

State legislators, while adopting some provisions of the Model Act in this regard, often amend specific conditions and include additional provisions.  The following is a summary of examples of legislation involving re-evaluation of credit history, insurance scores and adverse actions taken based upon credit information. 

Georgia requires the insurer to provide notice to an insured that is requesting re-rating or re-underwriting, that negative consequences such as non-renewal or termination, could result from the review.  In contrast, Florida requires an insurer that took adverse action based upon credit information to review the credit history of the insured every two years or at the request of the insured, whichever is sooner.  Florida prohibits the insurer from canceling, refusing to renew or requiring a change in payment plan as a result of such a review.  In Maryland, an insurer that based adverse action, such as utilization of a higher rate, upon a credit report or credit score must review the insured’s credit report every two years and adjust premium levels to reflect improved credit standing, if applicable.  In Oregon, an insured assigned to a less favorable rate category prior to the effective date of SB 260, passed in 2003, based upon a credit score or credit history, may request an annual review, requesting that the insurer use the standards in effect after the passage of SB 260.

In addition, insurers may be required to reevaluate an insured’s credit score or credit report if the insurer becomes aware that the credit history in question was incorrect or incomplete.  For example, Kansas law provides that if, through the dispute resolution process detailed in the federal Fair Credit Reporting Act, 15 U.S.C. § 1681(i)(a)(5), it is determined that the credit information of an insured is incomplete or inaccurate, the insurer must re-underwrite and re-rate the policy.  The insurer must re-rate and re-underwrite the policy within 30 days of receipt of notice of the error in the reported credit history.  Indiana bill SB 0178, passed in 2003, contains the same provision in this regard as the Kansas law.  

The Ohio Department of Insurance, in the absence of state legislation, issued Rule 3901-1-55, effective June 12, 2003.  Under this Rule, if a credit history or credit score was used in rating or underwriting and a consumer reporting agency determines that the credit information was inaccurate or incomplete, the insurer, within 30 days of receipt of notice of the discrepancy, must re-rate and re-underwrite the policy.  If the premium is determined to have been excessive, the amount of overpayment must be returned and must be calculated back to the shorter of the last 12 months or the current policy term.  Even in the absence of inaccurate or incomplete credit information, the insurer must recheck an insured’s credit history or credit score at the written request of the insured, but no more than once every 12 months.

Alaska legislation enacted in 2003 includes a provision requiring the insurer to establish a procedure for reconsideration of any adverse action taken on the basis of a credit score or credit history.  An insurer is required to provide written notice to the insured containing the following information: the specific factors in the credit history or insurance score that resulted in the adverse action, a notice that the insured may request reconsideration of the adverse action and is entitled to a free copy of the credit report at issue.  The notice must also inform the insured of the right to correct errors in a credit report and advice regarding how to improve an insurance credit score.

Because of the widespread activity related to the use of credit information during 2002 and 2003, insurers employing credit reports and credit scores should review their underwriting and pricing practices to ensure compliance with existing state laws and regulations.   Moreover, it is expected that the use of credit information in the underwriting and rating of personal insurance will continue to be the subject of significant legislative, regulatory, and legal activity during 2004.

Legislative and Regulatory Activity During 2002 and 2003

Alaska: Signed into law on August 6, 2003 and effective January 1, 2004, SB 13 requires a personal lines insurer to disclose, at the time of application, that the insurer will obtain credit information related to the application and may use such information in deciding whether to issue a policy and the amount of premium.  If an insurer takes adverse action based upon a credit history or insurance score, the consumer must be provided an opportunity to request reconsideration of the adverse action.  Notice of the opportunity to request reconsideration must include a statement describing the factors of the credit history or insurance score that resulted in the adverse action and must inform the consumer of the right to obtain a free credit report.  Credit history may not be used as the sole factor in deciding to cancel, deny, underwrite or rate a policy.  An insurer may not refuse to renew or again underwrite a policy based upon credit history or insurance score.  An insurer may not cancel, deny, underwrite or rate a personal policy based upon the absence of credit history or number of credit inquiries if not initiated by the consumer.  An insurance score may not be based upon age, income, sex, address, zip code, census block, ethnic group, religion, marital status, or nationality.  If incorrect credit history was used to charge higher premiums or to provide less favorable coverage, the insurer must retroactively re-rate and/or reissue the policy with terms for which the consumer would have qualified if the credit information had been correct.

Arizona: As signed into law on May 22, 2002, HB 2386, now codified at Ariz. Rev. Stat. §§ 20-2102, 20-2109, and 20-2110, provides a definition for the term “credit score” and amends the definition of an “adverse underwriting action” in property or casualty insurance to include the use of a consumer report, insurance score, or absence of credit history as a basis to assign a policyholder to a higher rating tier or to fail to apply a premium discount.  This new law also requires an insurer who makes an adverse underwriting decision based on a credit report or credit score to disclose this fact to the applicant and to tell the applicant the specific items and factors that affected the credit score.  The insurer must inform the applicant of the source of the credit score, where a copy of the credit score can be obtained, and how the applicant can improve the credit score.  In addition, if requested to do so by the insured, the insurer must reconsider its underwriting decision if the insured provides corrected credit information. 

