| CREDIT SCORING TO DENY HOMEOWNERS INSURANCE MAY VIOLATE THE FAIR HOUSING LAWS Edward G. Kramer, Director - Chief Counsel
The Housing Advocates, Inc. And Mary Ellen Fraser
2nd year law student Cleveland-Marshall
College of Law, Cleveland State University
Insurance companies have always used a number of factors to assess risk when setting homeowner insurance rates. Typically, insurance companies review such factors as previous homeowner claims, minimum coverage, location of the home, marital status, and employment stability. Within the last decade, and more prominently in the last few years, insurance companies have begun to use an insurance credit score, which is based on information obtained from consumer credit reports.
Under the Fair Credit Reporting Act 42 USC §1681, insurance companies are permitted to review credit reports as a measure for assessing risk. While the use of credit information is explicitly authorized for use in insurance underwriting, it must be applied within the context of the Fair Housing Act (FHA).
Over 90% of insurance companies use credit information to make decisions regarding consumer eligibility, premium rates, deductibles, recovery for claims, payment plan eligibility, marketing and service. Credit Scoring in the Insurance Industry: Discrimination or Good Business, 15 Loy. Consumer Law Rev. 315 (2003). The information is obtained from a consumer's credit report and evaluated by the insurance company. Information such as credit activity, payment history, account credit limit, late payments, delinquencies, defaults, and bankruptcies are several of the factors considered. Each element of the credit report that is of interest is assigned a numerical value, to which a mathematical model is then applied and an insurance credit score is generated. While insurance companies defend the policy of using credit scores as predictive of insurance claims, this correlation is not supported by concrete evidence Id. at 323.
A number of states have also launched investigations, including Oregon, Washington, Nevada, Montana, Indiana, and Missouri. A majority of states have taken regulatory measures regarding disclosure of the use of information. Several states have enacted legislation that restricts use to certain types of insurance or to limit it as a sole factor in underwriting. A few states, including Maryland, Utah, and Washington have prohibited the use of credit scores entirely.
The belief that credit information has a discriminatory effect on minority groups is supported by several recent studies. For example, Insurers Use of Credit Scoring for Homeowners Insurance in Ohio, A Report to the Civil Rights Commission, Birnbaum (2003), available at www.cjeonline.org (Insurers Use of Credit Scoring report). According to the report a majority of Ohio's insurance companies use credit scoring for rating and eligibility. Review of the filings with the Department of Insurance show up to a 4:1 difference in rates between best and worst credit scores. This evidence strongly implicates the possibility of discriminatory treatment of minorities Insurers Use of Credit Scoring report at 11. The study points out that low credit scores can result from information which is not included in a consumer credit report, because some financial institutions, typically those used by low-income groups, such as pay day loan, check cashing and rent to own organizations fail to report information to credit bureaus. Therefore, those who use these services do not have the opportunity to build strong credit reports. This lack of information combined with a low-income status will likely result in a low credit score, which will lead to discriminatory treatment by insurers.
There's also another relevant study issued in 2004 in the homeowner insurance context out of Missouri's Department of Insurance, available at http://insurance.mo.gov/consumer/faq/creditScoring.htm. The study concludes that there is a definite correlation, without exception, between lower credit scores and the racial make up of a neighborhood even controlling for a wide variety of socioeconomic characteristics.
In December of 2003, as part of the Fair and Accurate Credit Transaction Act, Congress mandated a study of the effects of the use of credit scores and insurance based credit scores on property and casualty insurance. (PL 108-159, 2003 HR 2622). Specifically, the report should show the statistical relationship between the risk and actual loss. Additionally the study will include information as to the extent the use of credit scores impact availability and affordability of credit and insurance by geography, income, ethnicity, race, color, religion, national origin, age, sex, marital status, and creed and result in negative or differential treatment of protected classes under the Equal Credit Opportunity Act.
Effective as of September of 2003, Ohio enacted a rule stating that credit cannot be used as the sole underwriting or rating factor for homeowners insurance. The rule regulates reporting requirements and addresses actions to be taken in the event an insurer receives incorrect credit information. Ohio Admin. Code § 3901-1-55
While this is clearly an area of the law currently under significant scrutiny, litigation to this point is minimal. Cases are generally being pursued in federal rather than state courts. Causes of action are typically brought under the Fair Credit Reporting Act or the Fair Housing Act. Those claims that fall under the Fair Credit Reporting Act implicate the disclosure provisions mandated by the FCRA. In Braxton v. Farmer's Insurance Group, 209 F.R.D. 651, 54 Fed.R.Serv.3d 28 (2002), the insurer failed to include the required contemporaneous notice when it raised premiums for existing clients by 50%, based on credit scores. Claims brought under the Fair Housing Act (FHA) have only reached the preliminary stages. In Dehoyos v. Allstate Corporation, 345 F.3d 290 (5th Cir. 2003) cert denied 124 S.Ct. 2074( 2004), six non-Caucasian policyholders alleged racial discrimination based on the use of a credit scoring system. The defendant attempted to have the complaint dismissed based on a theory of reverse preemption. However, the court ruled that preemption did not apply because the FHA does not impair state law, and therefore does not result in reverse preemption. Id. at 297-98.
In Owens v. Nationwide Mutual Insurance Company, 2003 WL 22364319 (N.D. Tex.), the plaintiff filed a class action alleging that she was denied insurance because of a racially discriminatory credit scoring system and that other minorities were paying higher premiums for substandard insurance. Id. at 2. The defendant filed a motion to dismiss because the plaintiff lacked standing to state a claim for discrimination related to pricing and that she failed to state a claim of intentional discrimination. Id. at 1. The court noted that the plaintiff's allegations that she was African American, had applied for insurance, was denied insurance because of her credit score, she was otherwise qualified for insurance and the defendant acted with the intent of exploiting minorities constituted a valid claim of intentional racial discrimination. Id. at 2. Consequently, the motion to dismiss was denied.
A similar situation arose in National Fair Housing Alliance, Inc. v. The Prudential Insurance Company of America, 208 F.Supp.2d 46 (2002). Plaintiffs, a number of non-profit fair housing advocate groups and three individual residents of Toledo, Ohio alleged discrimination due in part to the use of credit scoring, and defendants filed a motion to dismiss based on a lack of standing, that the FHA does not apply to homeowners insurance or allow for disparate impact claims. Id. at 48. The court rejected each of the defendant's arguments. The court also found that based on legislative intent, insurance is within the scope of the FHA. Id. at 57. The court noted that insurance is a prerequisite to owning a home for most people. Id. Disparate impact claims have been accepted in all other jurisdictions, and this court found that those decisions to be consistent with the legislative intent of the FHA. Courts have consistently recognized that housing practices can result in disparate treatment that is tantamount to intentional discrimination. Id. at 58.
The use of credit scores by the insurance industry is a relatively new practice. The insurance industry has made an effort to keep its practices and calculations regarding these scores confidential. Consequently, it is extremely difficult to evaluate the disparate impact on minority groups. However, as legislative investigations take place and reports are published, this information will be uncovered. This will most likely result in both legislative reform and increased litigation. There is a need for joint efforts between fair housing advocates, regulatory agencies like the Ohio Department Insurance or the Ohio Civil Rights Commissions and the insurance industry to meet and discuss the implications of credit scoring on civil rights of all Ohioans. If a dialogue between these various interests don't occur the results will no doubt be more litigation on this issue in the future. | 
