Mich. SC permits insurers to factor credit scores

Jessica M. Karmasek Jul. 20, 2010, 3:59pm


LANSING, Mich. (Legal Newsline) -- The Supreme Court of Michigan earlier this month reversed an initiative of Gov. Jennifer Granholm that would've barred insurance companies from considering customers' credit ratings when setting rates.

According to the Competitive Enterprise Institute -- a public interest group that studies regulation, risk and markets -- the decision has "national implications." The institute points to the use of credit scoring in economic transactions like job applications, bank loans and insurance policies.

Citing data showing the use of credit scores has lowered insurance rates for most consumers, the Court, in its July 8 opinion, wrote that this practice was not "unfairly discriminatory" under Michigan law and "reflects reasonably anticipated reductions in losses or expenses."

As explained in a 2002 report from the state's then-Office of Financial and Insurance Services Commissioner Frank Fitzgerald, "insurance scoring" or "insurance credit scoring" is the "use of select credit information to help insurance companies establish automobile and homeowners premiums."

An individual's credit score is calculated by applying a standard formula to information from the individual's credit history. These formulas are developed by the insurance companies themselves or by credit-scoring companies.

Companies that use insurance scoring tend to offer discounts to individuals with good insurance scores.

In 1997, the Michigan Legislature enacted a law that allows insurers to establish and maintain a premium discount plan without prior approval by the Legislature or the insurance commissioner.

As a result of the law, insurance companies in the state began using insurance scoring.

Then, in 2002, Fitzgerald undertook a statewide study of this practice "to gather information on the use of insurance credit scoring in personal automobile and homeowners insurance policies and to take testimony concerning its effect on Michigan citizens."

Later that year, the OFIS issued the Fitzgerald Report, which concluded that state law permitted such discounts based on insurance credit scoring but that "significant and legitimate concerns" identified during the study had to be addressed to protect the rights of the state's consumers.

So, the report included various administrative recommendations and concluded some concerns were beyond the statutory authority of the commissioner and would require action by the Legislature. Several legislative recommendations were submitted, none of which totally prohibited the use of insurance scoring.

In May 2003, then-OFIS Commissioner Linda A. Watters issued an update. In it, she wrote that "insurance scoring is problematic at best."

"Perhaps no other widespread practice of insurers presents so many technical and social issues."

The bulletin continued such considerations that led Granholm to call for a ban on the use of insurance credit scoring altogether.

"If a ban cannot be achieved, at least significant reform legislation is imperative to protect the interests of the consumers on such an important matter as the amount they pay for automobile and home insurance," Watters wrote.

"This agency will be fully supportive of the Governor in these matters."

In a closely divided 4-3 opinion with Justice Maura Corrigan writing for the majority, the Court wrote of the ban, "The Commissioner exceeded her authority by enacting a total ban on a practice that the Insurance Code permits."

They also wrote that the rules were "illegal, invalid, and unenforceable."

The Court said insurers have shown a "clear correlation between insurance scores and risk of loss" and demonstrated that insurance scoring may be used to establish a "reasonable classification system."

Michelle Minton, director of insurance studies for the Competitive Enterprise Institute, said the decision was "great news for every consumer in Michigan."

"Restraining insurance companies doesn't actually reduce the cost of insurance and the current governor's hostile attitude toward the industry has done nothing but create inefficiencies and higher premiums for consumers," she said in a statement.

"A vibrant insurance market is necessary for Michigan's economic recovery and this court decision gives us reason to be optimistic."

Auto insurance, Minton said, is expensive in Michigan because drivers are required to buy the greatest amount of coverage in the nation.

"I hope the next governor -- whoever that may be -- learns from the mistakes the current one and realizes that the only way to reduce insurance premiums in the long term is to allow insurers to price rates accurately and to allow consumers the ability to choose how much or how little coverage they want," she said.

But Linda Teeter, executive director of Michigan Citizen Action, recently told the Michigan Messenger the ruling will have a detrimental impact on drivers with credit issues.

She argued the result of the ruling could be to provide a person with a poor driving record a lower premium than someone with a good record.

Officials with OFIS -- renamed the Office of Financial and Insurance Regulation in 2008 -- were disappointed in the ruling.

"Affirming the unbridled use of credit scores by insurers is bad for Michigan consumers, who expect and deserve their rates to be determined by factors such as driving record," Ken Ross, OFIR's current commissioner, told the Messenger.

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