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Auto Insurance & Credit Scoring
Auto Insurance Laws & Credit Scoring
Auto insurance companies assess a driver's "risk" not just with your driving record but also your credit history
The practice of auto insurance using your consumer credit history to assess you as a risk factor is known as "credit scoring" and it is controversial for many reasons. Oregon and each state in the USA determines the rules in that state for auto insurance underwriting standards.
The Washington state insurance commissioner said in 2022 about credit scoring, especially for manditory auto insurance coverage:
He noted that insurers charge good drivers with low credit scores pay nearly 80% more for mandatory auto insurance.
In Oregon, your personal consumer credit history is used by insurance companies to assess your risk, and in order to determine your auto insurance rates.
In Oregon an insurer for personal insurance policies in Oregon:
(a) May not cancel or nonrenew personal insurance that has been in effect for more than 60 days based in whole or in part on a consumer's credit history or insurance score.
(b) May use a consumer's credit history to decline coverage of personal insurance in the initial underwriting decision only in combination with other substantive underwriting factors. An offer of placement with an affiliate insurer does not constitute a declination of insurance coverage.
Oregon has placed limits on the use of your personal consumer credit history in setting these auto insurance rules for "underwriting standards" that auto insurance companies may use in determining your auto insurance policy and rates.
Oregon allows insurers to use your personal consumer credit history only when you are a potential new policy to that company. Oregon does not allow an insurer to use a current policy holder's credit score to raise their insurance rate when it is time to renew the policy. Oregon law also does not allow insurers to cancel nor to refuse renewing an insurance policy, because of the consumer credit score.
If a person doesn't have a credit history - there are provisions for this case which is not uncommon for young drivers and retired drivers.
Oregon requires that insurance companies also prove that the credit score is not the only criteria in the system they use to determine a driver's risk and set their policy rates. Oregon also requires that the insurance company tell you how they will use your credit history information and they must notify you before they run a credit check. If the insurance company uses your credit history in determining either to not insure you or to not offer you the best rates, they must provide you with the specific reasons for their determination.
Credit scoring is considered by some to be unfair business because the use in auto insurance conflates whether you are a safe driver with your bill payment history and whether or not you even have or use credit.
Insurance companies have responded to this argument by saying lower credit score drivers are more likely to file a personal injury claim and that the credit score is a predictive information metric. However, since the insurance is there for the purpose of filing this claim, the social economic bias about the credit score and the insurance rate determined in part by the credit score is apparent.
Another controversial aspect of credit scoring is that our consumer credit scores are becoming more unreliable with the amount of identity theft on the rise. In addition, with identity theft a huge problem, the privacy issue of our credit history being used by yet another corporation for something that is not about getting a loan but about our driving record.
Credit Scoring is viewed by many as discriminatory.
Even more troubling, credit scores have experienced "mission creep": Companies now use credit scores to determine eligibility for benefits or services that are unrelated to financial risk. The National Consumer Law Center recently published a report about these inappropriate uses of credit scores. Drivers with bad credit may face higher car insurance premiums, even though credit history has nothing to do with driving habits. Many employers conduct a credit check during the hiring process, despite no evidence that credit impacts job performance at all. Utility companies might check credit before connecting necessary services. The Trump Administration even proposed folding credit scores into visa and green card decisions for immigrants, though this rule was vacated in 2021.
Credit Scoring by insurance companies, especially for auto insurance, continues to be contentious through the USA with only a few states banning credit scoring for auto insurance rates as well as rules regarding credit scoring practices in regard to home insurance.
If you live in California, Hawaii, Massachusetts, or Michigan, you're in luck—these states don't allow credit history to affect your auto insurance rates. Other states, such as Utah, Oregon, and Washington, have specific limitations regarding credit and insurance. Credit usage limitations are decided at a state level, and it is a hot topic in many legislatures these days, so it's important to be aware of your state's rules.
Credit scoring controversy first heated up in 2001 when a well known think tank released a report for the insurance industry on credit scoring.
This report made the growing adoption of using credit scoring both more publicly known and also provided information to the industry on how it was being used.
This research and 113 page report is still available for $1250.00 (one thousand, two hundred fifty dollars), titled: 2001: Insurance Scoring In Personal Automobile Insurance - Breaking the Silence.
