Supreme Court Rules on Insurers’ Credit Reporting Notification Cases

The Supreme Court sided with two insurance companies Monday in a case involving alleged violations of the Fair Credit Reporting Act.

The law requires insurance companies and other businesses to notify customers who are charged more because of their credit ratings.

In a unanimous decision, the justices said Geico General Insurance Co. did not violate the law and that Seattle-based Safeco might have, but did not do so recklessly.

The insurance industry said a decision against it could have subjected companies to billions of dollars in punitive damages for failing to notify customers.

The Property Casualty Insurers Associatin of America (PCI) agreed that the ruling by the U.S. Supreme Court clarifies significant issues related to the rules regarding insurers’ requirements to provide adverse action notice to consumers.

“Today’s ruling reverses the appeals court decision that said the defendant insurance companies had acted in ‘willful disregard’ of the law for failing to send adverse action notices,” said Kathleen Jensen, senior legal counsel for PCI. “We contended in our amicus that the 9th Circuit Court used a very low standard for determining whether insurers acted in willful disregard for the law. The Supreme Court ruling delivered by Justice Souter stated that when Congress enacted the FCRA they intended a civil-law usage, giving a plaintiff a choice of mental states to show in making a case for liability.”

The Court also ruled that the benchmark for determining whether FCRA notice is required at new business should be the rate the applicant would have had if the company had not taken his credit score into account, not a benchmark of what the “best” rate is. The Court further clarified that once a consumer has learned that his credit report led the insurer to charge more, he has no need to be told over again with each renewal if his rate has not changed.

“We are pleased with the ruling and hope it helps put to rest any questions about what constitutes an adverse action notice and when such notices need to be sent,” said Jensen. “Thanks to this ruling insurers now have greater certainty regarding how insurers must comply with the FCRA .”

The American Insurance Association, a national insurer trade group, also praised the Supreme Court clarification.

“The Court’s ruling provides guidance moving forward and makes clear that good faith efforts by insurers to comply with the law will not be punished as willful violations…” said Dave Snyder, vice president and assistant general counsel of the AIA.

Thirteen state insurance commissioners said that a lower threshhold for proving liability, adopted by the 9th U.S. Circuit Court of Appeals in San Francisco, would motivate compliance with the law.

To find liability, a company’s conduct must be more than “merely careless,” wrote Justice David Souter.

Souter said that a company’s conduct must entail an unjustifiably high risk of harm that is either known to a company or is so obvious that it should have been known.

The appeals court warned companies against relying on “creative lawyering that provides indefensible answers.” Liability, the appeals court said, could stem from a company’s “deliberate failure to determine the extent of its obligations.”

Relying on implausible interpretations of its obligations may constitute reckless disregard for the law and therefore amount to a willful violation, the appeals court said.

The Supreme Court adopted a notification requirement favored by the industry. The standard limits the circumstances in which customers must be told their premiums are higher because of their credit ratings. The appeals court and lawyers for consumers said they must be notified any time they pay more than the lowest rate available to customers with the very best credit scores.

“Geico has the better position,” the Supreme Court said.

Geico did not owe a prospective customer such notification, the court said. The company had offered him a rate that was the one he would have received if his credit score had not been taken into account.

Safeco did not notify two of its customers because it thought the law did not apply to initial applications, a mistake that left the company in violation of the law.

“The company was not reckless in falling down on its duty,” Souter wrote.

Under a more expansive notification standard, Safeco would be required to send adverse action notices to 80 percent of the company’s new customers, Maureen Mahoney, an attorney defending the two companies, said at arguments in the Supreme Court in January. At Geico, just 10 percent of new customers qualify for the top tier of credit, Mahoney added.

There are credit reports on 200 million Americans, and consumer information is used by an array of lenders, retailers, employers and government agencies. Credit reporting agencies generate over 1.5 billion consumer reports per year.

Congress passed the credit reporting act in 1970 to protect consumers from flaws in the system and improve the reliability of reports so that the business sector can accurately gauge risk.

Consumer groups point to the notification requirement as the cornerstone to cleansing credit reports of inaccurate information.

Geico General Insurance Co. is owned by GEICO Corp., a subsidiary of Warren Buffett’s Berkshire Hathaway Inc.

PCI and AIA contributed to this story.