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Maine Issues Bulletin on Insurance Scoring, Adverse Action Notices

The Maine Bureau of Insurance recently issued a bulletin advising insurers in the state that use credit information in underwriting or rating personal insurance policies. The bulletin examined the topic of insurance scoring and adverse action notices.

Maine Insurance Superintendent Eric Cioppa said in “Bulletin 406: Insurance Scoring – Adverse Action Notices,” issued on Aug. 25, that the content of some insurers’ adverse action notices has been “a source of significant consumer confusion.” The bulletin seeks to clarify and explain when insurers must send adverse action notices and how insurers should handle consumer inquiries concerning adverse action notices.

The Maine Insurance Code 24-A M.R.S.§ 2169-B requires that an insurer send its applicant or customer a notice when the company takes “adverse action based on credit information,” the bulletin notes.

Cioppa describes adverse action as “a denial or cancellation of, an increase in any charge for or a reduction or other adverse or unfavorable change in the terms of coverage or amount of any insurance, existing or applied for.” The bulletin notes that the insurance superintendent interprets this language the same way the U.S. Supreme Court has interpreted similar language in the Federal Fair Credit Reporting Act. The bulletin offered the following advice to insurers:

• For a new policy application, an adverse action notice is required if the credit factor results in a higher rate compared to what the insurer otherwise would have offered the applicant if the insurer didn’t use credit information in its rating plan, or if the insurer declines coverage but would have offered coverage if it didn’t use credit information in its underwriting guidelines.
• For a policy renewal, an adverse action notice is required if a change in the customer’s credit information results in a higher premium compared to what the insurer would have offered the customer had that information not changed. This is the case even if the new rate is a credit under the insurer’s rating system. As the Supreme Court has expressed it, after the parties’ initial dealing, “the base-line for ‘increase’ is the previous rate or charge, not the ‘neutral’ baseline that applies at the start.
• For a policy renewal, insurers are also prohibited from taking adverse action solely on the basis of credit information without considering any other applicable underwriting factor. If an insured’s credit information or insurance score is the only rating element that changes at renewal, the insured’s rate cannot be changed unless the insurer has given consideration to other rating factors in calculating the renewal rate. Insurers should also keep in mind that credit information must be current. Insurers are prohibited from basing adverse action on a credit report or insurance score calculated more than 90 days before issuing a new or renewal policy.

The bulletin also said the Maine Insurance Code’s subsection 2169-B(4)(B) requires that the notice must be “in sufficiently clear and specific language,” so that the consumer can identify why the insurer acted as it did. The notice must also include “a description of up to four factors that were the primary influences of the adverse action.”

However, the bulletin noted, this subsection also says that “standardized credit explanations” from credit reporting agencies and other sources of credit information are deemed to comply with this requirement. This language creates a safe harbor for such reasons as “0909 Insufficient Information on Department Store Accounts” and “0140 % of Open Bank Revolving Accounts to Open Total Accounts.”

The bulletin said the insurance superintendent understands that insurers often rely on credit reporting agencies and scoring model vendors to send them the factors and that this process is automated. This process results in some insurers including four factors regardless of their influence on that decision – negative, neutral, or positive. The bulletin warns that insurers that do so violate section 2169-B in two possible ways:

• First, by its nature, a positive or neutral factor is generally not a principal reason for an adverse action. If such a factor is mentioned at all in an adverse action notice, the insurer must provide a clear and understandable reason for including that factor – for example, because the factor has deteriorated from the previous year.
• Second, the statute does not require that every notice include four factors. If only two factors negatively affect the insurer’s decision, then only those two factors should appear in the notice. The bulletin advises that insurers should monitor the credit information that they receive from reporting agencies or other third-party sources and should take steps to ensure that adverse action notices only include adverse reasons.

Lastly, the bulletin notes that an applicant or insured might have questions – whether addressed directly to the insurer or in a complaint filed with the Maine Bureau of Insurance – about why reported reasons negatively affected the insurer’s view of the prospective or covered risk.

These questions typically involve increases in premium and denials, terminations, or limitations of coverage. The bulletin advises that the safe harbor for “standardized credit explanations” applies only to the adverse action notice; The safe harbor does not mean that the insurer may answer specific questions by saying that it simply passed along what it received from the reporting agency or other vendor.

Rather, the bulletin said, the insurance superintendent expects the insurer to explain to its customer what happened in “sufficiently clear and specific” terms that the customer can understand. For example, if the insurer cannot provide this explanation itself, it should get that information from the reporting agency or other vendor. The bulletin also said the insurer should also be prepared to explain the calculations that underlie its premium.

Source: The Maine Bureau of Insurance