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San Jose Mercury News

The state Senate passed a bill Thursday that would bar insurance companies from considering a person’s credit history when writing homeowners policies.

The bill, by state Sen. Martha Escutia, D-Norwalk, passed on a 23-14 vote and will now go to the Assembly.

Consumer advocates supported the bill, arguing that insurers should not be able to tie homeowners’ financial histories to their insurance risk. They said using credit reports to help write policies is especially harmful to poor and minority homeowners, who sometimes have less-than-perfect financial histories.

”Just because someone misses a Visa payment doesn’t mean that their roof is more likely to blow off in a windstorm,” said Doug Heller, of the Foundation for Taxpayer and Consumer Rights, which sponsored the bill. ”There’s no correlation.”

The voter-approved Proposition 103 bars California insurers from using credit information when writing automotive policies. No ban exists for homeowners policies, although few California companies have acknowledged that they rely on credit information.

Industry representatives say studies prove a strong link between a person’s financial stability and their likelihood of filing a claim. As a result, some companies compile what they call ”insurance scores,” which combine elements of customers’ credit records with risk factors such as their history of filing claims.

“Numerous studies have shown a strong correlation between insurance scores and the risk of future loss,” said Jerry Davies, director of communications for the Personal Insurance Federation of California. ”There was a Texas study where you could look at credit scoring and the people who make claims, and it’s obvious there’s a correlation.”

Just a page long, Escutia’s bill makes it illegal for insurers to refuse to write policies or to cancel policies based ”in whole or part” on credit history. Companies would also be prohibited from using credit scores to set premiums or place customers on payment plans.

Maryland has banned credit information from being used in homeowners-insurance underwriting. But if the Escutia bill passes, California would be the first state to ban the practice in both the homeowners- and auto-insurance industries, Heller said.

Allstate pushed the issue to the forefront late last year when it applied to the state insurance department for a 6.9 percent rate increase, acknowledging that it uses financial history to determine risk and premium prices.

Led by state Insurance Commissioner John Garamendi, the department denied Allstate‘s request for a rate increase.

”Credit scores have been called voodoo,” department spokeswoman Nanci Kramer said. ”The scores mean nothing.”

Allstate has since promised to suspend use of financial profiles as an underwriting factor, and will take the debate to the Legislature, company spokesman Bob Daniels said.

Consumer Watchdog
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