Independent subcontracting transportation company was not insured under general contractor’s trucker policy as subcontractor was not owner of “hired auto” covered under trucker policy.  American Int’l Underwriters Ins. Co. v. American Gty. and Liability Ins. Co. (6^thCal. App. Dist., 1/28/10) (judgment for umbrella insurer for subcontractor company reversed based upon holding that subcontracting company was not insured under trucker policy and, therefore, umbrella insurer was not entitled to demand initial exhaustion of trucker policy’s limits).  (This opinion is here.)

Liability from “fax blasting” claim not covered as “advertising injury” or “property damage.” State Farm Gen’l Ins. Co. v. JT’s Frames, Inc. (2^ndApp. Dist., Div. 4, 1/27/10)  (claims arising from insured’s sending of tens of thousands of unsolicited fax advertisements in violation of consumer fraud law did not constitute “advertising injury” (because there was no invasion of privacy) or “property damage” (because the sending of tens of thousands of faxes over years was not damage caused by “accident”) under liability insurance policy.)  (This opinion is here.)

Claim for building that was unintentionally built so as to encroach on adjoining property not covered under policy excluding coverage for nonaccidenal occurrences.  Fire Ins. Exch. v. Sup. Ct. (4^thApp. Dist., 1/26/10) (“[b]uilding a structure that encroached onto another’s property is not an accident even if the owners acted in the good faith but mistaken belief that they were legally entitled to build where they did” and, therefore, not covered under homeowner’s policy that did not provide for coverage for non-accidental occurrences.)  (This opinion is here.)

Insurer required “to notify its insured claimant of contractual limitations provisions and other policy provisions that may apply to the claim, regardless of whether the insured is represented by counsel.” Superior Dispatch, Inc. v. Ins. Corp. of New York (2^ndApp. Dist., Div. 3, 1/21/10)  (This opinion is here.)

Claim by competitor against insured pre-paid phone card company for use of point-of-sale advertising that allegedly falsely marketed value provided by insured’s pre-paid cards not covered as “advertising injury” under CGL policy.  Total Call Int’l, Inc. v. Peerless Ins. Co. (2^ndApp. Dist., Div. 4, 1/21/10).  (This opinion is here.)

Claim for liability arising from negligent repair and service of bus seat restraint system resulting in death of driver of bus excluded under “products-completed operations hazard” exclusion.  Baker v. Nat’l Interstate Ins. Co. (2^ndApp. Dist., Div. 8, 12/3/09).  (This opinion is here.)

[Disclaimer: Please note that this post does not constitute legal advice and provides only the author's own snapshot view of the cited opinion. No warranties are made as to the accuracy of the author's view of the opinion or as to its legal effect (including, but not limited to, whether it may be subsequently modified, depublished, and/or overruled). The import and applicability of a cited opinion to an actual matter or case depends upon the specific facts presented and should be reviewed by an attorney. ]

In its conclusion, the California Supreme Court held:

"In light of the policy justifications underlying the made-whole rule and reimbursement principles generally, we conclude that 21st Century states the better case. The automobile liability insurance company has not been paid to bear responsibility for the entire amount of attorney fees and costs the insured needed to spend in order to recover damages. Instead, a pro rata apportionment rule for attorney fees here better allocates responsibility for attorney fees between the insured and the insurer. Quintana does not claim that 21st Century’s $1,000 payment was insufficient to discharge its obligations under the med-pay policy limit. Nor has she claimed that $400 was less than 21st Century’s pro rata share of the litigation costs, or asked for leave to amend should we affirm the Court of Appeal’s judgment. Therefore, by accepting the $600 as full reimbursement (and thus contributing $400 to Quintana’s attorney fees), 21st Century has properly discharged its obligation to pay its pro rata share of attorney fees and has ensured that Quintana has been made whole. In light of this conclusion, we affirm the Court of Appeal’s judgment."

 A copy of the opinion can be found here.

[Disclaimer: Please note that this post does not constitute legal advice and provides only the author's own snapshot view of the cited opinion. No warranties are made as to the accuracy of the author's view of the opinion or as to its legal effect (including, but not limited to, whether it may be subsequently modified, depublished, and/or overruled). The import and applicability of a cited opinion to an actual matter or case depends upon the specific facts presented and should be reviewed by an attorney. ]

While most of the decision is largely irrelevant to insurers, one portion is relevant as it relates to the scope of the "safe harbor" defense to actions brought against insurers under California's Unfair Competition Law. 

