Why Credit Reports for Homeowners Insurance?

What’s the connection between your credit report and your homeowners insurance premium? Many consumers are unaware that the vast majority of homeowners insurance companies are using credit information to set insurance premiums. The practice is called credit scoring or insurance scoring.

Is your credit history affecting the premium you pay for homeowners insurance? That’s a question consumers around the country are asking about their homeowners policies. They’ve just gotten notices saying their homeowners insurance went up because of credit report information, or that their insurance was non-renewed for the same reason. Or their credit report was the reason they couldn’t have a payment plan, and they had to pay their entire premium up front. People want to know why credit reports are used in determining how much they pay for homeowners insurance. People don’t see what a bankruptcy has to do with the homeowners’ rates they pay. People with good credit want to know: why does my insurance company think my credit is bad?

Background

Few consumers understand that within the last few years the vast majority of property and casualty insurers have started using credit reports when writing or pricing policies — more than 90 percent of insurers, according to one study. For many insurers, credit has become the single most important factor in classifying its customers — The practice is called insurance credit scoring, or credit scoring. Insurance companies claim credit data is a better predictor of future claims than any other information available. But they aren’t letting people see the studies that they say back them up. They aren’t showing people their definition of clean credit. To insurers, some credit cards and some lenders are better than others. You can borrow too much, and you can borrow too little to suit them. But insurers will never tell you the right amount to borrow, or the right company to borrow from.

For many consumers, the only news they ever get is an “adverse action” letter required by the Fair Credit Reporting Act (FCRA), saying negative information in their credit report from one of the three major credit bureaus, Experian, Trans Union or Equifax, somehow ended up costing them more money. Maybe your insurance company gave you reason codes to explain its decision, maybe it didn’t. Many times, these higher charges are the result of erroneous information in credit reports. Or maybe medical bills or a divorce affected your finances. It’s the customer who ends up paying more.

Maybe you’ve seen your FICO score. That’s your credit rating according to the Fair, Isaac company. Mortgage lenders and credit card companies use the FICO formula when evaluating your application for a mortgage. Did you know that your insurance credit score is a different number entirely, one that you’ll never see, calculated using different formulas? Did you know that insurance companies have refused to show these formulas, which are also called models, to any consumer group?

We filed a lawsuit against Allstate Insurance alleging its use of credit report information discriminates against minorities, African-Americans and Hispanics. The use of credit information affects other groups of people as well: single mothers, young people who don’t have significant credit histories, older people who prefer to pay cash. We are investigating similar claims of bias against several other property and casualty insurance companies. Did your company non-renew you? Did your premiums go up because of credit report information? Did an insurance company demand you pay the whole premium in advance? Do you suspect your neighborhood was redlined because you live in the wrong ZIP code? Is your homeowners insurance premium rising? Is your agent not giving you a good explanation why?

State insurance regulators are concerned about the problems of credit scoring. Regulators or legislators in the following states have proposed legislation or other restrictions on insurers’ use of credit information: Alaska, Arizona, Colorado, Georgia, Idaho, Illinois, Indiana, Maryland, Minnesota, Missouri, Montana, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, Utah and Washington state. Here in Florida regulators formed a task force to look at the issue.

Consumer Checklist:

Did your insurance premiums go up, or was your coverage non-renewed or canceled, because of information in your credit report?

Were you denied a payment plan because of your credit, and told you had to pay your entire premium up front?

Did you receive an “adverse action” letter from your insurance company saying credit information had affected your insurance?

Do you feel consideration of your race, neighborhood, age or another inappropriate factor played into an insurer’s decision to raise your premiums or deny you coverage?

Does the title of your auto insurance company include the word “Indemnity”?

Do your auto insurance premiums seem unusually high?

Do your rates stay higher years after tickets or accidents should have been forgiven?

Did you receive “fair market value” for your vehicle after an accident?