Michigan Looks at Role of Credit Records in Rate-Setting

The Wall Street Journal

Insurance companies already are under fire for using information from consumers’ credit records to set rates. Now some wonder whether those practices violate federal credit-reporting laws.

Michigan Attorney General Jennifer Granholm says her office is investigating whether at least two insurers violated the Fair Credit Reporting Act when they used credit-based insurance scores, which are calculated from personal information in credit reports, to determine rates and coverage. Under the act, consumers harmed by the use of credit information must be told which credit-reporting company provided the information. They also are entitled to a free copy of their credit report so that they can dispute any incorrect information.

Separately, at least five lawsuits seeking class-action status have been filed against Allstate Corp. alleging that the Illinois insurer failed to properly notify customers who were denied coverage, charged higher rates or forced to pay more of their premiums upfront based on information in their credit records. Allstate, the nation’s second-largest personal insurer, has been using credit-based insurance scores since 1999.

What do credit scores have to do with insurance? Insurers say people with low credit scores tend to file more claims. The result: A person running into credit problems could wind up paying more for insurance or even being denied coverage. This year, five states — Idaho, Maryland, Minnesota, Utah and Washington — have enacted legislation restricting the use of credit scores. Critics say that the use of scores penalizes poor people, immigrants and seniors because they may not have credit records.

Consumers who see their rates climb should ask their insurer if it uses credit scores. If the answer is yes, try to find out what in your credit record was used against you and get a copy of the report to see if there are any errors. In some cases, you may be able to get a better deal with another insurer. That is because different insurers use credit scores differently. Some use them to set rates. Others use them to decide who gets coverage. And some use them for both.

“Rates can vary by more than 100%” at different insurers for the same customer, says Robert Hunter, director of insurance for the Consumer Federation of America, an advocacy group.

Ms. Granholm, the Michigan attorney general, declined to identify the companies being investigated by her office. But she says it has “received a whole slew of complaints about credit scoring and insurance.” Consumers “ought to know what is being evaluated when their rates are calculated,” Ms. Granholm says. That’s particularly important, she adds, because there is “a huge error rate with credit reports.”

Credit-reporting companies say that errors aren’t a big problem. “The overwhelming majority of credit reports are accurate,” says Clark Walter, a spokesman for Chicago-based TransUnion LLC.

Joseph Annotti, an assistant vice president of the National Association of Independent Insurers in Chicago, says insurers are meeting their legal requirements. “Our companies are confident that their practices are more than in line with the Fair Credit Reporting Act,” he says.

As for Allstate, it declined to comment on the pending legal actions against it. But Scott Falknor, a counsel for the company, says that “Allstate does and always has taken its obligations under the Fair Credit Reporting Act very seriously.” The company “has taken extensive steps to comply and continues to do so,” he adds.

Cynthia Silhol of Brooksville, Fla., a plaintiff in one of the lawsuits, says she had already written a check to Allstate for homeowners’ coverage when she was told that the company was denying her coverage based on her credit report. “I was so flustered when they said that,” she says. “I didn’t know what to do.” Ms. Silhol says she was never told which credit-reporting agency the information came from or that she could dispute any errors.

Woodrow Shelton Jr., a former Allstate agent who lives outside Nashville, says the premiums on his homeowners’ and auto-insurance policies were raised by 10% to 15% in November 2000 because of his credit score. “There wasn’t any notification,” says Mr. Shelton, a plaintiff in a separate lawsuit. Mr. Shelton says he only learned that the price increase was based on his credit record when he stopped by the Allstate office, where he had previously worked, to complain about the rate increase.

Last month, Allstate mailed Mr. Shelton and roughly 54,000 other Allstate policyholders in Tennessee letters informing them that the company had pulled their credit reports between October 2000 and May 2001. The notices went to people who were “renewing at anything but Allstate‘s best rate,” says Allstate‘s Mr. Falknor. He says these policyholders didn’t receive Fair Credit Reporting Act notices when their policies were renewed because of a computer programming error.