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Must Insurors Send Adverse Action Notices? - John Burnett

Must Insurors Send Adverse Action Notices?
John Burnett

Jason Ray Reynolds applied to the Hartford Insurance Companies for automobile and home owners insurance. Ajene Edo applied to the GEICO Companies for an automobile policy. Both Reynolds and Edo obtained their coverage. Yet both the Hartford and GEICO companies recently lost appeals in cases brought separately by Reynolds and Edo under the Fair Credit Reporting Act, and earlier decisions in both cases were reversed and remanded.

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  • The cases were combined in a decision filed by the United States Court of Appeals for the Ninth Circuit on August 4, 2005. Although the cases deal with consumer rights and insurer responsibilities under the Act with respect to applications for and provisions of insurance coverage, the circuit court's findings and the reasoning behind them also provide important guidance for applying the adverse action rules with respect to applications for credit.

    The principal question addressed by the court was whether the establishment of an initial policy premium rate (when that rate is affected by an applicant's credit history) might trigger the adverse action provisions of the Act. The court found that insurance companies must join the creditor community in providing adverse action notices if an initial premium is higher than might otherwise be available absent information in the consumer's credit history report. The insurance companies argued unsuccessfully that adverse action only occurs when an existing rate is increased based on a credit report. The court was unimpressed with that argument.

    The court also ruled for Reynolds and Edo on five "ancillary" issues in the two cases under review:

    • Assigning an "average" premium rate to a policy in cases where the rate would have been lower had the consumer's credit history been more favorable. In one of the cases, the credit report was ignored, and the consumer's policy was assigned an average premium. The court was not persuaded by arguments that the policy would have been issued at the same premium had the credit report been used in setting the premium, because the credit history was not adequate to warrant the more favorable rating.
    • Charging more for insurance on the basis of a "no hit" or "no score" report is adverse action.
    • The specific requirements of the adverse action notice in the FCRA must be covered when the company advises the customer of the action taken. A simple notice of the premium amount that does not include the other required information does not satisfy the statute.
    • When the consumer applies for insurance to a family of companies, and is charged a higher rate because of the consumer's credit report, two or more companies in that family may have an obligation to provide the adverse action notice and could be liable for failure to provide that notice.
    • "Willful violation" of FCRA means knowing and intentional commission of an act in violation of the Act in conscious disregard for the rights of others. The court agreed with an earlier Third Circuit ruling that "conscious disregard" means either knowing a policy to be contrary to the rights of consumers under the FCRA, or in reckless disregard of whether the policy is contrary to those rights. In other words, a company would willfully violate FCRA if it determined either, "Yes, we agree the consumer has these rights, but we will act to deny those rights," or "FCRA may or may not provide these rights. We aren't going to figure it out, and we'll act this way anyhow."

    The lessons for lenders in these cases are limited. "Adverse action" for lenders under FCRA is defined by reference to the Equal Credit Opportunity Act. Accordingly, FCRA notices of adverse action are required under different circumstances for lenders and insurors.

    Subsection 615(h) of FCRA, added by section 311(a) of FACTA, requires (or will require, when implementing regulations are issued) a separate notice in connection with risk-based credit pricing programs. It is unclear now whether regulations will require that the notice be given during the application process, or at the time an application is approved under a risk-based pricing program when information in the consumer's credit report results in a higher cost of credit.

    First published on 8/22/05

    First published on 08/22/2005

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