The Michigan Supreme Court overturned a state ban on “insurance scoring” – the practice of using credit information to set consumers’ rates for automobile and homeowner insurance. Insurance companies that use insurance scoring offer discounts to consumers with good credit. The Michigan Commissioner of Financial & Insurance Services promulgated rules prohibiting the practice, but the Supreme Court held the prohibition was illegal.
In striking down the regulation, the Court held that various parts of the Insurance Code allow insurance scoring. Chapter 21 of the Code allows insurers to establish and maintain a premium discount plan as long as it is consistent with the purpose of the act and “reflects reasonably anticipated reductions in losses or expenses” and is uniformly applied. MCL 500.2110a.
The Court held that the evidence showed a direct correlation between insurance scores and risk and therefore, insurance scoring reflects reasonably anticipated reductions in losses on the part of the insurer. The Court also held that insurance scoring is allowed under Chapters 24 and 26 of the Code, which allow rating plans measuring differences among risks that “may have a probable effect upon losses or expenses.”
The Court rejected arguments that insurance scoring is inconsistent with the Code because it will make insurance more expensive for some. The evidence, according to the Court, showed that insurance scoring reduces rates. Without insurance scoring, rates would rise and insurance would become less available.
Finally, the Court concluded that insurance scoring does not unfairly discriminate. The Court held that a rate is not unfairly discriminatory if there is a reasonable justification in the rate differentials. Because credit scores provide a reasonable justification for varying rates – the Court noted that the Commission itself relies on credit reports as reliable – the use of credit reports is not unfairly discriminatory.
Because the Insurance Code allows scoring, the Court concluded that the Commission exceeded its authority in banning the practice.
Undoubtedly, proponents of the ban will see the decision as a giveaway to the special interests while opponents will see it as a victory for law over irresponsible regulation. The Detroit Free Press reports that a law banning insurance scoring has passed the state House “but faces dim prospects in the Senate.”