Effective September 1, 2003, HB 2032 added the following provisions to existing law: an insurer shall not develop or use a credit score developed by others that is based upon the lack of credit history (unless actuarially justified), medical collection accounts, bankruptcy or liens more than seven years old, use of particular type of credit card (unless actuarially justified), a consumer’s available line of credit or an insurance score calculated using income, gender, address, zip code, ethnic group, religion, marital status or nationality.  An insurer may, however, use zip code, address, gender and marital status for underwriting purposes.

Arkansas:  SB 846 was signed into law on April 16, 2003.  SB 846 is, in the main, based upon the NCOIL Model Act.  The law prohibits an insurer from using a credit score determined on the basis of income, gender, address, zip code, ethnic group, religion, marital status, or nationality.   An insurer may not deny, cancel, refuse to renew or base renewal rates of a personal insurance policy solely on credit information.  An insurer may not take adverse action against a consumer based upon credit information unless the credit information is obtained within 90 days of the effective date or renewal date of the policy.  The insurer may not use credit information unless it has recalculated the credit score or obtained a revised credit report within 36 months.  If the insured requests, the insurer must re-underwrite and/or re-rate a policy based upon a current credit report.  An insured may make such a request no more than once in a 12-month period.  An insurer may not consider credit inquiries not initiated by the consumer or medical collection accounts as negative factors.  If the credit information on which credit history was based was incorrect, the insurer must re-rate or re-underwrite the policy within 30 days of notification of the error.  An insurer using credit information for underwriting or pricing purposes must disclose on the application that credit information will be used in considering the application.  If an insurer takes adverse action based upon credit information such action and the reasons therefore must be disclosed in writing.  The scoring model must be filed with the state insurance department.  An insurer using credit scoring must report annually to the insurance department regarding the number of policies written during the year and the number of policies for which premiums were increased or decreased based upon credit scores.

California:  Since June 26, 2003, AB 800 has been held in the California Assembly.  The bill would require any person regularly furnishing information to consumer credit reporting agencies to have reason to believe that such information is accurate and complete.  If such a person discovers that consumer credit information is inaccurate or incomplete, such person must inform the credit-reporting agency and promptly make corrections to the report.  If credit information is in dispute, the information may not be provided to a credit-reporting agency unless the agency is also advised that the information is in dispute.  Upon receipt of notice of a dispute, the person who provided the information to a consumer credit reporting agency shall review the information and complete an investigation with regard to the disputed information.  The person must correct inaccurate information and report the results of the investigation to the credit-reporting agency.  A consumer injured by negligent violation of this law may bring an action to recover statutory damages of $2,500, costs, attorney fees, lost wages, and pain and suffering if applicable.  A consumer injured by an intentional violation may recover, in addition, punitive damages of up to $5,000 per violation. 

Colorado: Signed into law on April 1, 2003 and effective July 1, 2004, HB 03-1273 is primarily a law requiring disclosure to consumers that an insurer will use new or updated credit information in insurance underwriting or rating.  If the insurer relies upon a producer to provide such notice, the insurer shall provide the form to the producer and take reasonable steps to ensure that the producer provides the required notice.   If requested by the consumer, an insurer or producer shall explain the credit information that impacts the consumer’s insurance credit score.  If the use of credit information results in an adverse action, the insurer shall comply with the notice requirements of the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.  In the event of an adverse action, the insurer shall provide the identity and location of the agencies from whom credit reports were obtained, notice that the consumer is entitled to a free credit report and notice of rights regarding challenges to the accuracy of credit information. 

Delaware:  The Delaware State Senate passed Concurrent Resolution No. 35 on June 30, 2002, requesting the state insurance commissioner to “promptly consider regulations relating to the proper use of credit scoring by insurers in the State of Delaware.”  In the resolution, the Delaware General Assembly expressed concerns about the adverse effect credit scoring may have on some consumers, the questions surrounding the predictive nature of credit scores and risk of loss, and the disparate impact the practice may have on minority groups. 

Florida: Signed into law on June 26, 2003 and effective January 1, 2004, SB 40-A and SB 42-A are companion bills that regulate the use of insurance credit scores and provide for the confidentiality of the credit scoring models that insurers must file with the Office of Insurance Regulation.  SB 40-A applies only to personal vehicle and homeowners’ insurance.  Under SB 40-A, an insurer must inform an applicant or insured that a credit report or insurance credit score will be used for rating or underwriting purposes.  If the insurer bases an adverse decision upon a credit report, the insurer must provide a free copy of the credit report to the insured or provide the name, address, and telephone number of the agency from which the report may be obtained.  In the event of an adverse decision, the insurer must provide, in clear and specific language, the four major reasons for the adverse decision.  An insurer may not request a credit score based upon race, color, religion, marital status, age, gender, income, national origin, or residence.  An insurer may not make an adverse decision based solely on a credit report or credit score.  An insurer may not make an adverse decision based upon lack of credit history, medical collections, place of residence, or number of credit inquiries not initiated by the applicant or insured.  Upon request, the insurer must provide an avenue of appeal for an applicant or insured whose credit report or score is unduly influenced by divorce, death of a spouse, or loss of employment.  An insurer requesting or using credit scores must maintain a written set of procedures that reflect applicable federal and Florida law.  An insurer must also establish procedures to review the credit history of an insured adversely affected by credit history.  The review must be performed every 2 years or at the request of the insured, whichever is sooner.  Such review will not be used to take any further adverse action.  Alternatively, an insurer who initially used credit reports or scores, but which will not use such reports or scores for re-underwriting, shall reevaluate the insured within the first 3 years after inception.  Statistical data and other supporting materials relating to the insurer’s use of credit reports and credit scores must be reported annually to the Office of Insurance Regulation.  SB 42-A provides that the credit scoring methodologies and materials filed with the Office of Insurance Regulation that are trade secrets are confidential and not subject to disclosure under Florida’s public access laws. 

