WASHINGTON (June 6, 2006) — The National Association of Mutual Insurance Companies (NAMIC) praised the U.S. Supreme Court’s unanimous ruling clarifying provisions of the Fair Credit Reporting Act that address the use of credit reports in the insurance underwriting process. NAMIC, along with several other industry trade associations, had filed an amicus brief in the case. The decision stems from the Ninth Circuit Court of Appeals’ ruling on the consolidated cases of Safeco v. Burr and Geico v. Edo.
“The Supreme Court held that the FCRA does not require insurers to inform all policyholders that their credit reports have been reviewed in the underwriting process,” said Christian J. Rataj, NAMIC western state affairs manager. “Instead, the Act only requires notification to policyholders and applicants when their credit reports are the basis for an adverse action, such as a rate increase.”
The court also said that the FCRA does not require the use of the Ninth Circuit Court's “best possible rates” standard when determining whether there is a rate increase for the purposes of the adverse action notice. The lower court had said an adverse action notice would be required if a quoted rate increase based on a credit score was higher than the best possible rate offered by the carrier. The Supreme Court disagreed and held that Geico’s use of a credit neutral comparison — comparing the credit score-based rate against a credit score neutral rate — is acceptable for determining whether there is an adverse action that requires an FCRA adverse action notice.
“NAMIC and members of the insurance industry were very concerned about the Ninth Circuit Court's ‘best possible rate’ standard because this nebulous legal standard would have exposed carriers to an onslaught of litigation over what is the ‘best possible rate’ and would have ultimately forced carriers to adopt a practice of sending out adverse action notices to all consumers,” Rataj said. “Further, the Ninth Circuit Court’s ‘best possible rate’ standard would not have provided carriers with a meaningful underwriting guideline for determining when to send out an adverse action notice and would have created needless conflict between insurance carriers and their consumers.”
Of paramount importance to the insurance industry is the Supreme Court’s holding on the ‘willful violation’ provision of the FCRA, which subjects defendants to punitive damages. The Supreme Court agreed with the insurance industry’s position that a defendant should not be found liable for a willful violation of the FCRA upon a mere finding of an ‘implausible interpretation’ of the FCRA.
In its amicus brief, NAMIC joined other members of the insurance industry in arguing that the Ninth Circuit Court's legal standard for determining a ‘willful violation,’ which is in conflict with legal holdings in the Fourth, Fifth, Sixth, Seventh and Eighth Circuits, is inconsistent with the basic legal concept of what it means to act willfully.
“NAMIC and the other amicus parties asserted that the Ninth Circuit Court’s holding would lead to unnecessary and costly litigation over the ambiguous meaning of the Court’s ‘implausible interpretation’ standard for determining whether a ‘willful violation’ of the FCRA had been committed,” Rataj said.
The Supreme Court held that a company subject to FCRA does not act in reckless disregard [a willful violation] of the FCRA unless the action is not only a violation under a reasonable reading of the statute’s terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading [of the FCRA] that was merely careless.
“NAMIC applauds the Supreme Court for holding that ‘mere careless’ conduct by a defendant is not enough to demonstrate a ‘willful violation’ of the FCRA,” Rataj said. “The Ninth Circuit Court’s legal standard for finding a ‘willful violation’ would have exposed insurance carriers to billions of dollars in frivolous punitive damages claims and would have needlessly driven up the cost of insurance for the consumer. The Supreme Court’s holding on this issue was not only legally sound, but also consumer friendly.”
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