Though there had been dicta in caselaw indicating that "safe harbor" could only be based upon statutes, the court in Yabsley held that the basis of such a defense was not so limited.  Specifically, it held:

Relying on Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th 924, Yabsley contends that statutes can provide a safe harbor, but administrative regulations cannot.  In Krumme, the appellate court rejected an insurance company's argument that regulations adopted by the Insurance Commissioner provided a safe harbor.  Citing Cel Tech as authority, the i court said in a footnote: "These materials are not germane to our analysis because our Supreme Court has held that only statutes can create a safe harbor." (Id. at p. 940, fn. 5.) Cel-Tech, however, dealt with statutes enacted by the Legislature and the safe harbor they created. There was no reference to regulations. Like the trial court here, we conclude that there is nothing in the Cel-Tech decision purporting to limit the safe harbor doctrine to statutes enacted by the Legislature.

...

The status of regulations promulgated by the Board was described by our Supreme Court[] "[R]egulations adopted by an agency to which the Legislature has confided the power to 'make law,' and which, if authorized by the enabling legislation, bind this and other courts as firmly as statutes themselves . . . ." The rule that valid administrative regulations have the force and effect of law has been reiterated in dozens of California cases. [].

As the Yabsley court noted, "[b]ecause agencies granted such substantive rulemaking power are truly 'making law,' their quasi-legislative rules have the dignity of statutes..."  They have the "'force and effect' and the 'dignity' of a statute" and, therefore, may provide a basis for safe harbor.

Why is this important for insurance litigation?  Well, insurers are one of the most heavily regulated industries in the State of California.  Many of the actions taken by insurers are pursuant to command or permission by way of regulation. To the extent that the industry can now rely upon regulations, as well as statutes, to demonstrate that they have been engaged in lawfully permitted conduct, the industry has a greater base upon which it can set forth a "safe-harbor" doctrine defense.

A copy of the opinion can be found here.

[Disclaimer: Please note that this post does not constitute legal advice and provides only the author's own snapshot view of the cited opinion. No warranties are made as to the accuracy of the author's view of the opinion or as to its legal effect (including, but not limited to, whether it may be subsequently modified, depublished, and/or overruled). The import and applicability of a cited opinion to an actual matter or casedepends upon the specific facts presented and should be reviewed by an attorney. ]

Introduction

Two summers ago, in June 2007, the United States Supreme Court issued Safeco Ins. Co. et al. v. Burr, 551 U.S. 47, 127 S.Ct. 2201 (2007). Two years later, Safeco v. Burr, remains a watershed event for insurance companies using credit scoring (or insurance scoring) to assist in underwriting and rating personal insurance policies. As insurance companies re-tool their insurance scoring models or newly enter the field of insurance scoring, they face newly defined obligations under the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. §§ 1681 et seq. because of Safeco v. Burr.

In Safeco v. Burr, the Supreme Court held that: (a) FCRA’s “adverse action” notifications apply to the initial rate offered for new personal insurance, and (b) the trigger for such notification rests not on the failure of the consumer to obtain the “best rate,” but rather, on the insurer’s determination of a “neutral” benchmark.

This article explores several ramifications of the Safeco v. Burr decision that may require future clarification in the courts. For example, while Safeco v. Burr sets forth a “neutral” benchmark as the standard for determining when an insurance company should issue a notice of “adverse action,” it is unclear how much leeway insurance companies have in determining that “neutral” benchmark. In addition, several state statutes contain definitions of “adverse action” that expressly require an insurance company to issue notice of “adverse action” in circumstances when the consumer fails to receive the “best rate.” These statutes which potentially conflict with FCRA as interpreted by Safeco v. Burr may be preempted. Finally, although Safeco v. Burr involved a credit-based consumer report, the holdings in this case could be applied to non credit based consumer reports. If so, insurance companies may be saddled with issuing “adverse action” notices when using C.L.U.E. reports or MVRs when they rate new customers for personal insurance.

FCRA & Users of Consumer Reports

Federal regulation of the consumer reporting industry began over 30 years ago with the enactment of the Fair Credit Reporting Act (“FCRA”), 15 U.S.C., §§ 1681 et seq.  With respect to insurance companies, FCRA regulates “users” of “consumer reports.” If, in connection with the use of a “consumer report,” an insurance company takes an “adverse action” against the consumer, it must issue a particular notice. 15 U.S.C., § 1681m(a). An “adverse action” means: “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.” 15 U.S.C. § 1681a(K)(1)(B). The goal of the notice requirement is to ensure that consumers adversely impacted by a “consumer report” have the opportunity to request and review their report for accuracy and make any necessary corrections. 15 U.S.C., § 1681m.

