HB 4117 proposes to stop using credit in setting prices; Calls credit scoring ‘unfair method of competition’ and ‘unfair or deceptive’ business practice by insurance companies
I’ve been an outspoken critic against credit scoring by insurance companies for many years. I’ve written on the pages of this legal blog that credit scoring is just a form of legalized discrimination, and it has no place in being used by insurers to set rates.
Unless you work for an auto insurance company, you probably feel similar to how I feel. Most people believe auto insurance companies should not be able to use a person’s credit history – or lack of credit history – as a factor in setting prices. It just sounds wrong. And you probably feel the same way about these insurance companies using a person’s occupation, level of education and where a person lives to set rates to be equally unfair.
You’re in good company. Most states have stopped automobile insurance companies from doing exactly this.
But not here in Michigan.
Hopefully, that may be about to change. Rep. Alberta Tinsley-Talabi (D- Detroit), and a number of lawmakers are pushing to change our law, and have Michigan join the many states that have put a stop to these discriminatory practices.
House Bill 4117 would abolish credit scoring
On January 29, 2015, Rep. Tinsley-Talabi – joined by 13 Democratic co-sponsors – introduced House Bill 4117, which proposes to abolish the practice of credit-scoring as “an unfair method of competition and an unfair or deceptive act or practice in the business of insurance.”
Credit-scoring is where auto insurance companies use a person’s credit history to determine how much to charge the person for auto insurance.
The practice draws heated criticism from consumers and consumer groups who contend credit scoring discriminates against less affluent motorists by charging high auto insurance prices to people with poor credit scores – and low prices to those with high credit scores.
I’ve also criticized credit scoring, even going so far as to all it a civil rights crisis in cities like Detroit. In my blog post, “3 solutions to lower the cost of car insurance in Detroit,” I called for the elimination of credit scoring, contending it’s “…really just legal discrimination that disproportionately impacts minorities and low income people.”
Additionally, I’ve pointed out that credit scoring results in widely disparate auto insurance pricing between consumers with good and poor credit. For example, in my blog post, “How do credit scores punish Detroit residents when paying for auto insurance?,” I talked about a study from WalletHub which showed that Allstate, Farmers, Progressive and State Farm charge as much as 116%, 80%, 48% and 45% more (respectively) to consumers with poor credit.
Through HB 4117, Rep. Tinsley-Talabi also proposes to stop auto insurance companies from using other (arguably irrelevant) factors in setting auto insurance prices. Specifically, HB 4117 provides:
“It is an unfair method of competition and an unfair or deceptive act or practice in the business of insurance for an automobile insurer to refuse to insure, refuse to continue to insure, limit the amount of coverage available, or charge a different rate or premium for the same coverage based on any of [several specific factors] for an insured or applicant …”
The off-limits factors in HB 4117 are:
- Education level.
- Credit history or lack of credit history.
HB 4117 also prohibits an auto insurance company from using where a person lives and/or works to determine how the person’s premium:
“An insurer shall not establish or maintain rates or rating classifications for automobile insurance based on the territory in which the insured resides or works.”
This is not the first time Rep. Tinsley-Talabi has taken aim at credit-scoring and other rate-setting factors. During the 2013-14 legislative session, she introduced House Bill 5000, which was substantively identical to HB 4117. She had 17 Democratic co-sponsors.
Also, during the previous legislative session, former Rep. Woodrow Stanley (D-Flint) introduced House Bill 4511, which proposed “an insurer shall not use credit information or an insurance score to determine premium installment payment options and availability.”
Like HB 5000, HB 4511 “died” due to inaction at the end of the 2013-14 legislative session.
A brief history of credit-scoring in Michigan
In 2004, former Insurance Commissioner Linda Watters implemented an administrative rule that prohibited Michigan auto insurance companies using consumers’ credit scores to determine how much to charge them, i.e., credit-scoring.
Shortly thereafter, Michigan’s auto insurers – through their trade group, the Insurance Institute of Michigan – successfully sued to invalidate the credit-scoring prohibition.
In a 2010 opinion, the Michigan Supreme Court ruled that the Insurance Commissioner “exceeded her authority by enacting a total ban on a practice [credit-scoring] that the Insurance Code permits,” thus allowing the use of unfair credit scoring in Michigan.