Insurers Mount Legal Challenge to Multi-state Credit Scoring Study;
Ask States to Withdraw Data Call
June 23, 2004,
Insurance Journal
Two national insurance company
trade organizations have expressed legal concerns about the recently initiated
multi-state study on credit-based insurance scores and have asked regulators in
eight states to withdraw their data requests.
The insurers' concerns were
detailed in a strongly-worded letter sent to commissioners by Nat Shapo, the
attorney retained by the Property Casualty Insurers Association of America (PCI)
and the National Association of Mutual Insurance Companies (NAMIC), to represent
the organizations in this effort. Shapo, the former insurance director of
Illinois, is a partner in the Chicago office of Sonnenschein Nath and Rosenthal.
The letter was sent in early June
to commissioners in Oregon, Alabama, Washington, Nevada, Montana, Indiana, and
Missouri. On June 18 the Alabama Insurance Department notified insurers that it
was withdrawing from the study.
The letter identifies two
significant areas of concern regarding the study: 1) the use of regulatory
examination powers for research on public policy issues; and 2) the possible
violation of anti-discrimination provisions of existing insurance laws.
Shapo stated that "the explanatory
letter accompanying the recent data call makes it clear that the primary purpose
of the study is not to verify compliance with existing law. PCI and NAMIC
believe that information gleaned from market conduct examinations should only be
used to determine compliance with existing law, not as the basis for developing
new laws."
PCI and NAMIC contend that state
laws grant regulators the power to demand information from insurers for the
purpose of enforcing existing provisions of the insurance code, not for deriving
information which has no relevance to established statutes and regulations.
The letter also states that "the
use of examination powers for research purposes are particularly acute due to [PCI
and NAMIC's] recent experience in Missouri, which is designated by the
participating states in the study as the lead state. Insurers objected to the
methodology used in a Missouri [conducted earlier this year]...and view this as
a template for the current study and thus approach this process with great
trepidation."
The Shapo letter also pointed out
that it appeared that if the study found that the use of credit information
leads to "an unintentional but disproportionate impact on an identifiable class
of consumers," commissioners may seek to enforce an anti-discrimination
provision of the existing insurance code. "PCI and NAMIC firmly believe that the
concept of disparate impact is not relevant to state insurance laws. In fact, as
the NAIC has unambiguously argued, application of a disparate impact standard is
inherently in conflict with the established definition and interpretations of
'unfair discrimination' in statutes and case law," Shapo wrote.
Shapo cited an NAIC amicus brief in
Nationwide v. Cisneros that stated: "The assertion of claims...especially under
the so-called 'disparate impact' approach, which requires no showing of
discriminatory intent, makes impossible the operation of state laws establishing
insurers' right to use rationally based, neutral risk selection techniques."
"We have been working with state
legislators and regulators for the past five years to enact laws that allow
insurers to use this important underwriting tool and that establish fair and
reasonable consumer protections," said Neil Alldredge, director of state affairs
for NAMIC. "Dozens of state legislatures have considered this issue and have
passed laws that meet these goals. We believe that this study is not a fair and
appropriate exercise of regulatory authority and have asked regulators in these
states to consider withdrawing their requests. We are pleased to see that the
Alabama Insurance Department withdrew from the study and hope other state
insurance regulators will follow suit."
"Last year Congress made permanent
the provisions of the Fair Credit Reporting Act - the federal law that for more
than 30 years has permitted insurers to use credit history to underwrite
automobile and homeowners insurance policies," said Robert Zeman, senior vice
president, insurance and regulatory affairs for PCI. "Congress also called for
the FTC and the Federal Reserve to conduct a broad national study on the impact
- positive and negative - of the use of credit scores and credit-based insurance
scores on all facets of consumers' lives - housing, employment, access to
mortgages and other loans, and insurance. We think it makes more sense for state
regulators to work closely with the FTC on this effort than to conduct a study
only on credit-based insurance scores that collects data from a few states."
The federal study is due to be
completed by the end of 2005.
http://www.insurancejournal.com/news/national/2004/06/23/43523.htm