Insurer Interest High in Michigan Credit Score Case

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

In 2005, under then-Commissioner Linda Watters, the Michigan Office of Financial and Insurance Regulation (OFIR) promulgated 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 for the last four years.

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 said that during hearings on the proposed credit scoring rules “more than one insurance company acknowledged that credit scoring is a redistribution of costs, and not a net reduction.”

The OFIR also argues that credit information has been found to be highly error-prone therefore 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.

“The Supreme Court is not deciding the merits of credit based insurance scoring. Today’s hearing is to determine whether OFIR overstepped its bounds by promulgating rules banning even the limited use under which Michigan residents receive discounts,” the MIC stated.

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 (PCI), the American Insurance Association (AIA) and the National Association of Mutual Insurance Companies (NAMIC), filed an amicus brief in support of the appeal.

“PCI supports the ability of insurers to use credit-based insurance scoring because it has proven to be a very accurate predictor of the risk of loss and allows insurers to provide more coverage and create financial benefits for policyholders with good credit,” stated Ann Weber, PCI vice president, regional manager, and counsel.

David Snyder, AIA vice president and associate general counsel, also weighed in.

“The use of credit-based insurance scoring continues to benefit the vast majority of Michiganders with lower rates and contributes to the over-all availability of insurance across the state,” Snyder said. “Restricting its use will eliminate a proven, objective tool used to more accurately predict risk.”

Snyder said the AIA expects a fair decision in the case.

A decision is expected by August, the Associated Press reported.