The San Francisco Chronicle

Last year, Andrew and Teresita Gnagy went to CSE Insurance Agency in San Diego to see if they could get a better deal on their homeowners policy. They told the agent, Gary Disney, about their house and past claims. Two days later, an assistant told them Travelers would sell them a policy, and quoted a price.

But three days after that, Disney called back, saying they had been turned down because of Andrew’s poor credit score.

“We had never been asked any questions regarding our credit, nor had we signed any authorization for our credit to be run,” says Gnagy. “We feel violated.”

Although California law severely limits the use of credit scores in insurance, many companies use them to deny homeowners policies, and some use them to determine payment plans on auto insurance.

The state Insurance Department says it goes after violators when it gets complaints. But some consumers don’t know they’ve been turned down because of credit, and even when they do, many don’t complain.

“Day in and day out, property insurance is being denied to people because of credit scoring,” says David Sydney, an insurance agent in Marin County. “People with marginal credit or sullied credit get used to getting kicked around in the marketplace. They don’t usually complain.”

A credit score is a numerical rating based on the information in one’s credit report, such as late-payment history, number of accounts, loan balances and bankruptcies. Lenders have long used credit scores to set interest rates.

In the past year or two, many insurance companies have begun using “insurance scores,” which is another type of credit-based score.

Craig Watts, a spokesman for San Rafael’s Fair, Isaac, a leading marketer of credit and insurance scoring formulas, explains that both systems take information from a consumer’s credit report. But “they weight it differently and combine it in different ways,” he says.

“Credit scores are substantially related to the likelihood that people will file claims,” says Diane Colborn, vice president for the Personal Insurance Federation of California.

The unproven theory is that people who handle credit responsibly are more likely to maintain their homes properly and obey traffic laws.

But consumer groups and some state regulators say consumers’ credit history has no bearing on whether they’re likely to have a pipe burst or a fence blow down in a storm.

“It just does not pass the smell test,” says Mike Kreidler, Washington’s insurance commissioner.

Norma Garcia of Consumers Union in San Francisco says the practice discriminates against low- to moderate-income people because they “tend to be more negatively impacted by inaccurate credit information.”

Rod Guilmette, spokesman for the National Association of Professional Allstate Agents, calls it “a form of economic redlining.”

Insurance companies “want customers who have high lifetime values. They want to sell them mutual funds, CDs, annuities. A person with no credit might have no lifetime value,” he says.

Some agents hate credit scoring because it costs them sales, and they’re the ones who have to explain it to angry customers.

“As an agent, there are few things more annoying than credit scoring,” says Disney.

More than half of the country’s state legislatures have introduced bills to limit or ban credit scores in insurance. Washington, Idaho and Utah have passed laws curbing their use. In California, existing laws severely restrict it.

In personal auto insurance, California law specifies three rating factors that must be used (driving safety record, years of driving experience and miles driven annually) and 16 other factors that may be used. Any type of credit information or score is not an approved criteria.

But some insurers are using credit scores to determine whether people can pay their auto premiums in installments or up front in a lump sum. State law doesn’t explicitly prohibit this. But “we think that it violates the good driver provisions of Proposition 103,” says Pam Pressley, a staff attorney with the Foundation for Taxpayer and Consumer Rights.

In California, everyone who qualifies for a good driver policy must be offered the same terms and conditions. That means companies can’t deny a good driver a payment plan simply because of his or her credit score, Pressley says. But she admits, “This is an issue that hasn’t been totally litigated or challenged.”

Consumer advocates are watching an enforcement action the state Insurance Department has filed against Allstate, alleging it may have used credit information improperly.

Allstate used a proprietary “insurance financial stability,” or IFS, scorecard to decide which new auto insurance customers got payment plans. Renewal customers got payment plans based on how many times Allstate had sent them cancellation notices.

Lara Sweat, an attorney for the department, says the complaint focuses on three issues:

“There was a period of time during which they were obtaining IFS scores but not offering payment plans. We’re not quite sure what they were doing with the IFS score, because the only reason they could have used it wasn’t in place,” she says.

Second, “because they used IFS scores to determine down payments for new business but used cancellation notices for renewal business, they were not offering policies with the same terms and conditions as required by the regulation,” she adds.

Finally, the Insurance Department is required to make sure insurance rates are not “excessive, inadequate or discriminatory.” Sweat says the department doesn’t know if IFS is discriminatory “because we don’t know what’s in it.”

The case is set for a hearing in June.

Allstate spokesman Mike Trevino says, “We believe we’re in full compliance with the letter and the spirit of the law in the state.”

According to agents, many companies in California — including Safeco, Fireman’s Fund, Allstate and CSE to name a few — use some type of credit or insurance score as one factor in underwriting new business.

Two of the biggest — State Farm and Farmers — say they do not.

“We’re beginning to ask for Social Security numbers for that purpose, but it’s not something we’re convinced we need to go to in California,” says Ron Siemsen, a State Farm agent in San Mateo.

Travelers has discontinued use of credit scores in California at the request of the Insurance Department.

Credit scoring has been called a “black box,” because almost nobody knows how it works except the people who invent it.

If an insurance company submits proposed rates based in part on credit scores, the California Insurance Department won’t approve them unless it can look inside the black box to make sure it’s not discriminatory, according to Elizabeth Moore, a department attorney.

So far, no company has allowed the department to look into its box, Moore says. Some companies have withdrawn proposed rates after the department asked to peer inside.

Californians who think they have been unfairly denied insurance can contact the insurance department at (800) 927-4357 or the Foundation for Taxpayer and Consumer Rights at (310) 392-0522 or http://www.consumerwatchdog.org.