Prior to Safeco v. Burr, many insurance companies interpreted the “adverse action” notice requirements to apply to renewal policies and not new policies.  In Safeco v. Burr, the insurance company contended that the statute did not apply to new policies because it was impossible to “increase” charges to customers with whom they had no prior dealings. Safeco, supra at 2211. The Court disagreed and read the statute to reach “initial rates for new applicants” that were higher than they would have been but for their credit reports. Id.  The Court pointed out that “notice in the context of an initially offered rate may be of greater significance than notice in the context of a renewal rate; if, for instance, insurance is offered on the basis of a single, long-term guaranteed rate, a consumer who is not given notice during the initial application process may never have an opportunity to learn of any adverse treatment. Safeco, supra  at 2212, n. 12. However, the Court conceded that the company’s interpretation of “increase” had “a foundation in the statutory text,” and thus did not find it’s reading “objectively unreasonable.” Id. at 2215.

The second significant ruling in Safeco v. Burr involved the Court’s pronouncement of the standard to be used by insurance companies in determining when notice of an “adverse action” is triggered. The Court made clear that Congress was not concerned with whether an individual failed to receive the “best rate.” The Court explained that adopting such a view “would require insurers to send slews of adverse action notices; every young applicant who had yet to establish a gilt-edged credit report, for example, would get a notice that his charge had been ‘increased’ based on his credit report.” Safeco, supra at 2214. This would result in “hypernotification” and would “undercut the obvious policy behind the notice requirement, for notices as common as these would take on the character of formalities, and formalities tend to be ignored.  It would get around that new insurance usually comes with an adverse action notice, owing to some legal quirk, and instead of piquing an applicant's interest about the accuracy of his credit record, the commonplace notices would mean just about nothing and go the way of junk mail.” Id.

Instead, the Court adopted a “neutral” credit score benchmark to determine the trigger. This translates into “what the applicant would have paid if the company had not taken his credit score into account.”  Safeco, supra at 2214.  The Court placed no additional requirements on how an insurance company determines the “neutral” score in connection with that company’s use of credit history or its insurance scoring model. In short, under Safeco v. Burr, insurance companies are free to determine the “neutral” benchmark in connection with their particular insurance scoring models.

Justice Stevens, who concurred in part in the decision, strongly disagreed on this point.

“ . . . As a matter of federal law, companies are free to adopt whatever ‘neutral’ credit scores they want. That score need not (and probably will not) reflect the median consumer credit score. More likely, it will reflect a company’s assessment of the creditworthiness of a run-of-the-mill applicant who lacks a credit report. Because those who have yet to develop a credit history are unlikely to be good credit risks, ‘neutral’ credit scores will in many cases be quite low. Yet, under the Court’s reasoning, only those consumers with credit scores even lower than what may already be a very low ‘neutral’ score will ever receive adverse action notices.” Safeco, supra at 2217, Stevens concurring in part, dissenting in part.

How insurance companies determine their “neutral” credit score may become the subject of future clarification, particularly where “neutral” scores do not reflect a median or average credit score but a much lower score. In other words, under Justice Stevens’ observations, the lower the “neutral” score, the less notices that will be sent to consumers and the less opportunities for consumers to correct inaccurate credit information.

Safeco v. Burr’s Application to State Statute’s Governing Credit Use & Scoring

Most states have adopted statutes governing the use of credit information and credit scoring in insurance. Of these states, the majority have adopted the National Conference of Insurance Legislators Model Act Regarding Use of Credit Information in Personal Insurance (“NCOIL Model Act”). The NCOIL Model Act defines “adverse action” consistently with FCRA. In this regard, the “neutral” benchmark standard set forth in Safeco v. Burr should govern “adverse action” notices issued in these states.

For example, following Safeco v. Burr, North Dakota, which adopted the NCOIL Model Act, issued a bulletin explaining to insurers that “adverse actions” occur not when the new customer fails to receive the best rate, “but rather only when the new customer’s rate is worse than what they would have received from a neutral rate (without the use of credit information).” ND. Ins. Bulletin, June 29, 2007.

However, some states define “adverse action” differently. For example, Kansas defines an “adverse action” to include “anything other than the best possible rate.” Kan. Stat. Ann., § 40-5103(a)(2) (emphasis added). The key questions that have yet to be addressed in these states concern whether the state statutes conflict with FCRA, as interpreted by Safeco v. Burr, and if so, whether FCRA preempts them. Under its general preemption provisions, FCRA does not preempt state laws regarding the use of consumer reports except when state and federal law conflict and only to the extent of the conflict. 15 U.S.C., § 1681t(a). Stated differently, an insurance company is not exempt from complying with consistent state laws on this topic, but would be exempt from complying with inconsistent state laws but only to the extent of the inconsistency.

