Mich. Judge Rules Insurance Scoring Ban Illegal

April 26, 2005

Michigan's Office of Financial and Insurance Services overstepped its authority in issuing rules that prohibited the use of credit-based insurance scores, according to a Michigan Circuit Court judge.

In the case of the Insurance Institute of Michigan, et al v. the Office of Financial and Insurance Services, insurers filed a lawsuit to prevent the enforcement of the new credit rule. Judge James Fisher agreed with the industry and rejected all of the arguments put forth by OFIS.

Judge Fisher ruled that the OFIS rules were illegal and the commissioner had no authority to order a reduction in rates. Fisher said the rules were illegal because they attempted to rewrite Michigan Insurance Code through administrative rulemaking. He found that the commissioner had no authority to order a reduction in rates without finding them to be excessive and that a reasonable degree of competition does not exist within the marketplace. Based on the commissioner's own report released March 18, 2005, she found that markets in Michigan were competitive.

In addition, the judge found that OFIS rules were illegal because a blanket prohibition on the use of insurance scores is contrary to the Insurance Code.

"The evidence clearly establishes," Fisher wrote in his opinion, "that on average a policyholder with a higher insurance score presents lower risk and lower expense, due to a lower number of claims, than a policyholder with a lower insurance score. Since rating plans utilizing insurance scores measure differences in risk that have a probable effect on losses or expenses, such plans are clearly authorized by the Insurance Code."

With the ruling, Michigan's current law remains in effect and insurers can continue to use insurance scores only as a discount.