The U.S. Supreme Court on June 4 unanimously backed the disclosure policies that 2 insurers follow when they use credit reports to assign a consumer a rate that is higher than the best possible rate.
Insurers had argued for a flexible standard on “adverse action notices.”
If the Supreme Court had rejected the insurers’ position, insurers could have faced a new wave of class-action lawsuits from consumers who were not told that poor credit scores had affected their insurance rates, insurers say.
The Supreme Court was reviewing a 2006 9th U.S. Circuit Court of Appeals ruling on Safeco Insurance Company of America et al. vs. Burr et al.
In considering 3 Oregon cases, the appeals court held that the insurer defendants had acted “in willful disregard” of the Fair Credit Reporting Act when they failed to disclose that they had given consumers rates other than the best rates as a result of use of credit reports.
The consumers involved had a right to recover damages, the appeals court held.
Maureen Mahoney of Latham & Watkins, Washington, who represented 2 of the defendants, Government Employees Insurance Company, Washington, and Safeco, Seattle, told Justice Ruth Bader Ginsburg during oral arguments in January that interpreting the law the way the plaintiffs wanted could expose insurers to “tens of billions of dollars” in claims.
Class-action lawsuits had already been filed, and, under the law as interpreted in the 9th Circuit decision, consumers could be awarded $1,000 each if an adverse action notice was not sent in each case in which an applicant for insurance was not given the lowest possible rate, Mahoney said.
The Supreme Court found in its decision that GEICO did not violate the law.
Safeco might have violated the law, but it did not do so recklessly, the court found.
The central issue before the Supreme Court was the meaning of the terms “willfully” and “adverse action” in the Fair Credit Reporting Act.
Under the final 9th Circuit appellate court decision, even inadvertent and unintended errors would be deemed “willful” and “reckless,” and thus subject to severe penalties.
The Supreme Court rejected this argument, instead finding that a company subject to the FCRA does not act in reckless disregard of the law unless the action is a violation under a reasonable reading of the terms and the company ran a risk of violating the law substantially greater than the risk associated with a cursory reading, according to David Snyder, assistant general counsel at the American Insurance Association, Washington.
In another part of the ruling, the Supreme Court held that an adverse action may be triggered for new insurance policies if the first-time rate is a “disadvantageous increase” from a rate otherwise offered when not considering credit–a so-called “neutral score,” Snyder says.
“By limiting the scope of adverse action notices to when they are legally necessary and beneficial to consumers, the court is clearly helping consumers by making sure such notices do not turn into ‘junk mail,’” Snyder says.
Justice David Souter wrote the decision for the court. Chief Justice John Roberts and Justices Anthony Kennedy and Stephen Breyer joined him. Justices Clarence Thomas and Antonin Scalia filed a concurring opinion, while the other justices joined in most parts of the opinion by Souter.
“If the [FCRA] statute has any claim to lucidity, not all ‘adverse actions’ require notice, only those ‘based…on’ information in a credit report,” Souter writes in the opinion.
“It makes more sense to suspect that Congress meant to require notice and prompt a challenge by the consumer only when the consumer would gain something if the challenge succeeded,” Souter writes.