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Financial Services Law Insights and Observations

Michigan Supreme Court Invalidates State Rules Prohibiting the Practice of Insurance Scoring

State Issues

On July 8, the Michigan Supreme Court struck down rules issued by the state’s Commissioner of Financial and Insurance Regulation (Commissioner) banning the use of credit reports to determine automobile and homeowners insurance premiums, a practice known as “insurance scoring.”Ins. Inst. of Mich. v. Comm’r, Fin. & Ins. Servs., 2010 WL 2696342, No. 137400 (Mich. Jul. 8, 2010). The court held that the Commissioner’s rules were contrary to Michigan’s Insurance Code, which allows insurers to establish premium discount plans and rating systems based on factors that reasonably reflect an insurer’s anticipated reduction in losses, and, thus, exceeded the statutory scope of the Commissioner’s rule-making authority. The court based its determination largely on evidence in the record indicating that individuals with higher insurance scores pose a lower risk of loss to the insurer. Based on that evidence, the court found that there was “little difference between providing a discount for anti-lock brakes, for example, and providing a discount based on high insurance scores.” The court separately rejected an argument by the Commissioner that credit reports are unreliable and, therefore, their use violates an Insurance Code prohibition on “unfairly discriminatory” rates. In the course of its opinion, the court also noted that the Michigan Legislature had at one time considered legislation that would ban the use of credit scores in insurance underwriting. However, this legislation was abandoned by the Legislature after the governor made clear her intention to veto the legislation.