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As insurers consider augmenting the quoting process with
algorithmic predictive models, including those aided by artificial
intelligence, machine learning, and/or robotic process automation
(“Models”) for which core inputs are,
or could be considered, a consumer report, one question that may
arise is whether the Fair Credit Reporting Act, 15 U.S.C.
§§ 1681-1681x (the “FCRA”)
dictates the distribution of an adverse action notice when a Model
is not implemented for the purpose of making
“coverage and rating decisions”
(determining whether to accept or decline a particular risk or the
premium charged), but instead for the purpose of determining
whether other actions can be taken with respect to consumers like
routing applicants to certain payment methods or other designations
unrelated to coverage and rating decisions
(“administrative decisions”).
Under the FCRA, an “adverse action” can mean
different things in the context of different industries or
uses. In the context of insurance, an “adverse
action” is defined to mean “a denial or
cancellation of, an increase in any charge for, or a reduction or
other adverse or unfavorable change in the terms of coverage or
amount of, any insurance, existing or applied for, in connection
with the underwriting of insurance.”1 Under a
different section of the FCRA, “If any person takes any
adverse action with respect to any consumer that is based in whole
or in part on any information contained in a consumer report”
that person must, among other things, provide an adverse action
notice to the consumer.2
A “consumer report” is defined to
mean “any written, oral, or other communication of any
information by a consumer reporting agency bearing on a
consumer’s credit worthiness, credit standing, credit capacity,
character, general reputation, personal characteristics, or mode of
living which is used or expected to be used or collected in whole
or in part for the purpose of serving as a factor in establishing
the consumer’s eligibility for . . . (A) credit or insurance to
be used primarily for personal, family, or household purposes; or .
. . (C) any other purpose authorized [as a permissible purpose of
consumer reports]”3 The
“permissible purposes” of consumer
reports include, in relevant part, the furnishing of a consumer
report by a consumer reporting agency “to a person which it
has reason to believe . . . intends to use the information in
connection with the underwriting of insurance involving the
consumer.”4
1. “Adverse Action”
First, insurers should consider whether an administrative
decision could be considered “[1] an increase in any charge
for . . . or other adverse or unfavorable change in the terms of
coverage . . . applied for, [2] in connection with the underwriting
of insurance.”
1.A “An increase in any charge for . . . or other adverse
or unfavorable change in the terms of coverage . . . applied
for”
An administrative decision could be considered an increase in
the charge for coverage, because applicants subject to an
administrative decision could be giving more value for the same
level of coverage in some way. Such additional value could be
minimal to the point of appearing nominal, but could theoretically
be construed as an “increase.”
An administrative decision could be considered an adverse or
unfavorable change in the terms of coverage, because the burden of
having to pay premium in a different way or obtain or interact with
their coverage in a different way could be construed as
“adverse or unfavorable” from the perspective of the
applicant. In many circumstances, particularly those
affecting applicants with fewer resources, paying more at one time
or in a different manner could mean the applicant has less funds on
hand to contribute to other needs. An administrative decision
could therefore be considered “adverse” or
“unfavorable.”
1.B “In connection with the underwriting of
insurance”
Depending on the nature of the administrative decision, it could
be construed as being undertaken in connection with the
underwriting of insurance. The only permissible purpose for
which a consumer report may be provided to an insurer is to
“use the information in connection with the underwriting of
insurance.” Further, it seems counterintuitive that the
legislative intent of the FCRA would be to permit the provision of
consumer reports without the attachment of attendant restrictions
and obligations like the FCRA’s requirements in respect of
adverse actions.
2. Adverse Action Notice
As stated above, according to the FCRA, if any person takes any
adverse action with respect to any consumer that is based in whole
or in part on any information contained in a consumer report”
the person must, among other things, provide an adverse action
notice to the consumer.5 Insurers must therefore
consider whether an administrative decision could be construed as
being (1) based in whole or in part on (2) any information
contained in a consumer report.
2.A “Based in whole or in part on”
The phrase “based in whole or in part on” has been
interpreted to apply only when there is a “but-for”
causal relationship. An adverse action is not considered to
be based in whole or in part on the consumer report unless
“the report was a necessary condition” of the adverse
action.6
Under certain caselaw, the baseline or benchmark for considering
whether there has been a disadvantageous increase in rate (and,
therefore an adverse action requiring notice to the applicant) has
been interpreted to be “what the applicant would have had if
the company had not taken his[/her] credit score into
account.”7 It may be that the only
purpose of a Model’s use of a consumer report is to determine
whether an administrative decision will be engaged. In that case,
the “baseline” could be considered to be the absence of
the result of the administrative decision. In other words,
without use of the Model that integrates the consumer report, there
might not be any possibility of the administrative decision
impacting the applicant.
2.B “Any information contained in a consumer
report”
An insurer must analyze whether particularized information used
in a Model has been obtained from a consumer reporting agency based
on the insurer’s permissible purpose. An insurer should
also analyze whether the information is: (i) a written
communication of information derived from a consumer reporting
agency; (ii) bearing on a consumer’s credit worthiness, credit
standing, credit capacity, character, general reputation, personal
characteristics, or mode of living; (iii) which is used or expected
to be used or collected in whole or in part for the purpose of
serving as a factor in establishing the consumer’s eligibility
for insurance to be used primarily for personal, family, or
household purposes.
3. State Insurance Scoring Laws & the NCOIL Model Act
Finally, an insurer should consider whether the above analysis
would differ or whether additional considerations arise out of
state insurance scoring laws promulgated based on the National
Council of Insurance Legislators’ Model Act Regarding Use of
Credit Information in Personal Insurance (“NCOIL
Model”). The NCOIL Model defines what
constitutes an “insurance score” (which is similar to
the FCRA’s definition of consumer report), what constitutes
an “adverse action” in respect of such insurance scores
(which is similar to the FCRA’s definition of adverse
action), and when an adverse action notice must be sent in respect
of such adverse actions (which trigger language is similar to the
FCRA’s trigger language). This analysis will depend on the
state-specific implementation of the NCOIL Model (where
applicable), or on other related state laws and regulations
addressing this subject matter (for those states that have not
adopted some form of the NCOIL Model).
Of course, in analyzing these issues, insurers should consult
extensively with insurance and federal regulatory counsel as to the
specific nature of the administrative decisions, how Models are
created and used, and what the impact of such administrative
decisions and Models are on applicants and consumers.
Footnotes
1 15 U.S.C.A. § 1681a(k)(1)(B)(i).
2 15 U.S.C.A. § 1681m(a).
3 15 U.S.C.A. § 1681a(d)(1)(A) and (C).
4 15 U.S.C.A. § 1681b(a)(3)(C).
6 Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 63, 127 S.
Ct. 2201, 2212, 167 L. Ed. 2d 1045 (2007). This case is also
sometimes referred to as Geico v. Edo.
7 Id. at 2213.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
