Arguments For and Against Credit Scores Begin in Michigan Court

By | October 9, 2009

Attorneys on both sides of the issue argued before the Michigan Supreme Court on Oct. 7 as to whether insurance companies should be allowed to use credit history in setting auto and home premium rates.

The practice was outlawed by state regulators in 2005, but insurers are being allowed to factor credit reports into their rates pending the outcome of their lawsuit at the high court.

Most large insurers in Michigan use some form of credit scoring to give discounts on premiums. Generally, the better a customer’s credit report, the lower his or her insurance premium, the companies say.

Lawyers for the industry told justices that former insurance commissioner Linda Watters overstepped her authority when she barred insurers from providing discounts to policyholders with good credit ratings.

“Insurance scores work,” attorney Peter Ellsworth said. “They are actuarially sound. If they weren’t, insurance companies wouldn’t be before this court today asking to be able to use them.”

He warned that at least 60 percent of policyholders will pay higher premiums if the court allows the ban against insurance credit scoring.

Critics, however, say insurers raise all base rates, then “discount” some.

“Insurance scoring makes insurance less available and affordable as a whole by driving up the cost for people who are least able to pay,” said Assistant Attorney General William Chenoweth. “Discounts given to favored policyholders are paid for by premium increases charged people who are disfavored.”

He said the practice is illegal because it does not cut insurers’ overall losses – unlike giving discounts for having anti-theft devices or fire extinguishers. Chenoweth also said credit reports are too unreliable because of errors.

The fight over basing premiums on credit history has been raging in Lansing for at least five years.

Watters, who was appointed by Democratic Gov. Jennifer Granholm, held public hearings in 2004. In 2005, the administration set rules reducing base rates and prohibiting discounts for good credit ratings. The insurance industry, four insurers and a policyholder sued to block the change from taking effect.

Barry County Circuit Judge James Fisher declared the rules illegal and unenforceable.

But in 2008, the Court of Appeals said Fisher wrongly considered additional evidence instead of limiting his review to the administrative rule-making record. A fractured panel found little else to agree on in three separate opinions, including whether the trial judge should have heard the suit because there is another way to challenge regulatory decisions.

The Supreme Court heard arguments for nearly 90 minutes.

Three Republican justices appeared to have problems with the ban. But three Democrats and a Republican did not ask many questions, making their position harder to gauge.

A ruling is expected before August.

Michigan’s insurance consumer advocate Melvin “Butch” Hollowell criticized insurers for basing rates on people’s occupation, education and record of paying bills.

“These factors have nothing to do with how consumers drive,” Hollowell said in a statement. “How can insurance companies justify charging consumers 50 percent more for their auto insurance if they don’t have a college degree? They can’t.”

Watters’ successor, Ken Ross, also opposes insurance credit scoring.

But Peter Kuhnmuench, executive director of the Insurance Institute of Michigan, said all but three states permit insurance credit scoring. Though he is urging lawmakers to join 27 states and pass limits on how credit ratings are used, he opposes a ban.

“Today’s hearing is about the governor’s attempt to misuse a state agency to pass new laws and disallowing discounts to millions of financially responsible Michigan citizens in the process,” Michigan Insurance Coalition spokesman Tom Shields said in a statement.

David Eggert can be reached at deggert(at)ap.org

Read background and briefs about the case:
www.courts.michigan.gov/supremecourt/Clerk/10-09/137400-137407/13740 0-Index.html

Topics Carriers Legislation Michigan

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