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INDUSTRY NEWS
Supreme Court Sides
with Insurers, Against Trial Lawyers in Credit Scoring Case
Decision saves insurers from billions of dollars in potential
penalties.
In any given year,
only a few dozen cases ever make it to the Supreme Court's docket,
and very few of those have a significant or direct impact on the
state-regulated insurance industry. The Supreme Court handed the
nation's insurers an important victory in which billions of
dollars and the continued viability of some leading carriers were
at stake.
The new decision ---
handed down in the cases of Safeco v. Burr and GEICO v.
Edo --- addresses insurance company use of consumer credit
reports and the obligations that insurers using this information
have under the federal Fair Credit Reporting Act (FCRA). The FCRA
requires insurers to alert consumers when they take an "adverse
action" based on credit scores and information contained in credit
reports. These written notices provide affected consumers with the
name and contact information of the reporting agency that provided
the report, a statement explaining the consumer's right to obtain
a free copy of the report and a description of how the consumer
can dispute the report's accuracy.
The FCRA
was not entirely precise in specifying the instances in which
adverse action notices must be provided, and some insurers
believed the notices were only required when a person’s credit
information had an adverse or unfavorable impact on the insurance
rates or terms that would otherwise have been provided. The
district court that initially heard these cases agreed with the
insurers, but the U.S. Court of Appeals for the Ninth Circuit
later adopted an expanded view and ruled that adverse action
notices were also required whenever more favorable credit
information would improve the rates or terms of a policy.
In its 2006 decision, the Ninth Circuit said an adverse action
notice must be provided to a person who does not receive the
insurer’s best rate because of a less-than-perfect credit history,
even when the credit information or score is better than average
and its consideration by the carrier results in a lower premium
for the consumer. On Monday, the Supreme Court disagreed. The
court found that an adverse action only occurs when a consumer
pays a premium that is worse than what he/she would have paid had
credit information not been considered and that notices are not
required to consumers in cases where a better credit history or a
superior credit score would have produced a cheaper rate.
Perhaps the most crucial elements of Monday’s decision were its
findings concerning the penalties that apply to insurers who do
not satisfy the FCRA’s adverse action notification requirements.
The law states that insurers who negligently fail to comply are
liable for any actual damages incurred by consumers, but those who
willfully violate the law can be liable to each consumer for
damages between $100 and $1,000 (plus punitive damages). The
circuit court determined last year that GEICO and Safeco had
recklessly disregarded the law and thus willfully violated the
notice requirements even though the carriers claimed to have, in
good faith, followed plausible legal interpretations provided by
attorneys and adhered to an earlier lower court opinion.
Fortunately, the Supreme Court---as well as common
sense---intervened. In addition to confirming that the industry
was in fact largely conforming to the FCRA’s notice requirements,
the court clarified that the penalties associated with willful
violations are reserved for companies that do not have an
objectively reasonable basis for their interpretation of the law.
The court recognized that, given the lack of clarity in the FCRA
language, the carriers’ positions were not unreasonable and did
not pose the type of “unjustifiably high risk” for illegal
behavior that would warrant triggering the harsher, more expansive
penalty provisions.
The
significance of the court’s reversal and its findings concerning
liability and penalties are impossible to understate. Although the
plaintiffs never alleged that they suffered any actual damages or
real harm, the adoption of a contrary position by the court would
have meant that GEICO, Safeco and many other insurers had
committed millions of technical and inconsequential errors in
recent years and faced incalculable financial penalties as a
result. Instead, company officials this week find themselves
relieved to have survived an extremely close call while many in
the trial lawyer community lament the loss of a potentially
colossal source of revenue.
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