June 25, 2007
Supreme Court ruling backs insurers on using credit scores
By Pete Yost
The Supreme Court ruled in favor of two large insurers recently, limiting the circumstances under which companies must tell customers their credit ratings are affecting the amount they pay.
The justices said Geico General Insurance Co. did not violate the Fair Credit Reporting Act and that Safeco Insurance Co. of America might have, but did not do so recklessly.
Consumer groups point to the notification requirement as the cornerstone to cleansing credit reports of inaccurate information.
The case has significant implications for pending class-action lawsuits seeking billions of dollars in punitive damages on behalf of consumers who say they should have been notified, but weren't.
In order for a company to be found liable, its conduct must entail an unjustifiably high risk of harm that is either known to the company or is so obvious that it should have been known, wrote Justice David Souter.
"It's not a great decision for consumers, but there are some silver linings," said Scott Shorr, an attorney representing plaintiffs in the case involving Safeco and Geico.
Notification waiver
The court ruled that the law's notification requirements apply to initial applicants, which means new customers will be informed when their credit scores affect the rates they're being quoted.
But the court overturned an appeals court ruling that would have required notification of the vast majority of customers. Notification would have been the rule unless consumers were paying the very lowest rate offered to those with the very best credit ratings.
Under such an expansive notification standard, Safeco would have been required to notify 80 percent of its new customers, while at Geico, just 10 percent of new customers qualify for the top tier of credit, lawyers representing the companies say.
The court agreed with Geico's approach, which was to compare the rate a customer is being offered with the rate that would be charged if the company had not taken the credit score into account.
On another issue, the companies lost on their contention that in order to be found liable for a willful violation, it must be shown that they knew they were breaking the law. The court said "reckless disregard" was sufficient. But the justices laid down a restrictive definition.
The court's ruling on the liability question was unanimous, while the decision on notification was 7-2.
On the liability question, the court supported "a middle-of-the-road position," said Gene Schaerr, chair of appellate and Supreme Court practice at the law firm of Winston & Strawn. "The court adopted what initially would have been a pro-plaintiff position, but in actually applying the definition, they have a very narrow interpretation of 'reckless.'"
Schaerr filed court papers in the case on behalf of FreedomWorks Foundation, a private group supporting the insurance companies.
Future implications
The mortgage industry is disappointed that the standard for liability encompasses "reckless disregard," but it believes the court is giving the industry some leeway in interpreting the law in good faith, said Washington, D.C., attorney Tom Hefferon. He is counsel to two trade groups, the Mortgage Insurance Companies of America and the Consumer Mortgage Coalition.
The court's approach on liability will have a positive ripple effect, causing companies to take greater care in how they conduct their business, predicted Delaware Insurance Commissioner Matthew Denn.
On the notification question, "I find it difficult to believe that Congress could have intended for a company's unrestrained adoption of a 'neutral' score to keep many if not most consumers from ever hearing that their credit reports are costing them money," Justice John Paul Stevens wrote in dissent.
Yost is a reporter for the Associated Press.
The Supreme Court ruled in favor of two large insurers recently, limiting the circumstances under which companies must tell customers their credit ratings are affecting the amount they pay.
The justices said Geico General Insurance Co. did not violate the Fair Credit Reporting Act and that Safeco Insurance Co. of America might have, but did not do so recklessly.
Consumer groups point to the notification requirement as the cornerstone to cleansing credit reports of inaccurate information.
The case has significant implications for pending class-action lawsuits seeking billions of dollars in punitive damages on behalf of consumers who say they should have been notified, but weren't.
In order for a company to be found liable, its conduct must entail an unjustifiably high risk of harm that is either known to the company or is so obvious that it should have been known, wrote Justice David Souter.
"It's not a great decision for consumers, but there are some silver linings," said Scott Shorr, an attorney representing plaintiffs in the case involving Safeco and Geico.
Tom Hefferan
The court ruled that the law's notification requirements apply to initial applicants, which means new customers will be informed when their credit scores affect the rates they're being quoted.
But the court overturned an appeals court ruling that would have required notification of the vast majority of customers. Notification would have been the rule unless consumers were paying the very lowest rate offered to those with the very best credit ratings.
Under such an expansive notification standard, Safeco would have been required to notify 80 percent of its new customers, while at Geico, just 10 percent of new customers qualify for the top tier of credit, lawyers representing the companies say.
The court agreed with Geico's approach, which was to compare the rate a customer is being offered with the rate that would be charged if the company had not taken the credit score into account.
On another issue, the companies lost on their contention that in order to be found liable for a willful violation, it must be shown that they knew they were breaking the law. The court said "reckless disregard" was sufficient. But the justices laid down a restrictive definition.
The court's ruling on the liability question was unanimous, while the decision on notification was 7-2.
On the liability question, the court supported "a middle-of-the-road position," said Gene Schaerr, chair of appellate and Supreme Court practice at the law firm of Winston & Strawn. "The court adopted what initially would have been a pro-plaintiff position, but in actually applying the definition, they have a very narrow interpretation of 'reckless.'"
Schaerr filed court papers in the case on behalf of FreedomWorks Foundation, a private group supporting the insurance companies.
Future implications
The mortgage industry is disappointed that the standard for liability encompasses "reckless disregard," but it believes the court is giving the industry some leeway in interpreting the law in good faith, said Washington, D.C., attorney Tom Hefferon. He is counsel to two trade groups, the Mortgage Insurance Companies of America and the Consumer Mortgage Coalition.
The court's approach on liability will have a positive ripple effect, causing companies to take greater care in how they conduct their business, predicted Delaware Insurance Commissioner Matthew Denn.
On the notification question, "I find it difficult to believe that Congress could have intended for a company's unrestrained adoption of a 'neutral' score to keep many if not most consumers from ever hearing that their credit reports are costing them money," Justice John Paul Stevens wrote in dissent.
Yost is a reporter for the Associated Press.
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