It seems that the terms "insurance scoring" and "credit scoring" are used interchangeably. What is insurance scoring? Conning defines this term as a score derived from credit report data that has been determined to be highly predictive of future claim costs. Insurance scoring or insurance scoring models as discussed in this study are not synonymous with credit scoring as used in the loan underwriting process in the banking industry to predict loan defaults. Fair Isaac and Company Inc. (referred to throughout this study as "Fair Isaac") is the pioneer in credit scoring and insurance bureau scores. Insurance and credit scoring models have proliferated throughout the financial services industry during the 1990s.
Voters in Oregon voted in 2006 to not to completely ban the use of credit scoring, but Oregon in 2003 had voted in some protections for consumers for how credit scoring could be used in determining their insurance policies. Measure 42 in 2006 was the first measure of it's type in the USA.
In 2003, the Legislature prohibited insurance companies from using the credit information of existing policyholders to decide whether to raise rates or drop a policy. Ballot Measure 42 would take the restrictions further. [...] Critics of credit scoring say it targets lower-income people and minorities, who tend to have poorer credit histories. And many critics say it is done without a clear understanding of the customers affected. At least 18 states have considered clamping down on the practice in 2006.
According to Eugene's The Register Guard, Oregon's Measure 42 was the first of it's type in the USA and, "will help protect the poor and minorities from unfairly paying more for insurance because of poor credit scores, backers and consumer groups say. Insurance companies have mounted an aggressive campaign to defeat the measure, putting up $3.5 million to date."
Maryland has very strict laws on the use of credit scoring – and in 2010 Maryland attempted to ban credit scoring completely for the use in new auto insurance policies. The 2010 attempted ban failed.
Currently, Maryland prohibits homeowners insurers from using credit information in underwriting or rating. The law also prohibits private passenger automobile insurers from using credit information for underwriting, but allows such information in rating new policies within 40 percent rate collars—either a surcharge or discount of up to 40 percent, he said. The proposed bills would have gone even further and repealed provisions of Maryland's law authorizing insurers to use credit information to rate a new automobile insurance policy, he said.
Michigan is another state that has tried to fight the use of credit scoring with a big state decision in July of 2010 where the Michigan Supreme Court ruled in a 4-3 decision that credit scores can be used to set insurance rates. This was an interesting case of the insurance industry suing the Michigan Insurance Commissioner for the State Constitutionality of their insurance underwriting rules specific to the use of credit scoring.
In a dissenting opinion, Justice Marilyn Kelly, "argued that the majority was ignoring the plain text of Michigan law, noting that the stated purpose of the state Insurance Code is "to provide for the continued availability and affordability of automobile insurance and homeowners insurance in this state and to facilitate the purchase of that insurance by all residents of this state at fair and reasonable rates."
Washington state in 2010 also had a similar attempt to ban credit scoring use, but the effort died in the legislature. According to Washington State's Official Insurance Commissioner and state government website:
Commissioner Kreidler is asking the state Legislature to ban insurers' use of credit scores when determining how much you pay for auto, homeowners or renter insurance.
The bill had a hearing in the Senate on Jan. 14. (www.tvw.org). The Senate Committee on Business, Financial Services & Trade voted on an amended bill on Feb. 15 that Kreidler does not support. Watch a March 2 podcast about the amended bill featuring Commissioner Kreidler: The Fight to Stop the Use of Credit Scores to Set Insurance Rates (www.youtube.com).
Updating the saga -- Washington state no longer has a Credit Scoring Ban as of August 29, 2022 when it was overturned by a judge.
The court issued a final order overturning the ban on credit scoring and the commissioner has chosen not to appeal the decision.
In Washington currently, your insurance company is allowed to use your credit to determine your insurance premium.
In the summer of 2021, because of the Pandemic, the Insurance Commissioner of Washington state put a pause on the use of credit scoring for insurance, but this was met with resistance immediately even though the ban was to be limited to 3 years. While the ban was fought in court, the insurance commissioner of Washington state worked with lawmakers in an effort to put into effect a permanent ban which didn't become law. In March 2022 a number of groups sued to overturn the temporary ban and a stay was placed on the ban until August 2022 when a judge overturned the ban.
In 2010 the Washington state insurance commissioner drafted this op-ed in his long battle against the use of personal credit history for auto insurance and homeowner insurance:
For more than 10 years, the insurance industry has increasingly relied on your personal credit history to set your auto and homeowner's insurance rates and to decide whether they'll even offer you coverage. This is not just about whether you pay your bills on time. In fact, your credit information is now one of the biggest factors that insurers use to set your rates.
Oregon Insurance Commission
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