Fair Credit Reporting Act

Case Study Insurance companies frequently make use of credit reports when evaluating applicants for coverage. The industry justifies use of the reports by claiming that poor credit histories tend to be associated with poor drivers. Thus, a low credit score, as calculated by the insurance company evaluating a report, is likely to lead to a higher insurance premium or the rejection of coverage. The Fair Credit Reporting Act requires that firms notify consumers when taking adverse action because of information in a credit report. For example, an applicant must be notified if coverage is denied or premiums are increased because of information obtained in the applicant's credit report. The Supreme Court ruled during summer 2007 that insurance companies are not required to notify consumers when a credit report is used in evaluating an applicant and the applicant is not offered the lowest available rate. In the case considered by the court, insurance company Geico claimed the firm offered the consumer the same rate as if the applicant's credit report had not been seen, even though the rate was not its lowest available rate. The Supreme Court indicated that notification is required only when information in a report results in a higher rate than would apply if information in the report were not considered.