AIA: Ninth U.S. Circuit Appeals Court Ruling on Credit-Related Adverse Action Notices Disturbing

August 9, 2005

The American Insurance Association (AIA) on Tuesday sharply criticized a recent decision by the Ninth U.S. Circuit Court of Appeals that it says mandates an unfair application of the Fair Credit Reporting Act (FCRA) adverse action notice requirement not intended by Congress.

“This ruling is very disturbing,” said David Snyder, AIA vice president and assistant general counsel. “The Court created a standard of conduct that conflicts with the plain language of the FCRA – penalizing companies that employed reasonable procedures to comply with the statute. To hold that an insurer’s interpretation of the law is ‘nonsensical’ and ‘willfully’ disregards the law, at a minimum, ignores the fact that this same interpretation had been adopted by the lower federal court.”

The U.S. Court of Appeals for the Ninth Circuit ruled last Thursday in Edo v. GEICO Casualty Co., et. al. (#04-35279) and Reynoldsv. Hartford Financial Services, et. al. (# 03-35695) that the FCRA’s adverse action notice requirement applies to insurers regardless if the premium charged is part of an initial policy or a renewal. The lower court held that those same FCRA requirements are not activated unless previous terms were unfavorably altered.

Additionally, the Court addressed “ancillary questions” regarding the contents of, and reasons for, issuing adverse action notices. For example, it deemed the notice requirement to be triggered even when a consumer with no credit history, thus given a “neutral” score because one cannot be calculated, still secures an insurance policy. Finally, the Court purported to adopt a minority view of what constitutes a “willful” violation and found that as a matter of law the insurers acted willfully. One of the three judges dissented on that last point because of an inadequate factual record supporting that conclusion.

“This decision could have significant negative consequences for the entire financial services industry because the Court wrongly places itself in the role of a legislative or regulatory body, imposing a litany of requirements on insurers without debate or consideration. This is simply legislating from the bench,” added Snyder.

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