Georgia:  Signed into law on May 30, 2003 and effective July 1, 2003, HB 215 is based largely on the NCOIL Model Act.  The law prohibits an insurer from using a credit score calculated on the basis of income, gender, address, zip code, ethnic group, religion, marital status or nationality.  An insurer is also prohibited from basing rate increases or other adverse decisions solely upon credit information or solely upon the fact that a consumer does not have a credit card account or credit history.  Further, an insurer is prohibited from using credit information as the basis for an adverse decision unless the credit information has been calculated within 180 days of the inception date of the policy.  An insurer may not use credit information unless the insurer obtains an updated credit report or recalculates the insurance credit score every 36 months.  An insured, at renewal, may request that the insurer re-underwrite or re-rate the policy based upon current credit reports or insurance scores.  Before the insured chooses to have the policy re-rated or re-underwritten, the insurer must inform the insured of the possible negative consequences of the review, including non-renewal or termination.  If credit information is in dispute, and the matter is under the dispute resolution process of the Fair Credit Reporting Act, an insurer may not use such information in rating or underwriting decisions during the 45-day period after the matter is disputed.  The insurer must advise a consumer of its intent to use credit information in underwriting and rating at the time of application.  In the event of an adverse decision, the insurer must provide, in clear and specific language, an explanation of up to four major reasons for the adverse decision.   Insurers must file their credit scoring models with the Commissioner of Insurance; such information will not be subject to public disclosure. 

Idaho:  On March 23, 2002, the Governor of Idaho signed SB 1408, now codified at Idaho Code § 41-1843, which prohibits an insurer from charging a higher premium, or canceling, non-renewing or declining to issue a property or casualty policy based primarily on an individual’s credit rating or credit history. 

Illinois:  HB 1640 as amended by HB 3661 regulates the use of credit information related to personal insurance in Illinois.  HB 1640 was signed into law on July 9, 2003 and was effective October 1, 2003; the amendments in HB 3661 were enacted on August 8, 2003 and were effective immediately.  These bills are based largely on the NCOIL Model Act.  The bills do not apply to commercial insurance.  An insurer may not use a credit score calculated on the basis of income, gender, address, ethnic group, religion, marital status, or nationality.  An insurer is prohibited from basing rate increases or other adverse decisions solely upon credit information or solely upon the fact that a consumer does not have a credit card account or credit history.  Further, an insurer is prohibited from using credit information as the basis for an adverse decision unless the credit information has been calculated within 90 days of the inception date of the policy.  An insurer may not use credit information unless the insurer obtains an updated credit report or recalculates the insurance credit score every 36 months.  An insured, at renewal, may request that the insurer re-underwrite or re-rate the policy based upon current credit reports or insurance scores.  An insurer is not required to recalculate a credit score or obtain updated credit reports more often than once every 12 months.  An insurer may not use the number of credit inquiries as a negative factor if those inquiries were not made by the insured.  If it is determined that the credit information of an insured was inaccurate or incomplete, and the insurer is so informed, the insurer shall re-rate and re-underwrite the policy and make appropriate adjustments, including refunds of overpayments, if necessary.  The insurer must advise a consumer of its intent to use credit information in underwriting and rating at the time of application.  In the event of an adverse decision, the insurer must provide, in clear and specific language, an explanation of the four major reasons, if that many exist, for the adverse decision.  Insurers using credit information must file their credit scoring models with the Illinois Department of Insurance; any such filing shall be considered a confidential trade secret. 

Indiana:  Signed into law May 8, 2003, and effective January 1, 2004, SB 178 is largely based on the NCOIL Model Act.  Insurers intending to use credit information in underwriting or rating must inform consumers of this fact at the time of application.  The law prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status or nationality, and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers may not base renewal rates solely upon credit information or take adverse action solely because a consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except in limited circumstances.  Insurers are prohibited from taking adverse action against a consumer based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  Insurers must obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, upon request, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer is required to re-rate the policy within thirty days of receiving notice of the discrepancy and refund any premium overpayment. 

