(202) 349-8000
1250 24 th St NW · Suite 700 · Washington D.C. 20037
www.buckleykolar.com

InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

Special Alert

Supreme Court Reverses Ninth Circuit in Insurance Adverse Action Cases

The Supreme Court today issued an opinion in two consolidated Fair Credit Reporting Act (FCRA) insurance adverse action cases, Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100.  The Court reversed, 7-2, the holding of the U.S. Court of Appeals for the Ninth Circuit that GEICO had taken adverse action when it provided insurance at a rate higher than the best available rate, after considering credit-report information about the consumer.  The Court also unanimously reversed, as to Safeco, the Ninth Circuit’s holding that a company can be found to have willfully violated FCRA’s adverse action requirement if it had inadequate compliance procedures.  (Safeco did not seek certiorari on the substantive issue of whether it took adverse action.)

The cases involved the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.”  FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations.  The Ninth Circuit had held in a related case (Reynolds v. Hartford Financial Services Group, 453 F.3d 1093 (9th Cir. Jan. 25, 2006)) that FCRA adverse action in insurance transactions occurs whenever an insurance company provides a consumer a higher rate than it would otherwise have provided if the information in the consumer’s credit report had been more favorable.  The Ninth Circuit also held that a company can be found to have “willfully” violated FCRA if it acts with “reckless disregard” of the consumer’s rights under the law, which that court defined as failing to “diligently and in good faith attempt . . . to fulfill its statutory obligations.”

In an opinion by Justice David Souter, the majority stated that FCRA did not require an adverse action notice when GEICO offered the plaintiff insurance at the same or a better rate that he would have been offered if his credit history had not been considered at all – i.e., he received a “neutral” risk score.  The Court noted that requiring notices whenever the rate offered is worse than the best available rate would “require insurers to send slews of adverse action notices,” which would result in consumers’ ignoring the notices.

At the same time, the Court held that a consumer who receives a rate that would have been better but for his or her credit history – i.e., receives a higher rate than he or she would have received if his credit history had not been considered – is entitled to an adverse action notice.  The Court rejected the argument that the FCRA definition of adverse action with respect to insurance refers an “increase” in the charge for insurance as the trigger, and the reference to an “increase” implies that a policy already exists.  Finally, addressing a question not specifically raised in the cases before it, the Court also stated that a renewal of a policy at the previous rate or better is not adverse action even if the rate is higher than what would be offered to an applicant with no credit history.

The Court agreed with the Ninth Circuit that a company may be found to have willfully violated FCRA when it acts with reckless disregard of the law.  But the Supreme Court adopted a much narrower definition of “recklessness” than that of the Ninth Circuit.  In the Supreme Court’s view, Safeco’s interpretation of the FCRA adverse action provisions was not “objectively unreasonable” in view of the lack of guidance from the federal courts of appeals or the Federal Trade Commission.  Therefore, Safeco did not act recklessly, and although it may have violated the adverse action requirement, it did not do so willfully and was not subject to statutory damages.  (In view of its holding that GEICO did not violate FCRA at all, the Court did not reach the question of the willfulness of GEICO’s conduct.)

While the justices concurred unanimously in the judgment, Justices John Paul Stevens and Ruth Bader Ginsburg filed a concurring opinion in which they disagreed with the majority’s holding that no adverse action notice is required when the rate provided is as good or better than that provided to consumers for whom no credit report is obtained.  Justices Clarence Thomas and Samuel Alito declined to concur in the portion of the opinion that addressed whether Safeco violated the adverse action requirement.  Justice Scalia did not concur in two footnotes in the majority opinion that cited congressional reports.

Aside from the direct impact on insurers that use credit scores in setting the initial rate for insurance, these cases are also likely to affect other FCRA litigation involving the consumer financial services industry.  The Court’s consideration of objective reasonableness in determining whether a company has acted recklessly is much narrower than the Ninth Circuit’s expansive view, which implied that a company might have to waive attorney-client privilege and offer testimony from its attorneys and compliance personnel in order to demonstrate that it did not engage in a willful violation of FCRA.  The Court’s clarification of the willfulness standard should be helpful to the many companies facing class-action litigation in the FCRA “firm offer” cases, as well as, more recently, in FCRA credit-card truncation cases.  The cases could also potentially affect the mortgage insurance industry, since the courts have generally held that adverse action in mortgage insurance is determined under the insurance, rather than the credit, “prong” of the FCRA definition of “adverse action.”

The opinion is available at http://www.supremecourtus.gov/opinions/06pdf/06-84.pdf.

© Buckley Kolar, LLP 2005. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

We welcome reader comments and suggestions regarding issues or items of interest to be covered in future editions of InfoBytes. Email:

For back issues of INFOBYTES (or other Buckley Kolar LLP publications), visit http://www.buckleykolar.com/publications.