Assembly OKs bill on `credit scoring'

Legislation would limit insurance companies' charges based on reports

April 09, 2002|By Michael Dresser | Michael Dresser,SUN STAFF

The General Assembly passed a bill last night that would tightly restrict insurance companies' use of credit reports in deciding which consumers to insure and what to charge them for auto and homeowner's policies.

The legislation, approved in the final minutes before the midnight end of the 2002 legislative session, apparently would be one of the strongest restrictions on the practice in the country. Gov. Parris N. Glendening has not said whether he would sign the bill but has expressed support for the concept.

The bill's final passage came after House and Senate negotiators hammered out a compromise yesterday evening that fell short of the House's proposal for a flat ban on the practice known as "credit scoring."

The agreement reached by the conference committee goes significantly further than the version originally passed by the Senate.

"This is a huge win, as far as I'm concerned, for the consumer," said Anne Arundel Del. Michael E. Busch, the House's lead negotiator. "In all honesty, I think we've saved the industry from themselves."

Sen. Thomas L. Bromwell of Baltimore County, chairman of the Senate Finance Committee, called it "probably the most important consumer bill of the session."

The credit scoring issue came from out of nowhere to become one of the most heavily lobbied bills of the legislative session. The bill became a bone of contention between Allstate Corp. - perhaps the most aggressive user of credit scoring to raise rates - and its independent agents.

The agreement prohibits insurance companies from using credit scoring to make decisions on whether to sell someone auto or homeowners' policies.

On homeowner's insurance, the companies would not be allowed to use it as a factor in pricing - either at the time of initial underwriting or at renewal.

Insurers would be allowed to use credit scores in deciding what to charge customers for auto insurance when they first apply for coverage. However, the insurers would not be able to use credit scores to increase rates at renewal.

The conferees agreed to accept a Senate provision guaranteeing that customers who are charged higher auto insurance rates because of bad credit would be re-evaluated for possible reductions - but not rate increases - after two years.

The final problem to be ironed out was how much insurers could deviate from the standard rate charged to a new customer because of good or bad credit. The conferees settled on 40 percent.

The legislation was propelled by an outcry from consumers and legislators against credit scoring, a practice that has taken hold in the insurance industry over the past five years or so. In hearings in both chambers, lawmakers heard stories of longtime consumers who suddenly saw their premiums rise 50 percent to 100 percent even though they had not filed any claims.

Insurance industry executives, dismayed by the legislation, defended the use of credit as a predictor of risk.

"There's no question it's a valid indicator," said Henry H. Stansbury, chairman of Baltimore-based Agency Insurance Co. "It's highly predictive, and it shouldn't be surprising because credit scoring's been around for 20 years."

To Teresa Monaldi of Hamilton, it came as a big surprise when Allstate raised her semiannual auto insurance rates by $170. Monaldi said she learned that her credit score had suffered because a rating agency decided she opened and closed credit-card accounts too often.

"It shouldn't matter how many credit-card companies I switch to, as long as everything's paid up on time," she said.

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