On December 5, 2003, the Insurance Commissioner for Indiana issued Bulletin Number 123.  Insurers using credit scores to underwrite and rate policies must file their credit scoring models with the Department of Insurance.  The filings are confidential and not available for public disclosure.   An insurer may not deny, cancel, refuse to renew or increase a renewal rate due to a credit score unless at least one other rating factor has changed to justify the adverse action.  If credit is a factor resulting in an adverse action, the insurer must use a credit score calculated or a credit report issued no more than 90 days before the policy is first written or renewal is issued.  The insurer shall also provide notice explaining the specific reasons for the adverse action.  The insurer may not use income, gender address, zip code, ethnic group, religion, marital status or nationality as a factor to determine a credit score.  The absence of credit information may not be used as a negative factor in underwriting or rating.  If the insured requests, the insurer must re-underwrite and re-rate the policy not more than once in a 12 month period.  Effective, January 1, 2004, an insurer may not use a credit report or score older than 36 months.  The following may not be used as negative factors: a credit inquiry not initiated by the consumer, inquiries related to medical accounts, multiple lender inquiries related to mortgage or automobile loans.  The insurance application must inform the consumer that the insurer will use credit information in considering the application.  Finally, the insurer must maintain procedures for handling notices of errors in credit reports and procedures for a consumer to dispute a credit score. 

Kansas:  Signed into law April 16, 2003, and effective April 20, 2003, HB 2071 governs the use of credit scoring in personal lines of insurance and is based on the NCOIL Model Act.  The law prohibits insurers from using insurance scores calculated using income, address, zip code, race, religion, color, sex, disability, national origin, ancestry, or marital status and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers are also prohibited from basing renewal rates solely upon credit information and from taking adverse action solely because a consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except in limited circumstances.  Insurers are prohibited from taking adverse action against a consumer based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  The law requires insurers to obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer is required to re-rate the policy within thirty days of receiving notice of the discrepancy and refund any premium overpayment.  The law requires disclosure at the time of application if credit information is to be used in underwriting or rating.  The insurer must also disclose whenever adverse action is taken based upon credit information.  The law requires that insurers file their insurance scoring models with the insurance department.

Louisiana:  Signed into law July 7, 2003, and effective August 15, 2003, HB 1448 prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status, or nationality and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers are prohibited from basing renewal rates solely upon credit information and from taking adverse action solely because a consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except under certain limited circumstances.  Insurers are prohibited from taking adverse action against a consumer based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  The law requires insurers to obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, upon request, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not create unreasonable disparities between underwriting tier placement regarding different lines of insurance for the same applicant solely on the basis of credit information, unless actuarially justified.   Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other, and the extension of available credit in excess of what the insurer deems reasonable, when the consumer has an acceptable credit history and does not present an increased underwriting or rating risk as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer is required to re-rate the policy within thirty days of receiving notice of the discrepancy and refund any premium overpayment.  Insurers must provide reasonable exemptions from the use of credit information if the consumer demonstrates hardship due to medical crisis, death of a spouse, identify theft, the personal guarantee of a business loan, or other catastrophic event.  If credit information is to be used in underwriting or rating the insurer must disclose this fact at the time of application.  The insurer must also disclose and specifically describe adverse actions taken on the basis of credit information.  The law requires that insurers file their insurance scoring models with the insurance department. 

Maine:  Signed into law on May 19, 2003, and effective ninety days after adjournment, HB 362 prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status, or nationality.  The law prohibits insurers from denying, canceling, or non-renewing a policy solely on the basis of credit information.  Insurers are further prohibited from raising premiums or reducing coverage solely on the basis of credit information.  Insurers may not take adverse action against a consumer based on negative credit information if caused by illness, unemployment, or death of a spouse.  Insurers cannot consider the absence of credit history, number of inquiries, or an inability to determine credit history as a negative indicator on a consumer’s insurance score.

Maryland:  The Governor of Maryland signed HB 521, now codified at Md. Code Ann. § 27-501, on May 17, 2002.  With respect to automobile insurance, this new law affects the manner in which an insurer can use the credit history of an applicant when rating policies.  In rating new policies, insurers are prohibited from using a credit factor on a credit report that is more than five years old or taking into account the absence of credit history and the number of credit inquiries.  Insurers are required to disclose to the applicant that credit history is used in rating a policy and must provide a rate quote that separately identifies the portion of the premium attributable to the credit history if asked to do so by the applicant.  If an applicant was adversely impacted by the use of credit history at the initial rating of the policy, the insurer must review the applicant’s credit history every two years and adjust the premium to reflect any improvements in the insured’s credit.  In addition, this law directs the Maryland Insurance Commissioner to conduct a study to determine if the use of credit scores has an adverse impact on “any demographic group defined by race or socio-economic status.”  The Commissioner must consult with insurance industry representatives, consumer organizations, and consumer reporting agencies in completing the study by January of 2004.  In addition to its legislative activity, the State of Maryland also addressed the issue of credit scoring by promulgating regulations and releasing two insurance bulletins. 

