Use of Credit-based Insurance Scores in Texas Upheld

Texas law permits an insurer to use race-neutral factors in credit scoring to price personal lines of insurance. That’s the conclusion of the Texas Supreme Court, which considered a certified question from the Ninth Circuit court in a class action suit over the use of credit scores in pricing insurance coverage.

In Ojo v. Farmers Group, et al, the state Supreme Court clarified that “Texas law prohibits the use of race-based credit scoring, but permits race-neutral credit scoring even if it has a racially disparate impact.”

The suit was brought by Texas resident Patrick Ojo, an African-American, whose home was insured by Farmers, according to Justice Green, who wrote the opinion of the Court. Despite the fact that Ojo had never made a claim on his policy, the insurer raised his rates by 9 percent.

“Ojo alleges that Farmers increased the premium as a result of unfavorable credit information acquired though its automated credit-scoring system,” Green wrote.

Ojo sued Farmers on behalf of himself and other racial minorities whose premiums increased due to Farmers’ use of a credit-scoring system. While Ojo did not assert that he or other minorities were intentionally discriminated against, his complaint alleges that Farmers’ “credit-scoring systems employ several ‘undisclosed factors,’ which result in disparate impacts for minorities and violate the federal Fair Housing Act (FHA).”

The Court rejected Ojo’s argument as it relates to the FHA, stating that Texas law “provides that ‘[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, unless such Act specifically relates to the business of insurance.'” The FHA, the Court said, does not relate specifically to the business of insurance.

In addition, the Texas Insurance Code allows the use of credit information to develop rates, except when its use constitutes “unfair discrimination.”

The insurance code does not specifically define the term “unfair discrimination,” Green wrote, but it does clarify that rates may not be based on an “individual’s race, color, religion or national origin.”

The Texas Supreme Court ruling affirms previous conclusions of both the Legislature and the Department of Insurance, according to the Property Casualty Insurers Association. Texas has enacted legislation that allows insurers to use credit information in underwriting and rating, and the Texas Insurance Department has found that credit information significantly improves pricing accuracy.

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