NAII Says Federal Case Threatens Insurers’ Ability to Use Credit Information

September 26, 2002

A U.S. District Court ruling in a federal class-action lawsuit challenging Allstate Insurance Company’s use of credit data in underwriting and rating policies should be reversed because the suit distorts the industry’s practice of credit-based insurance scoring, according to the National Association of Independent Insurers (NAII).

In DeHoyos v. Allstate, several policyholders allege that Allstate’s use of credit data as part of the company’s insurance scoring program— which helps the company assess the likelihood of insurance losses— is racially discriminatory because the practice leads to “excessive” and “unfair” premiums for automobile and homeowners’ insurance paid by minorities.

The NAII and other interested property/casualty trade groups filed an amicus brief in the 5th U.S. Circuit Court of Appeals—which covers Texas, Louisiana, and Mississippi— last week, asking the court to overturn the San Antonio division of the U.S. District Court’s April 5 ruling.

“Race, income, address, gender and marital status are not considered in insurance scoring,” NAII Counsel Robert Hurns said. “These scores provide an objective, unbiased and accurate tool for underwriting and rating insurance risks. Individuals less likely to incur insurance losses pay less for insurance because of insurance scoring practices. Individuals with less favorable scores, who pose a greater insurance risk, may pay higher premiums. That clearly is fairest for everyone.”

In January 2000, the Virginia Bureau of Insurance released a study that, in part, stated insurance scoring is an ineffective tool for redlining and that income and race alone are not reliable predictors of insurance scores.

Insurance companies report they have found a strong correlation between insurance scores and loss costs. The scores supplement other sources of underwriting and rating information that may be subject to errors, underreporting or misrepresentation.

“Insurers are interested in having available as many tools as possible to assist them in making a fair and objective decision about whom to insure and at what rate so it can price products with greater accuracy,” Hurns said. “The right for companies to use insurance scoring should be preserved.”

Plaintiffs in DeHoyos v. Allstate are reportedly attempting to use the “disparate impact” test to evaluate the legitimacy of Allstate’s use of credit data, which clearly interferes with state insurance law, according to the brief. The disparate impact theory is used to attempt to show that a business practice or business decision that seems to be neutral may actually be deemed unlawful under certain federal civil rights laws, even though no evidence of intentional discrimination against minorities, elderly, women and others protected classes exists.

However, any well-accepted insurance rating factor, including dwelling construction type, age of home, proximity to a firehouse, among other factors, could conceivably correlate with race, or another protected class, in certain areas or circumstances, the brief states.

“Credit data being used in insurance pricing is part of the framework of insurance underwriting and rate-making regulated by the states,” Hurns said. “The application of the disparate impact standard in this case would displace diverse state law decisions and prevent those states that are currently considering, but have not yet adopted, regulations on insurers’ use of credit data from reaching their own individual decisions on the issue.”

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