In response to the passage of the credit scoring legislation discussed above, the Commissioner issued new regulations designed to implement the legislation, clarify the steps an insurer must take in determining if an applicant or policyholder has a credit history after an initial inquiry fails to generate a credit score, codify the best price rule regarding credit scores in rate-making standards, and require the submission of the credit scoring model to the insurance department for those insurers that use credit history for rating purposes in automobile insurance.  The regulation also requires property and casualty insurers that use credit scores for certain adverse actions, to notify applicants and policyholders of the actual reason for the adverse action.  On June 24, 2002, the commissioner issued Bulletin 14-2002 to provide guidance to insurers in complying with HB 521.  Presented in a question and answer format, this bulletin addresses specific questions posed by insurers regarding the interpretation and implementation of the new law and offers the position of the Maryland Insurance Administration in response to these questions.  A supplemental bulletin, 02-16, was issued on August 9, 2002 to address supplemental issues regarding the implementation of the recently passed legislation.  On November 20, 2002, the Maryland Insurance Administration issued Bulletin 23B-2002, requiring insurers to identify the credit scoring model or models used by the insurer in Maryland. 

On November 26, 2003, the Maryland Insurance Administration issued Bulletin 03-17, which is a data call for information regarding credit scoring.  The Commissioner is required to conduct a study to determine whether the use of credit scoring has an adverse impact on any racial or socio-economic group.  The data requested includes the name of the credit scoring model and the number of policies within selected zip codes that have a credit score less than 700 and more than 700 under the ChoicePoint model. 

Michigan:  The Office of Financial and Insurance Services (OFIS) issued Bulletin 2003-01-INS on February 14, 2003.  The major features of this Bulletin include requirements that insurers using a credit scoring discounts must file the formula and specific credit classification factors with the OFIS.  This requirement also applies to insurers using credit scoring for personal lines of insurance other than automobile and homeowners.  Insurers using a credit-scoring discount must recalculate the score annually.  No later than June 30, 2004, insurers using a credit score discount must file an actuarial certification justifying the discount levels and tiers employed by the insurer.  Also, insurers must certify actuarially the discount offered to policyholders who have no credit history or an incomplete credit history.  Insurers must notify consumers of the credit used to apply a discount and the discount tier into which the consumer is placed.  If a consumer successfully contests a credit score, the insurer must recalculate the score and apply a revised discount.  On February 14, 2003, the OFIS Commissioner issued an Order directing OFIS employees to “diligently monitor” compliance with the Bulletin and to initiate compliance actions where appropriate.  On May 14, 2003, OFIS issued Bulletin 2003-02-INS revising the earlier Bulletin.  While the previous Bulletin required annual re-scoring, Bulletin 2003-02-INS requires re-scoring annually only if the consumer believes a discount will be increased or will become applicable where none was previously applied.

During 2003, three bills relating to the use of credit scores were  introduced in the Michigan legislature.  None were enacted into law. Referred to the Committee on Insurance and Financial Services on February 25, 2003, HB 4268 and SB 191 would prohibit an insurer from establishing or maintaining a premium discount plan based upon an applicant or insured’s credit history or lack of credit history.  Referred to the Committee on Banking and Financial Institutions on May 8, 2003, SB 473 would prohibit insurers from basing a premium discount plan on a lack of credit history. 

Minnesota:  On May 2, 2002, the Governor of Minnesota signed SF 2363, now codified at Minn. Stat. § 72A.20, prohibiting an insurer from using a credit score in underwriting as the sole basis for rejecting, canceling or non-renewing an automobile or homeowner’s insurance policy.  The law prohibits an insurer from considering credit inquiries not initiated by the consumer in the insurance score and directs the insurer to exclude the use of credit history in those instances where the absence of credit history adversely affects the applicant or policyholder.  Insurers must disclose to consumers that credit information will be used in the underwriting process.  When a consumer has adverse credit due to catastrophic illness, temporary loss of employment, or the death of an immediate family member, insurers are required to provide reasonable underwriting exceptions based on prior credit history.  This law prohibits the use of any insurance scoring model that incorporates the gender, race, nationality, or religion of an applicant or insured and requires the insurer to file the scoring model with the insurance commissioner’s office. 

Missouri:  Signed into law on July 12, 2002, HB 1502, now codified at Mo. Rev. Stat. § 375.918, prohibits an insurer from using a credit score in underwriting as the sole basis for rejecting, canceling, non-renewing, or reducing the amounts of benefits and coverage in an automobile or homeowner’s insurance policy.  If an insurer uses a credit report or credit score in underwriting, the insurer must disclose this at the time of application.  The insurer may not utilize any credit information known to be in dispute or take an adverse action based on a lack of credit history.  If the credit report or credit score results in action adverse, the insurer must inform the insured or applicant: a) that the credit report or score resulted in the adverse action; b) the name and address of the credit reporting agency; c) that the applicant or insured has a right to obtain a free credit report within 60 days; and d) that the applicant or insured has a right to lodge a complaint with the credit reporting agency regarding erroneous information. 

