Insurers Overturn Fla. Restriction on Use of Credit Scoring

A Florida Administrative Law Judge has declared that the Florida Office of Insurance Regulation’s rule restricting the use of credit information by insurers is invalid.

In a Dec. 29 ruling, Judge Lawrence P. Stevenson of the Florida Division of Administrative Hearings blocked the OIR from restricting insurers in how they may base their underwriting and pricing decisions on potential customers’ credit scores.

OIR filed its rule in March 2005 to implement the credit law passed by the Florida Legislature in 2003. That law, based on a National Conference of Insurance Legislators’ model, authorized insurers’ use of credit information and credit scores in underwriting and rating.

However, insurers fought the rule, arguing that it went far beyond the language of the statute. Insurance trade groups (American Insurance Association, Florida Insurance Council, National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America) filed the legal challenge that was the subject of the administrative judge’s ruling of Dec. 29.

Insurers generally cite credit scores as a valuable predictor of a person’s likelihood of filing a claim in the future and maintain their use does not unfairly discriminate against any one group of insureds. Some consumer groups and regulators, however, worry that credit scoring use disproportionately affects lower income applicants.

According to Guy Marvin, president of the industry’s Florida Insurance Council, the OIR rule had the effect of blocking the use of credt scores.

“OIR’s rule would have required insurers to meet an unprecedented ‘disproportionate effect’ standard that is contrary to state law,” Marvin explained. “Because insurers do not collect the data necessary to prove there is no ‘disproportionate effect,’ the rule would have effectively eliminated the use of credit information, a proven risk assessment tool that benefits countless insurance consumers.”

David Snyder, American Insurance Association vice president and assistant general counsel, called the Dec. 29 ruling “an impartial decision that unmistakably rejects efforts to arbitrarily restrict a proven risk measurement tool benefiting a majority of policyholders that is used in most states.”

According to the AIA, Judge Stevenson called the rule “arbitrary and capricious,” and found that it is “vague, fails to establish adequate standards for agency decisions, and vests unbridled discretion” in the regulating agency.

The judge also found the proposed rule would “enlarge, modify, or contravene the specific provisions of law.”

Legal Consultant Steve Roddenberry worked with the FIC in petitioning the case against the OIR. He said the OIR has two options: to accept Judge Stevenson’s decision or to revise and republish the rule.

“The statute as it exists does not afford the OIR to effectively prohibit the use of credit scoring in Florida,” Roddenberry said. “Their rule is invalid and they will need a rule that establishes standards that have the effect of at least impeding the use of credit scoring by insurers.”

Sam Miller, executive vice president of the FIC, maintained that if the ruling stands, insurance costs will remain “status quo” but if the OIR successfully appeals the decision, auto and homeowners’ insurance costs will increase for the majority of Floridians.

The OIR could not be reached for comment,

Currently, 26 states have adopted laws or regulations based on the NCOIL model governing credit scoring. Four states do not allow insurers to use credit information in some manner, with one of those states prohibiting it only for one line of insurance.

Julie Pulliam, public affairs director for the American Insurance Association, said credit scoring in the insurance industry is not the same as in other financial institutions.

“The lower an insurance score, the more likely a consumer is to file a claim,” Pulliam said. “Credit scoring is just one tool insurers use in price determination. The more tools insurers have at their disposal, the more accurate pricing will be.”

Sources: American Insurance Association
Florida Insurance Council