Insurer Interest High in Michigan Credit Score Case

The Michigan Supreme Court on Oct. 7 heard opening arguments in a closely watched case that may decide the fate of insurers’ use of credit history in setting rates for personal lines policies in that state.

In 2005, under then-Commissioner Linda Watters, the Michigan Office of Financial and Insurance Regulation (OFIR) issued rules banning the use of insurance credit scoring.

The Insurance Institute of Michigan, the Michigan Insurance Coalition, and others in the insurance industry challenged the rules and the issue has been working its way through the legal system since then.

In Insurance Institute of Michigan et al v. Office of Financial and Insurance Services (OFIS), a Barry County Circuit Court first “held that the administrative rules were illegal, invalid, and unenforceable; the court permanently enjoined the Insurance Commissioner from enforcing them,” according to a Supreme Court analysis of the case. The Court of Appeals, however, reversed the circuit court’s decision in a split published opinion.

The OFIR asserts that Michigan’s Insurance Code explicitly states that there must be reasonably anticipated reductions in losses in discounts, such as credit scoring discounts, offered by automobile insurance companies.

The agency says during hearings on the proposed rules “more than one insurance company acknowledged that credit scoring is a redistribution of costs, and not a net reduction.” The OFIR argues that credit information has been found to be highly error-prone and basing insurance scores on such unreliable information is unfairly discriminatory.

Insurance companies and their representatives assert that insurance credit scoring is useful, fair and permitted under Michigan law. The Michigan Insurance Coalition maintains that state law allows the use of credit based insurance scores if the practice is limited to providing discounts to people who have higher scores.

“Under Michigan’s limited-use law, over 70 percent of Michigan residents with auto and home insurance receive some type of discount because they have a good credit based insurance score,” the MIC stated in a published announcement. It asserted that if current Commissioner Ken Ross wants to change state statutes, he needs to go to the legislature, not the courts.

In its analysis, the Court listed several questions that it would be considering. Among them: “Do the challenged administrative rules violate the plaintiffs’ due process rights? Are they valid and enforceable under the Insurance Code? Are they arbitrary and capricious? Do they exceed the defendant’s rulemaking authority?”

National insurance trade groups, such as the Property Casualty Insurers Association of America, the American Insurance Association and the National Association of Mutual Insurance Companies, filed an amicus brief in support of the industry’s position.

“Insurance scores work,” Peter Ellsworth, an attorney for the appellants, told the Court. “They are actuarially sound. If they weren’t, insurance companies wouldn’t be before this court today asking to be able to use them.”

He warned that at least 60 percent of policyholders will pay higher premiums if the court allows the ban against insurance credit scoring, according to the Associated Press.

Critics, however, say insurers raise all base rates, then “discount” some, the AP reported.

“Insurance scoring makes insurance less available and affordable as a whole by driving up the cost for people who are least able to pay,” said Assistant Attorney General William Chenoweth. “Discounts given to favored policyholders are paid for by premium increases charged people who are disfavored.”

He said the practice is illegal because it does not cut insurers’ overall losses, unlike discounts for having anti-theft devices or fire extinguishers.

A decision is expected by August.

Topics Carriers Michigan