State: Insured sue, claiming credit bias

TALLAHASSEE -- Georgia Harrison never realized how much she was doling out to insure her 1994 Lexus sedan until a friend persuaded her to switch insurance companies.

Harrison had paid Allstate $174 a month. When she moved to Nationwide, the cost dropped to $53.

That's an annual difference of almost $1,500 -- no pocket change for Harrison, a 55-year-old nurse from Plant City.

She had a clean driving history: no accidents, no tickets, no insurance claims. But Allstate still had her in a high-risk bracket.

The reason? She said Allstate gave her an unfavorable score based on her credit history even though it has nothing to do with her driving record.

Most insurance companies in the United States use credit ratings to help determine the cost of premiums for auto and homeowner policies, a controversial practice that has become widespread in the insurance industry in the past two years.

"When you start looking at how many credit cards a person has, then I think that's wrong," said Elsie Crowell, a consumer advocate at the state's insurance department. "I just don't think that's a fair way to do it. It should be banned."

Florida is among 18 states that do not regulate the use of credit ratings by insurance companies at all. Twenty-three states are considering adding or amending regulations this year. Florida is not one of them.

Insurance Commissioner Tom Gallagher hasn't made it a top priority this year and the state Legislature, already halfway through its 60-day session, has no plans to take up the issue.

So consumers are taking matters into their own hands: They're going to court.

Most auto and homeowner insurance companies in Florida, including Allstate, State Farm and Progressive, use credit ratings to calculate premiums. Nationwide does not use them but plans to start this spring.

Most insurers use credit ratings as just one factor, though some use them alone. A bad credit rating can raise a bill by hundreds, even thousands, of dollars.

Though state and federal regulations require insurance companies to inform customers that they use credit ratings, consumer advocates say most people have no idea.

Insurance companies say credit ratings measure how likely a customer is to make a claim, though company officials can't explain why.

But some say the practice unfairly discriminates against racial minorities, the young and the elderly, single mothers and others who may not have good credit -- or any credit at all.

Gallagher, like many of his counterparts in the nation, convened a task force to study the practice. The group recommends that companies not be allowed to use credit alone to determine costs and that they not penalize customers with little or no credit.

"I hope they see what they are doing," Harrison said. "They put people in different categories and overcharge them. It's discrimination."

Another 'red line'?

For decades, insurance companies used to routinely draw "red lines" around poor or minority neighborhoods, refusing to insure homes and cars there. Though the practice was banned in 1968, some consumer advocates wonder if relying on credit ratings is just another way to do that.

"It amounts to red-lining," said Bill Newton, executive director of the Florida Consumer Action Network. "That's not a valid basis. That's not a valid way to look at risk."

The insurance industry has used credit ratings for years to decide which customers to accept. But it has become popular recently to help determine premium costs, too.

Company officials say the practice helps accurately predict risk so that customers pay rates that reflect their actual costs. That can reward financially sound customers by lowering their rates.

"If you don't use credit as an insurer, then you put yourself at a competitive disadvantage," said Mike Trevino, an Allstate spokesman.

Industry officials haven't explained the correlation between insurance and credit because they say they don't know why the two are related, just that they are. Some speculate, though, that stress over finances can lead to irresponsible behavior.

"There's absolutely a correlation," said Tom Hagerty, a State Farm spokesman. "We don't know why, but it's clear it's there."

A July 2001 study by Conning & Co., a Connecticut industry research firm, shows that 92 percent of companies use credit nationwide as a factor in calculating premiums in residential and auto insurance.

Most companies use credit ratings as one of dozens of factors to determine premiums, though they won't say how heavily they weigh finances. A handful use the information alone.

The credit information is calculated mathematically into a single number, which indicates the statistical odds that a customer will file a claim or the severity of the potential loss. Companies say they have refused to reveal the formulas they use because they don't want to tip their hands to competitors.

"The company has spent a lot of time and energy on the system and we don't want that to be public," Trevino said.

Some of the factors companies consider are: the number of open accounts, balance vs. limit on credit cards, length of history, type of credit, late payments, bankruptcies and the amount of outstanding debt.

But just because consumers have good credit doesn't mean they're off the hook. It's possible to have a good credit history but end up with a bad score.

That's because credit reports are often wrong. Customers may be penalized for seemingly innocuous factors, such as the number of credit reports run on them by banks when they shop around for home financing. And some companies punish people for having little or no credit.

Harrison said she ran into that problem. Though her lawyers say her credit was good, she may have been unfairly charged for using finance companies, instead of banks, for loans or for having more than a couple of credit cards.

What perplexes consumers is the inability or unwillingness of insurance companies to explain the link between bad credit and high risk.

"I have yet to see anything that shows there's a relationship between credit history and the risk you present as an insurer," said Christa Collins, a lawyer at James, Hoyer, Newcomer and Smiljanich in Tampa, which represents Harrison and others in a federal lawsuit in Texas. "If there is evidence, then provide it. Why be so secretive about it?"

States take action

The state received 65 consumer complaints about premiums based on credit ratings in the past year either from people whose insurance was canceled or denied altogether because of their finances.

That's a fraction of the people with 13-million auto and home policies in the state. But it was enough to prompt Gallagher to create a group to look into the practice.

"(Investigating the industry) is kind of in vogue," said Sam Miller, a spokesman with the Florida Insurance Council, an industry lobbying group in Tallahassee. "It's not because there is consumer outcry about it."

In the past year, dozens of states have launched investigations into the use of credit reports as a handful of consumer advocates spread the word that the practice was becoming more common.

Some states already have proposed regulations or legislation.

Hawaii recently passed a law banning the practice, while other states have limited its use. Some, such as Virginia, say it should not be the sole reason to deny insurance. Others, such as Oklahoma, say a customer shouldn't be penalized for having no credit.

The task force Gallagher put together, including consumer advocates, insurance agents and lobbyists, recommended limited regulations and a more comprehensive investigation.

"There's probably something wrong with using it by itself," Gallagher said. "It's an issue that needs to be looked at for consumers in Florida."

Gallagher called the study "the first stage in the process" and has not made specific recommendations. He asked two legislators to be on the task force, leaders of the House and Senate insurance committees, but neither attended.

No bills were introduced in the Legislature addressing credit rates and there is no talk of any this session.

Rep. Leslie Waters, R-Seminole, chairwoman of the House committee and a former employee of an insurance company, said the issue is worth considering.

"Credit scoring can be a useful tool if insurance companies use it in a fair and consistent manner, in consideration with other risk and rate features," Waters said.

But Sen. Bill Posey, R-Rockledge, isn't so sure.

"It should be up to me how I do business," Posey said. "This is the United States of America. I don't think I should be forced to think one way or another. That's a choice I think I ought to have."

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Lucy Morgan

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