Safeco v. Burr’s Application to Non-Credit Consumer Reports

Most people think of “consumer reports” under FCRA as those reports prepared by consumer reporting agencies bearing on a consumer’s “credit worthiness, credit standing or credit capacity.” 15 U.S.C.A. § 1681a(d)(1). However, Congress drafted the statute more broadly to include non-credit consumer reports. These include reports by a consumer reporting agency “bearing on a consumer’s . . .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-- credit or insurance to be used primarily for personal, family, or household purposes . . .” Id.

Given the breadth of the definition, an unresolved issue for insurance companies concerns whether non credit consumer reports such as loss history or claims history reports (C.L.U.E. reports) as well as Motor Vehicle Reports (“MVRs”) fall within the scope of FCRA’s notification requirements.  Federal Trade Commission (“FTC”) Commentary suggests that MVRs should be considered “consumer reports” and subject to FCRA’s “adverse action” notification requirements. The FTC notes: “[m]otor vehicle reports are distributed by state motor vehicle departments, generally to insurance companies upon request, and usually reveal a consumer’s entire driving record, including arrests for driving offenses. Such reports are consumer reports when they are sold by a Department Motor Vehicles for insurance underwriting purposes and contain information bearing on the consumer’s ‘personal characteristics,’ such as arrest information.” 16 C.F.R. Pt. 603(c), App. The FTC further notes that: “[a]n insurer that refuses to issue a policy, or charges a higher than normal premium, based on a motor vehicle report is required to comply with subsection (a) [i.e., notice of adverse action].” 16 C.F.R. Pt. 615 App. The FTC Commentary, however, serves as guidance only, and is non-binding as the courts are free to reject these interpretations. 16 C.F.R. Pt. 600, App. Introduction, 1.

In Safeco v. Burr, the U.S. Supreme Court acknowledged it was dealing only with the creditbased “consumer reports” under the broad FCRA definition. Safeco, supra at 2206, n. 1. However, the opinion does not limit itself to credit based consumer reports and could be read to apply to non credit consumer reports as well. If so, application of Safeco v. Burr to non credit “consumer reports” would require insurance companies to issue “adverse action” notices when using C.L.U.E reports and MVRs in rating new policies.

In conclusion, while Safeco v. Burr helped clarify the FCRA obligations imposed upon insurance companies, the decision raises multiple issues such as how to determine the “neutral” benchmark, what to do with potentially conflicting state statutes and whether non credit consumer reports such as C.L.U.E. and MVR fall with its holding. These issues await further clarification in the courts. 

One of the summarized recommendations in the attachment is as follows:

"H. Enhance Oversight of the Insurance Sector

Our legislation will propose the establishment of the Office of National within Treasury to gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector. Treasury will proposals to modernize and improve our system of insurance regulation accordance with six principles outlined in the body of the report."

In terms of providing guidance on what the Treasury will consider in improving insurance regulation, the plan sets forth the following six principles:

"1. Effective systemic risk regulation with respect to insurance. The steps proposed in this report, if enacted, will address systemic risks posed to the financial system by the insurance industry. However, if additional insurance regulation would to further reduce systemic risk or would increase integration into the new regulatory regime, we will consider those changes.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies. Although the current crisis did not stem from widespread problems in the insurance industry, the crisis did make clear the importance of adequate capital standards and a strong capital position all financial firms. Any insurance regulatory regime should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.

3. Meaningful and consistent consumer protection for insurance products and practices. While many states have enacted strong consumer protections in the insurance marketplace, protections vary widely among states. Any new insurance regulatory regime should enhance consumer protections and address any gaps problems that exist under the current system, including the regulation of producers of insurance. Further, any changes to the insurance regulatory system that would weaken or undermine important consumer protections are unacceptable.

4. Increased national uniformity through either a federal charter or effective action by the states. Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient. As a result there remain tremendous differences in regulatory adequacy and consumer protection among the states. Increased consistency in the regulatory treatment of insurance – including strong capital standards and consumer protections – should enhance financial stability, increase economic efficiency and result in real improvements for consumers.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business. As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy. Any new regulatory regime must address the current gaps in insurance holding company regulation.

6. International coordination. Improvements to our system of insurance regulation should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services."