Nebraska:  Signed into law on April 16, 2003, and effective August 31, 2003, LB 487 is based on the NCOIL Model Act.  The law prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status, or nationality and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers are prohibited from basing renewal rates solely upon credit information and from taking adverse action solely because the consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except under limited circumstances.  Insurers are prohibited from taking adverse action based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  The law requires insurers to obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, upon request, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer is required to re-rate the policy within thirty days of receiving notice of the discrepancy and refund any premium overpayment.  The new law requires certain disclosures when using credit information in underwriting or rating a consumer and when adverse action is taken against a consumer.  The law requires that insurers file their insurance scoring models with the Insurance Department. 

Nevada:  Signed into law and effective July 1, 2003, SB 319 is based largely upon the NCOIL Model Act and prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status, or nationality and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers are prohibited from basing renewal rates solely upon credit information and from taking adverse action solely because the consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except under limited circumstances.  Insurers are prohibited from taking adverse action against a consumer based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  The law requires insurers to obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, upon request, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer must re-rate the policy within thirty days of receiving notice of the discrepancy and refund overpayment. 

New Hampshire:  On March 4, 2002 the New Hampshire Insurance Department adopted regulations concerning the use of insurance scores in underwriting and rating for automobile and homeowners insurance.  The regulation requires the insurer: (1) to keep written standards for determining when to use credit scores; (2) to give applicants and insureds notice that credit scores will be used in underwriting or rating; (3) to file the credit scoring model with the Department of Insurance for approval; (4) to provide information to the applicant or insured regarding the credit score in the event of an adverse decision; and (5) to re-rate a policy if it receives confirmation of an inaccuracy in credit history. 

New Mexico:  The New Mexico Insurance Division issued Bulletin 2002-001 on March 18, 2002.  This bulletin requires insurers that use credit scores in underwriting or ratemaking, to submit all portions of their programs to the Insurance Division. 

North Carolina:  Referred to the House Insurance Committee on March 24, 2003, HB 596 would prohibit rating plans for private passenger motor vehicle insurance based upon credit history or credit rating. 

North Dakota:  Signed into law on April 4, 2003, and effective August 1, 2003, HB 1260 governs the use of credit scoring and is based on the NCOIL Model Act.  The law prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status, or nationality and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers are prohibited from basing renewal rates solely upon credit information and from taking adverse action solely because the consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except under certain circumstances.  Insurers are prohibited from taking adverse action against a consumer based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  The law requires insurers to obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, upon request, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer is required to re-rate the policy within thirty days of receiving notice of the discrepancy and refund any premium overpayment.  The law requires that insurers file their insurance scoring models with the insurance department. 

Ohio:  The Superintendent of Insurance for Ohio issued Rule 3901-1-55 regulating the use of credit information.  Rule 3901-1-55 prohibits the use of credit history or credit score as the sole factor in determining premium or in taking any adverse or underwriting action.  An insurer may not use the following as negative credit factors: credit inquiries nit initiated by the consumer, inquiries related to insurance, disputed information under investigation, medical accounts and multiple lender inquiries related to mortgage or automobile loans.  An insurer must advise a consumer at the time of application that credit information will be used in rating and underwriting.  If an insurer takes adverse action based upon credit information, the insurer must inform the consumer of the factors of the credit history or credit score that resulted in the adverse action.  If the credit information used by the insurer is determined to be incorrect, the insurer must re-rate and re-underwrite the policy within 30 days of receipt of notice of the errors.  Excess premium, if any, must be returned.  Upon written request of the insured, an insurer must review the credit history or credit score, but not more than annually. 

Introduced March 11, 2003 and referred to the Insurance Committee, SB 48 would make it an unfair and deceptive practice to consider a credit report or score in determining the rate for, or the coverage to be provided by, a homeowners policy.  The bill would also prohibit an insurer from refusing to issue, canceling, or refusing to renew a homeowners policy based upon credit information. 

Oklahoma:  Signed into law April 22, 2003, and effective November 1, 2003, SB 539 is based upon the NCOIL Model Act.  An insurer using credit information must advise the consumer of that fact at the time of application.  SB 539 prohibits insurers from using insurance scores calculated using income, gender, address, zip code, ethnic group, religion, marital status, or nationality and prohibits insurers from denying, canceling, or non-renewing a policy, solely on the basis of credit information.  Insurers are prohibited from basing renewal rates solely upon credit information and from taking adverse action solely because the consumer does not have a credit card account.  The law prohibits insurers from considering the absence of credit information or inability to calculate an insurance score in underwriting or rating except under certain circumstances.  Insurers are prohibited from taking adverse action against a consumer based on credit information unless the insurer uses a credit report issued or an insurance score calculated within ninety days from the date the policy was written or renewal was issued.  The law requires insurers to obtain updated credit reports and recalculate insurance scores every thirty-six months.  At annual renewal, upon request, insurers must re-underwrite and re-rate policies based on current credit reports or insurance scores.  Insurers may not use credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  If the insurer relies on incorrect credit history, the insurer is required to re-rate the policy within thirty days of receiving notice of the discrepancy and refund any premium overpayment.  The law requires insurers to file their insurance scoring models with the insurance department. 

