Michigan Court Upholds Ban on Credit Scoring in Insurance

August 25, 2008

Insurance companies in Michigan no longer will be able to use customers' credit scores to set home and auto insurance premiums if a state Court of Appeals ruling stands.

The 2-1 decision released Friday, August 22 reversed a 2005 ruling by a lower judge who blocked the state insurance office's ban against credit-based insurance rates.

Most large insurers in Michigan use some form of credit scoring to give premium discounts. Generally, the better one's credit score, the lower a customer's insurance premium will be. One with a worse score usually pays a higher rate.

Insurers will continue using credit scores pending the outcome of an appeal to the Michigan Supreme Court.

Critics said the practice is unfair, illegal and disproportionately affects minorities, younger insurance holders and the poor.

"Time and time again studies have shown that credit reports are unreliable and are not good barometers of a person's insurability,'' said state Sen. Martha Scott, D-Highland Park. "I believe insurance companies use this method to cherry pick the more financially attractive customers and to punish our low-income consumers.''

The industry disagreed and said customers receiving discounts for good credit scores will pay higher premiums if the ban takes effect.

"The use of credit has proven to be an effective and efficient tool to evaluate risk,'' said Peter Kuhnmuench, executive director of the Insurance Institute of Michigan, a trade group of insurance companies.

One national trade group agreed.

"We are disappointed with yesterday's Michigan court ruling, as credit scoring has been shown to greatly benefit consumers," said Ann Weber, Property Casualty Insurers Associatin of America (PCI) vice president and regional manager. "Credit information is more likely to help consumers obtain lower insurance rates. PCI supports the ability of insurers to use this tool because it has proven to be a very accurate predictor of the risk of loss."

Insurers use credit information in developing credit-based insurance scores to predict the likelihood of future insurance loss. Much like factors such as years of driving experience, previous crashes, and the age of a vehicle or home, credit scores are a way for insurance companies to differentiate between lower and higher insurance risks.

Democratic Gov. Jennifer Granholm said the ruling is "great news'' that will lower rates for many residents.

Insurers sued in 2005 to prevent then-insurance commissioner Linda Watters from implementing rules reducing base rates and barring discounts to policyholders with good credit ratings. Barry County Circuit Judge James Fisher declared the rules illegal and unenforceable.

But the appeals court said Fisher wrongly considered additional evidence instead of limiting his review to the administrative rule-making record. The fractured panel found little else to agree on in three separate opinions, including whether the trial judge even should have heard the lawsuit because there is another way to challenge regulatory decisions.

Judge Helene White said credit scoring is not a rating factor that can be used for auto and home insurance. Insurers can offer discounts not allowed specifically by state law, but people's credit scores do not reflect "reasonably anticipated'' reductions in companies' losses or expenses, she wrote.

Judge Kirsten Frank Kelly agreed to reverse Fisher's ruling but did not address the legality of credit scoring.

In a dissent, Judge Brian Zahra said the Office of Financial and Insurance Services, now the Office of Financial and Insurance Regulation _ overstepped its authority.

"The OFIS has no authority to order rate reductions without first determining that an insurer's rates are excessive,'' Zahra wrote.