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Insurers Under Fire Over Credit Reports

Jan 16, 2007

By PETE YOST Associated Press

WASHINGTON -- Several Supreme Court justices seemed taken aback Tuesday at the idea that insurance companies might be required to notify tens of millions of customers that they aren't getting the best rates because of their credit reports.

In making the argument for notification, lawyers for consumers said two insurance companies -- Geico and Safeco -- violated the Fair Credit Reporting Act by failing to send customers notices of adverse decisions made because of their credit reports.

The case casts a spotlight on the business world's vast credit reporting system, which has compiled files on 200 million Americans.

Congress passed the credit reporting act in 1970 to protect consumers from flaws in the system and improve the reliability of reports.

At issue is a decision a year ago by the 9th U.S. Circuit Court of Appeals in San Francisco that would make it easier for consumers to prevail when they sue corporations for failing to notify them.

The appeals court and lawyers for the consumers say the standard for proving violation of the law is reckless disregard of it. The companies say the standard for showing violation is higher -- proving that the companies knowingly broke the law.

Pending lawsuits against various insurance companies on behalf of consumers over the notification issue potentially involve "billions of dollars," Maureen Mahoney, an attorney for Geico and Safeco, told the justices.

If the court adopts the consumers' argument, there will be tens of millions of notices being sent out, said Justice Stephen Breyer.

Regarding the expansive notification views, "I don't understand where that comes from," said Justice Samuel Alito.

That is what the law requires, responded Scott Shorr, an attorney for some consumers suing the companies.

The system's cornerstone is consumer monitoring of their credit reports for accuracy. Consumer groups say the insurance companies are weakening the system by looking for ways to avoid notifying customers when it uses a credit report in making a decision.

"Consumers who do not receive an adverse action notice . . . do not learn of their right to a free credit report to check its accuracy," a half-dozen advocacy groups said in court papers.

One consumer represented in the case, Ajene Edo of Portland, Ore., applied for auto insurance. Geico concluded that Edo didn't qualify for its coverage for low-risk customers. Instead, it offered to insure him, but as as moderate-risk.

The company says credit scores are one of 15 factors in underwriting decisions and that Edo's credit scores were actually above average. But they weren't high enough under for Geico to lower his rate.

The appeals court had said that rather than using the average credit score, the company should use the top potential score. Under that formulation, customers should be notified whenever a consumer pays a higher rate because his credit rating is less than the top potential score.

(c) 2007 Tulsa World. Provided by ProQuest Information and Learning. All rights Reserved.

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