Oregon:  Signed into law September 22, 2003, and effective January 1, 2004, SB 260 requires an insurer responsible for an adverse underwriting decision based on credit information to provide the reasons for the decision in writing.  The notice must include specific provisions dictated by the statute.  The law further prohibits an insurer from canceling or non-renewing personal insurance in effect for more than 60 days based on credit history or insurance score.  Insurers are prohibited from relying solely on credit history when deciding whether to decline coverage.  The law prohibits the use of certain types of credit history to decline coverage, calculate an insurance score, or determine a premium or rate.  Furthermore, insurers are required to re-rate a policy upon request (but no more than once annually) if the consumer was assigned a less favorable rating category due to credit history.  If the insurer relies on disputed credit history later shown to be inaccurate, the insurer is required to re-rate the policy retroactive to the effective date of the policy term and provide premiums based on accurate credit history.  An insurer must file its insurance scoring models with the Director of the Department of Consumer and Business Services. 

Two other bills were introduced in Oregon during 2003.  Neither was enacted into law.  Referred to the Judiciary Committee on January 30, 2003, SB 280 would require insurers to inform consumers that they are entitled to a free copy of their credit report and insurers must provide a free copy upon request.  The bill would prohibit insurers from canceling or non-renewing personal insurance based solely on a credit history or insurance score.  The bill would permit insurers to use credit history to decline coverage of personal insurance, but only when used in combination with other substantive underwriting factors.  Referred to the Judiciary Committee on February 5, 2003, SB 314 would prohibit an insurer from using the credit history or the insurance score of a consumer in determining eligibility for personal insurance. 

Pennsylvania:  In 2003, four bills were introduced into the Pennsylvania legislature prohibiting insurers from denying, canceling, or refusing to renew personal insurance policies based upon credit history.  None were enacted into law.  SB 198, SB 331, SB 336, and SB 337 all were referred to the Banking and Insurance Committee in February of 2003.

Rhode Island:  Becoming law without the Governor’s signature and effective January 4, 2004, SB 137 (HB 5362) adds new provisions to existing Rhode Island law.  The new provisions prohibit insurers from treating credit inquiries not initiated by the consumer, inquiries made by the consumer for his or her own credit information, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies. 

On June 28, 2002, the Rhode Island General Assembly enacted H 8027A, now codified at R.I. Gen. Laws §§ 27-6-53 and 27-9-56.  The legislature found evidence which “clearly and convincingly shows that a credit score is a strong predictor of future loss” and that this data was not impacted by variation in demographics.  The law applies to the underwriting and rating of homeowners and automobile insurance policies and requires an insurer to demonstrate the predictive nature of its insurance score to the insurance division.  Insurers are prohibited from using a credit score -- or absence of a credit score -- as the sole basis for rejecting new applicants or using an existing policyholder’s worsened credit score as the sole basis for canceling, non-renewing or increasing the rate for an existing policy.  If requested by the insured, the insurer must obtain an updated credit score every two years and adjust the rate of the premium to reflect any improvements in the insured’s credit rating.  In situations where a credit bureau has determined that disputed information contained in a credit report is inaccurate or incorrect and that information was used in determining the credit score of a policyholder or applicant, the insurer must reissue or re-rate the policy within 30 days of receiving notice of the correction. 

South Carolina:  On May 24, 2002, the South Carolina Department of Insurance issued Bulletin 4-2002 regarding the use of credit scores in the rating, underwriting, cancellation or renewal of automobile insurance policies.  This bulletin prohibits an insurer from using a credit score as the sole basis for denying, canceling or non-renewing a policy.  This prohibition also extends to situations where the insurer relies solely on a credit score that the insurer knows is incomplete or inaccurate.  The bulletin requires the insurer to disclose at the time of application that it may gather credit information in connection with the application.  In addition, the insurer is allowed to check or recheck an insured’s credit score prior to a policy renewal, although an insured may request in writing that the score not be rechecked more than once a year. 

Texas:  Signed into law June 11, 2003, and effective immediately with the exception of certain specified provisions, SB 14 prohibits the use of credit scoring in ways unfair or discriminatory.  The law prohibits an insurer from considering the absence of credit information as a factor in underwriting and rating except under specific circumstances.  Insurers may not use credit inquiries not initiated by the consumer, inquiries related to insurance coverage or medical collections, and multiple lender inquiries related to mortgage and automobile loans made within 30 days of each other as negative factors in insurance scoring methodologies.  Multiple mortgage and automobile inquiries must be treated as one inquiry.  Upon written notice from an applicant, an insurer must provide reasonable exceptions for a consumer whose credit has been influenced by catastrophic illness or injury, death of a family member, loss of employment, divorce, or identity theft.  When an insurer receives notice that credit information is inaccurate, the insurer must re-underwrite and re-rate the policy no later than 30 days after the date of notice and return any premium overcharge.  The law requires that an insurer disclose to applicants that their credit report may be used in the underwriting or rating of poli,cies.  The insurer must also provide certain disclosures to applicants when the insurer takes adverse action against the applicant due to information contained in their credit reports. 

