U.S. Supreme Court Clarifies When Notice of Adverse Action Is Required under FCRA, Adopts Standard Consistent with Washington Law

Safeco Insurance Co. of America v. Burr (U.S. S. Ct., June 4, 2007)

The U.S. Supreme Court recently made compliance with restrictions on the use of credit history a little easier for insurers underwriting personal lines policies in Washington State. The Court clarified when notice of "adverse action" must be sent under federal law, adopting a standard that is consistent with Washington law: credit history must be a determining factor.

A Washington statute adopted in 2002 restricts the use of credit history in underwriting. The statute has parallels in the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681 et seq. Although "adverse action" under the Washington statute may result from factors other than credit history, both statutes require an insurer to send the consumer notice if it takes an "adverse action" -- such as cancellation, denial, or nonrenewal of personal insurance coverage or increase of the premium rate -- due to the consumer's credit history. It is an adverse action requiring notice to the consumer under the Washington statute if an insurer "charg[es] a higher insurance premium rate for personal insurance than would have been offered if the credit history or insurance score had been more favorable." RCW 48.18.545(1)(a)(ii). Until recently, it was unclear whether the FCRA required more frequent adverse action notices, as in whenever a consumer would have been offered a lower rate if his or her credit were perfect. In an opinion filed June 4, 2007, the U.S. Supreme Court held that, as under the Washington statute, notice is required only if the consumer would have been offered a lower rate if credit history had not been considered.

In the context of insurance, "adverse action" under the FCRA is "a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for." 15 U.S.C. 1681a(k)(1)(B)(i). The Supreme Court applied this provision in two consolidated cases, one involving a GEICO company and the other involving a Safeco company. GEICO's practice was to send an adverse action notice to an initial applicant if using a "neutral" credit score would have resulted in a lower premium rate, but not if a better credit score would have resulted a better rate. Safeco's practice was not to send adverse action notices to any initial applicants, interpreting the statute as not applying to initial applications because there could be no "increase" in the premium rate if there was no existing relationship with the applicant.

The Supreme Court agreed with GEICO's interpretation. The Court held that the baseline for determining whether the rate was "increased" is the rate the consumer would have been charged if the applicant's credit score had not been taken into account. The Court observed: "Congress was ... more likely concerned with the practical question whether the consumer's rate actually suffered when the company took his credit report into account than the theoretical question whether the consumer would have gotten a better rate with perfect credit." The Court further held that notice to the consumer is not required upon renewal if the rate is not changed. The baseline in an existing relationship is the previous rate, not the "neutral" baseline used for determining whether an initial applicant must be notified.

The plaintiffs in the case against Safeco alleged that Safeco willfully violated the notice requirement. The FRCA provides a private right of action, permitting actual damages for negligent violations and actual, statutory, and punitive damages for willful violations. The Supreme Court held that Safeco did not willfully violate the notice obligation. The Court held that "willfullness" includes reckless disregard, but that Safeco did not act in reckless disregard of the requirement because "Safeco's reading of the statute, albeit erroneous, was not objectively unreasonable." As evidence of reasonableness, the Court pointed out that there was no case law on the subject, the statutory language was unclear, and the district court had ruled in Safeco's favor.