Insurers Under Fire in Consumer Credit Case

By Pete Yost

WASHINGTON -- Lawyers for insurance companies and consumers want the Supreme Court to settle a dispute over notifying customers when their credit report is used against them.

At issue in arguments to be presented to the court today are requirements in the Fair Credit Reporting Act holding businesses liable when they fail to inform customers of adverse decisions made because of credit reports.

A decision a year ago by the 9th U.S. Circuit Court of Appeals in San Francisco would make it easier for consumers to prevail when they sue corporations for allegedly violating the law. The Supreme Court agreed to hear the appeal of two insurance companies, GEICO and Safeco.

Much of the business community has lined up behind the insurers, telling the justices in a brief that the appeals court ruling "may increase even more the risk of enormous damage recoveries."

The case casts a spotlight on the business world's vast credit reporting system, which has compiled files on 200 million Americans.

Congress passed the credit reporting act in 1970 to protect consumers from flaws in the system and improve the reliability of reports.

The system's cornerstone is consumer monitoring of their credit reports for accuracy. Consumer groups say the insurance companies are weakening the system by looking for ways to avoid notifying customers when it uses a credit report in making a decision.

"Consumers who do not receive an adverse action notice ... do not learn of their right to a free credit report to check its accuracy," a half-dozen advocacy groups said in court papers.

The arguments before the Supreme Court feature the case of Ajene Edo of Portland, Ore., who applied to GEICO for auto insurance. GEICO concluded that Edo didn't qualify for its coverage for low- risk customers. Instead, it offered to insure him, but as a moderate- risk customer.

The company says credit scores are one of 15 factors in underwriting decisions and that Edo's credit scores were actually above average. But they weren't high enough under GEICO's system to lower his rate.

Edo's lawyers and the 9th U.S. Circuit Court of Appeals say the company used the wrong comparison.

The court said that rather than using the average credit score, the company should use the top potential score. Under that formulation, customers should be notified whenever a consumer pays a higher rate because his credit rating is less than the top potential score.

The biggest issue in the case is the legal standard for finding that the insurance companies willfully broke the law. The 9th U.S. Circuit Court of Appeals said the standard is reckless disregard for the law. The companies say the standard is higher -- actual knowledge on the part of the companies that they are breaking the law.

The appeals court said reckless disregard can be shown if the companies explanations for failing to notify customers are "implausible" or "unreasonable."

The Bush administration sided with the insurance companies, saying the appeals court ruling sets the legal requirement too low. The solicitor general's office in the Justice Department says reckless disregard is tantamount to acting knowingly that the law is being violated.

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