Insurance Companies Would Not Be Allowed to Discriminate Based on Credit Score
Sacramento, CA — Legislation to end the insurance industry practice of charging higher rates, requiring 100% down payment of premium and denying coverage based on a customer’s credit history passed the California Senate Thursday. SB 691, authored by Senator Martha Escutia (Whittier) and sponsored by the Foundation for Taxpayer and Consumer Rights (FTCR) is a key provision in Insurance Commissioner Garamendi’s Homeowner’s Bill of Rights. In recent years insurance companies have begun to discriminate against consumers who have less than stellar credit scores. According to FTCR, an individual’s credit history has nothing to do with their risk to insurance companies and, therefore, the practice should be banned.
“People understand that their credit history might affect whether or not they get a loan, but nobody thinks that a low credit score will affect their insurance premium,” said FTCR’s senior consumer advocate Douglas Heller. “Just because someone misses a Visa payment does not mean that they are more likely to have damage to their roof in a windstorm. Credit scoring for insurance is a non sequitor.”
Insurance companies, which have increased the use of consumer credit history in recent years, allege that there is a statistical correlation between a person’s credit score and the risk that they will file an insurance claim. However, consumer groups note, the correlation has never been vigorously and independently verified and is always based on a scoring system that is kept secret. More importantly, the groups argue, statistical correlation is not a good enough reason to use the data; the data must have something to do with the insurance product.
“Statistics could show that blondes file more claims than brunettes, but that does not mean insurance companies can charge a higher premium to people with blonde hair. The same goes for credit history, which may explain a lot about a person’s income and the financial institutions available in their community, but has nothing to do with whether or not they are a low-risk homeowner,” said Heller.
The legislation, which now moves to the Assembly would ensure that California provides the nation’s strongest insurance consumer protections against the unfair practice of credit scoring insurance policyholders. California law, under Proposition 103 rules already bars credit scoring of auto insurance customers. It would also relieve some of the pressure insurance companies have been putting on homeowners who have faced difficulties in the tight insurance market of recent years.