High court rules for insurers on use of credit scores
By Brigitte Yuille • Bankrate.com

The Supreme Court has reduced the chance that auto and property insurers will notify you when your low credit score kept the insurers from offering a better rate.

This means it's less likely that you will receive a notice from your auto or property insurance company when your credit score affects the cost of your insurance.

Auto and property insurers challenged a class-action lawsuit from consumers who argued they should have received such notification, called an adverse action notice.

The justices unanimously ruled in favor of the insurers, reversing the decision of a lower court, which ruled the companies broke the law.

In January 2006, the 9th Circuit Court of Appeals in San Francisco had ruled the companies should have sent an adverse action notice letting consumers know that their low credit scores prevented them from getting better rates. It found the companies showed a "willful violation" because they "recklessly disregarded" the law.

The companies and their supporters say they believe the use of credit scores is helpful for determining risk, but credit scores are not the only measure used to determine insurance rates.

"When insurance companies base rates on credit scores, it is a factor along with other factors such as driving record, age, type of car and where it's being driven," says Anne Fortney, an attorney for the Consumer Data Industry Association, or CDIA, which lobbies for credit bureaus.

"Insurance companies have found that there is a correlation between the credit score and the likelihood the consumer will file a claim next year," she says.

Consumer advocates disagree. They also say most people don't realize that their credit histories are being used to determine their insurance coverage.

"Credit reports are notorious for inaccuracies," says Chi Chi Wu, attorney for the National Consumer Law Center, a consumer law group.

The Fair Credit Reporting Act requires creditors to send letters to consumers letting them know when adverse actions have been taken as a result of what was on their credit reports.

Two levels of civil remedies are used to enforce the FCRA requirement. If a consumer shows that the creditor failed to notify because of neglect, the consumer can recover actual damages.

Scott Schorr, an attorney with Stoll Stoll Berne Lokting & Shlachter P.C., in Portland, Ore., represented consumers in the case. He says adverse action notices alert consumers that someone is using their credit reports.

"It gives them a free credit report and an opportunity to review the credit report to make sure it's correct," he says.

If the consumer proves that the creditor "willfully" chose not to let them know, the person can recover statutory damages between $100 and $1,000, and the consumer could also be compensated with punitive damages.