On November 10, 2003, the Texas Department of Insurance adopted Article 21.42-2U of the Texas Insurance Code.  The following are the most significant provisions of Article 21.42-2U.  Ins,urers may not take adverse actions based solely upon a credit report or credit score.  Insurers may not consider the absence of a credit history in rating or underwriting unless the insurer can show that the absence of credit history is reasonably related to loss experience.  If an insurer takes adverse action based upon a credit report or score the insurer must provide information explaining how the insured can verify or dispute information in the credit report.  If it is determined through the procedures described in section 611(a)(5) of the federal Fair Credit Reporting Act that the credit information of the insured was incomplete or inaccurate the insurer must re-rate and re-underwrite the policy within 30 days of receipt of notice of the determination.  The Texas Department of Insurance has also proposed an amendment to Texas law that would prohibit a rate difference of more than plus or minus ten percent based entirely upon credit scoring.  If an insurer intends to employ a credit score that will result in a variance of more than ten percent, the insurer must submit and justify a variance to its rate structure.

Utah:  Passed by the legislature on March 6, 2002, HB 110, now codified at U.C.A. § 31A-22-320, prohibits insurers from using credit information, including credit scores, in the renewal, non-renewal, termination, eligibility, underwriting or rating of an automobile insurance policy unless the credit information is utilized in conjunction with other risk related factors in the initial underwriting of the policy or the credit information is used to provide a reduction in rates to the insured. 

Virginia:  Signed into law March 26, 2003, and effective January 1, 2004, SB 1284 (HB 2535) requires insurers writing homeowners, renters, or personal lines motor vehicle insurance to make certain disclosures relating to the insurer’s use and consumer’s rights with regard to credit information.  The law requires an insurer that takes an adverse action based on credit information to provide notice to the applicant or insured.  Insurers using credit information for tier placement or the rating of renewal business must update credit information once every three years and more frequently if requested by the insured.  If an insurer is unable to obtain credit information, the insurer must treat the individual as having a neutral credit score or exclude the use of credit information as a factor.  The law requires an insurer that reevaluates credit information to apply any reduction in premium retroactively.  The law prohibits an insurer from using certain discriminatory criteria to determine an insurance score.

Washington: Signed into law on April 4, 2002, HB 2544, now codified at Wash. Rev. Code §§ 48.19.545 and 48.19.035, prohibits an insurer from canceling or non-renewing personal insurance based upon credit history or scores.  The law allows insurers to use credit history in denying personal insurance, as long as it is not the sole basis for the decision and other substantive underwriting factors are taken into consideration.  Insurers are prohibited from denying coverage based on the absence of credit history, the number of credit inquiries, the addition of the financing of a vehicle or house to a consumer’s credit history, the existence of medical related collection accounts, the consumer’s use of a particular type of credit card, or the consumer’s total available line of credit.  The law also requires the insurer to provide an applicant or policyholder with a written notice when an adverse action is taken based in whole or in part on credit history or score.  Additionally, this new law prohibits the use of credit history in determining personal insurance rates, premiums, and eligibility for coverage unless the insurer files the credit scoring model with the insurance commissioner.  The Commissioner is directed to adopt necessary rules to implement the new law, and to prepare a report to the legislature by January of 2004 on issues related to the use of credit history in personal insurance underwriting and rating.

In response to the passage of sections 48.19.545 and 48.19.035, the Commissioner promulgated regulations to implement the new law.  The new rules provide detailed information concerning the filing of credit scoring models with the insurance commissioner.  One of the provisions of the rule requires insurers that take an adverse action against an insured to disclose the significant factors that adversely affected the consumer’s credit score. 

Wisconsin:  Referred to the Assembly Financial Institutions Committee on February 26, 2003, AB 102 would require that a consumer-reporting agency provide, upon written request, a disclosure report within five business days after receiving the request.  The disclosure must provide the following: a current consumer report pertaining to the individual; the date of each request for credit information and the name of each person requesting credit information pertaining to the individual received by the agency during the 12 months before the date on which the report is provided; the dates, original payees, and amounts of any checks upon which an adverse characterization of the consumer is based; any other information in the individual’s file; a clear and concise explanation of the report; and a summary of rights.  The written disclosure report must be provided free of charge, unless the individual has requested a report during the preceding twelve months.  The bill prohibits an agency from disclosing to an individual the sources of any information acquired solely for use in preparing an investigative consumer report and used for no other purpose.  The bill also prohibits an agency from disclosing any credit score or risk score or predictor relating to the consumer. 

Wyoming:  Signed into law March 3, 2003, and effective July 1, 2003, SF 81 authorizes the commissioner to adopt rules governing credit scoring practices in the underwriting of personal lines policies.  The law directs the commissioner to adopt rules prohibiting an insurer from using credit history as the sole basis to cancel, deny, or non-renew an insurance policy and requires that insurers provide notice to persons when credit scoring is being used to underwrite a policy or when the use of credit scoring results in an adverse decision.  The rules must also ensure that consumers are adequately protected against unfair discrimination in the use of credit-scoring.