Limits on ‘insurance credit scoring’ and how you can protect yourself
The blog on credit scoring that I previously wrote drew a lot of reader comments. But the sad reality is that today, thanks to the Republican Michigan Supreme Court, Michigan auto insurance companies use drivers’ credit scores and credit information as factors in determining how much to charge drivers for auto insurance.
The process is called “insurance scoring” or “insurance credit scoring” or “credit-based insurance scoring,” and it was deemed “permissible under the Insurance Code” in the Michigan Supreme Court’s 2010 ruling in Insurance Institute of Michigan, et al., v. Commissioner, Financial & Insurance Services, Department of Labor & Economic Growth.
In order to protect themselves against “insurance credit scoring” abuse and credit-information misuse, Michigan drivers must know the following eight things about how auto insurance companies can and will use your credit scores and credit information.
1. Insurance credit scoring affects auto insurance prices.
“Insurance scoring” or “insurance credit scoring” or “credit-based insurance scoring” is the process whereby an insurer uses a person’s credit score and credit information to determine how much to charge the person for auto insurance.
Under a recently passed law:
- “Credit information” is defined as “any credit-related information derived from a credit report, found on a credit report itself, or provided on an application for personal insurance.” (Senate Bill 300; Public Act 165 of 2012; MCL 500.2151(c))
- “Insurance score” is defined as “a number or rating … based in whole or in part on credit information for the purposes of predicting the future insurance loss exposure of an individual applicant or insured.” (Senate Bill 300; Public Act 165 of 2012; MCL 500.2151(e))
2. Insurance credit scoring is legal in Michigan.
In its 2010 opinion in Insurance Institute of Michigan, et al., v. Commissioner, Financial & Insurance Services, Department of Labor & Economic Growth, the Michigan Supreme Court ruled that “[i]nsurance scoring is permissible under the Insurance Code.”
The rationale for insurance credit scoring, which was accepted by the Michigan Supreme Court, is that:
“‘There exists a correlation between a person’s insurance credit score and the likelihood that a claim will be filed … [B]etter scores are connected with fewer claims and thus lower expenses than are the scores of persons with weaker credit histories.’”
3. There are limits to how a Michigan auto insurance company can use a person’s credit score or credit information.
A Michigan auto insurance company cannot use a person’s credit score to refuse coverage or refuse to renew existing coverage.
Under a recently passed law, insurers are prohibited from using “credit information or an insurance score as any part of a decision to deny, cancel or nonrenew a personal insurance policy …” (House Bill 4594; Public Act 206 of 2012; MCL 500.2153)
However, insurers may use “credit information and an insurance score … to determine premium installment payment options and availability.” (House Bill 4594; Public Act 206 of 2012; MCL 500.2153)
4. Previous inquiries into a person’s credit history cannot hurt a person’s “insurance score.”
Insurers are prohibited from using any of the following “as a negative factor” in calculating an insurance score or “in reviewing credit information,” according to a recently passed law:
- Credit inquiries not initiated by the consumer;
- Credit inquiries relating to insurance coverage;
- Multiple lender inquiries from the home mortgage industry and/or the automobile lending industry;
- Collection accounts with a medical industry code. (House Bill 4594; Public Act 206 of 2012; MCL 500.2153(g))
5. A person has a right to request to be “rerated” if her credit score or credit information improves or otherwise changes.
At the time of an auto insurance policy’s “annual renewal” or otherwise “during the course of the policy,” but not more “than once in a 12-month period,” an insured has the right to request and the insurer has the obligation to “obtain a new credit report or insurance score and rerate the insured,” according to a recently passed law. (House Bill 4594; Public Act 206 of 2012; MCL 500.2153(f))
6. There are exceptions for poor credit scores and unfavorable credit information which were caused by circumstances beyond a person’s control.
When circumstances beyond a person’s control damage his credit score or credit information, he may request that an auto insurance company make an exception to its insurance scoring policy.
Under a recently passed law, an auto insurance company that uses credit information as part of its rate-setting process “shall … provide reasonable exceptions … for an insured or insurance applicant who has experienced and whose credit information has been directly influenced by any of the following events:
(a) Catastrophic event, as declared by the federal or state government.
(b) Serious illness or injury, or serious illness or injury to an immediate family member.
(c) Death of a spouse, child or parent.
(d) Divorce or involuntary interruption of legally owed alimony or support payments.
(e) Identity theft.
(f) Temporary loss of employment for a period of 3 months or more, if it results from involuntary termination.
(g) Military deployment overseas.
(h) Predatory lending resulting in the foreclosure of, or commencement of proceedings or an action to foreclose, a mortgage of real property owned by the insured or insurance applicant.
(i) Other events, as determined by the insurer.” (House Bill 4595; Public Act 207 of 2012; MCL 500.2154(1))
However, the insurer may require “a reasonable written and independently verifiable documentation” of the events listed above. (House Bill 4595; Public Act 207 of 2012; MCL 500.2154(2))
7. When an insurance credit score is based on erroneous credit information, a person has a right to request to be “rerated” or “reevaluated.”
Assuming the person successfully challenges the erroneous credit information by having it determined to be “incorrect or incomplete,” “the insurer shall reevaluate the insured within 30 days of receiving … notice [of the determination],” according to a recently passed law. (House Bill 4596; Public Act 208 of 2012; MCL 500.2157)
8. Michigan auto insurance companies must let people know they are using “insurance scoring” or “insurance credit scoring” or “credit-based insurance scoring.”
Under a recently passed law, an insurer must disclose at the time that a person is applying for insurance that the insurer uses “credit information” or a “credit-based insurance score” in determining the price it will charge for auto insurance. (House Bill 4594; Public Act 206 of 2012; MCL 500.2153(a))
Effective Date: The date on which the above mentioned “recently passed” credit-based insurance scoring laws shall take effect is “the “91st day after final adjournment of 2012 Regular Session” of the Michigan Legislature. Although there is no set “final adjournment” date, it typically occurs in mid- to late December.
– Steve Gursten is head of Michigan Auto Law and pastchair of the Michigan Association for Justice Automobile Accident No‐Fault Insurance Committee. He frequently writes and speaks about Michigan No-Fault insurance laws, and is available for comment.
Michigan Auto Law is the largest law firm exclusively handling car accident, truck accident and motorcycle accident cases throughout the entire state. We have offices in Farmington Hills, Detroit, Ann Arbor, Grand Rapids and Sterling Heights. Call (248) 353-7575 to speak with one of our lawyers.