The Michigan Supreme Court has narrowly sided with the insurance industry’s argument that the use of credit-based insurance scoring for rates should be allowed under the state’s insurance laws. That marks an industry win in a long and hard-fought legal battle.
The 4-3 decision puts an end to the state Office of Financial & Insurance Regulation’s attempts to ban the practice, but it may also be seen outside Michigan’s borders as a signal to other states waging legal debates over the same issue.
“It certainly is one of the clearest rulings that I have ever seen issued — both on the law and the value of an insurance rating and underwriting tool,” said David Snyder, vice president and associate general counsel of the American Insurance Association. “It will, we believe, have significance beyond the borders of Michigan.”
Insurance scoring has been a legal issue in Michigan since 2004, when Gov. Jennifer Granholm and then-Commissioner Linda Watters proposed a new state rule to reduce base rates by prohibiting the use of insurance scoring for homeowners and automobile insurance. While an August 2008 state Court of Appeals ruling overturned a lower-court decision preventing the state from banning the practice, both sides in the case petitioned the Michigan Supreme Court to take the case (BestWire, April 10, 2009).
“We hold that the commissioner exceeded her authority by promulgating the [state insurance office's] rules because they are contrary to the insurance code,” the state’s high court ruled. “Accordingly, we vacate the judgment of the Court of Appeals and reinstate the trial court’s order.” The court also found the commissioner’s case “failed to show that insurance scoring produces rates that are ‘unfairly discriminatory,’” which would be disallowed under the law.
That view is wrong, said Michigan’s insurance consumer advocate, Melvin Butch Hollowell. “There is no statistical correlation between credit scoring and one’s driving behavior,” he said. Insurers simply want to track and retain wealthier customers, Hollowell argued. “They will want to cross-sell an individual who has a higher income boat insurance, home insurance, travel insurance.”
Hollowell sees this as another example of the court unfairly favoring insurers. “The court has a long history … of siding with the insurance industry over consumers,” he said, calling this ruling “arbitrary and unfair.” “We will be fighting back hard on this decision.”
Opponents of credit scoring in Michigan are now shifting focus to a bill that has passed Michigan’s House of Representatives and is before the Senate: HB 5634, which would officially ban the practice. “This would trump the Supreme Court ruling of yesterday,” Hollowell said. “This needs to be resolved at the legislative level, and I do believe that it will be.”
Meanwhile, the potential of this “very powerful ruling” being closely watched by other states is high, Snyder said, “because many states have the same standards for acceptable rating and underwriting tools.”
The top five writers of homeowners multiperil insurance in Michigan in 2009 were State Farm Group, with a 20.8% market share; Auto-Owners Insurance Group, with 14.3%; Auto Club Group, with 12.5%; Hanover Insurance Group Property and Casualty Cos., with 9.5%; and Allstate Insurance Group, with 8.0%, according to BestLink, which provides online access to A.M. Best’s Global Insurance & Banking Database.
The top five writers of private passenger auto insurance in Michigan in 2009, according to BestLink, were: State Farm Group, with 18.9%; Auto Club Group, with 18.3%; Auto-Owners Insurance Group, with 10%; Progressive Insurance Group, with 8.5%; and Hanover Insurance Group Property and Casualty Cos., with 7.7%.
(Jesse A. Hamilton, Washington bureau manager: Jesse.Hamilton@ambest.com)