Zach Von Eiff
Bus Law 1
“How Do Insurance Companies Use Credit Scores”
Insurance companies are using certain parts of credit scores to affect the premiums they charge people for auto insurance. Companies started doing this in the 1990’s working with creator of the standard credit score, FICO. It gained a lot of traction quickly and by 2006 almost every major insurer was using it as a part of their rating system. For the purpose of understanding how insurance companies actually use your credit score to affect your premium I’m going to go through how the rating system works. The way the rating system works for insurance companies is quite simple actually. Insurance companies have to deal with a ton of regulations to set premium levels and what they will charge people for insurance, so what they do is create tiers for each premium bracket. Once insurance companies have the possible premiums for these tiers set the government regulation is essentially gone. This is how they are able to use many factors including parts of your FICO credit score to change your premium without breaking laws regarding price changing. Insurance companies can move a customer between tiers according to the information they find, thus changing their premium. This is considered an underwriting issue which has almost no government regulations. So now we all know how insurance companies deal with “getting around” laws for changing people’s premiums, how is it pertinent and/or legal to use credit scores in these decisions? Well, in terms of legality, right now the Federal Government does not have any regulations preventing this. The only thing that the Federal Courts have a hand in is that they require insurance companies have to make sure they don’t let premiums be affected by credit scores, and not send the applicant an adverse action letter. Unfortunately for the consumer it is not something that is strictly enforced because of how hard it is to prove the insurance company took adverse action. Once you do you also have a few other hoops to jump through.
They had a rather large case in 2007 brought against Geico and Safeco insurance companies. I’m going to focus on the Geico side of the case as it incorporates more of how the courts decided on this issue. Customers of Geico brought suit against them when they found out that their insurance premiums had been affected by their credit scores and they hadn’t been sent an adverse action letter stating that. When your credit is used in determining a rate for something you are entitled under the FCRA to receive an adverse action letter. Now these policy holders were suing, claiming that Geico acted recklessly by not sending these letters. Now to determine if this is a credible claim the courts had to figure out if Geico had violated their responsibility to send an adverse action letter. Through investigation they found that Geico did violate this responsibility and acted recklessly. ...