Insurers must warn consumers about rates
Consumers who are charged higher rates for insurance because of a poor credit report must be notified by the insurer, the Supreme Court ruled Monday.
However, the justices shielded most insurance firms from being sued in such cases, except when the insurer recklessly violates federal law.
The Fair Credit Reporting Act of 1970 was intended to protect consumers and to shield them from the hidden power of a bad credit report. Sometimes the credit report contains errors, and consumers should have a chance to learn about the mistakes and correct them, lawmakers said.
The law says companies must notify consumers whenever they are subjected to an “adverse action” because of information in their credit file. A company that “willfully fails” to follow the law can be sued and be required to pay damages.
Until Monday, courts were split on what constituted “adverse action” and a “willful” violation.
Last year, the U.S. 9th Circuit Court of Appeals in San Francisco got the attention of the insurance industry and the high court when it cleared the way for class actions against two insurance firms. Plaintiffs argued that Geico Corp. and Safeco Insurance were subject to damage claims because they had failed to send routine notifications to customers.
The Supreme Court unanimously reversed the 9th Circuit, shielding the two insurers from being sued. The plaintiffs in Geico did not have evidence they were charged higher rates, the court said, and Safeco thought the law applied only to rate increases for existing policyholders, not the initial rates for new customers.
“Safeco’s misreading of the statute was not reckless” and should not open the door to large damage claims, Justice David H. Souter wrote on behalf of the court.
Souter wrote that Congress had not sought to create more “junk mail” by requiring insurers to send routine notices that a credit report was considered when setting rates. Rather, lawmakers wanted insurers to send notices when “the consumer’s rate actually suffered when the company took his credit report into account,” he wrote.
The notice rule certainly applies when a bad credit report prompts an increase in the insurance rate, he wrote, and it also applies to “the newly insured who gets charged more owing to an erroneous report.”
