A new law in Minnesota prohibits insurance companies from rejecting, canceling, or not renewing auto or home insurance based solely on your credit score.

In addition, insurance companies are going to have to provide evidence that their use of credit scores is "legitimate, lawful, and fair" according to Jim Bernstein, Minnesota Commerce Commissioner, who sees the new law as "a good step in addressing a bad idea."

"Insurance companies are confident they can show the correlation" between credit scores and the likelihood that you'll make a claim, says Laura Kotelman, counsel for the National Association of Independent Insurers.

The law, passed April 30, 2002, also says that insurers can't use a lack of credit history to reject, cancel, or nonrenew policies — something insurance companies aren't pleased about.

"We've found that people with no hits [on their credit record] have worse loss histories than those with bad credit," says Kotelman. She says that insurers aren't looking for your debt load, but rather for judgments, liens, and other indications of irresponsible behavior.

Kotelman says the idea behind using credit scores to determine premiums was to put more of the cost on the shoulders of the parties who cost insurers more money in claims. "That way the people paying higher premiums are the ones who should be paying them," she says.

However, Bernstein says he isn't convinced that's how the system really works. "Only a handful of Minnesota consumers with higher credit scores get better rates while many more with lower scores pay higher premiums, if they can get insurance at all." Bernstein says his department receives an average of 40 calls a week from consumers complaining about insurance credit scoring.

Companies are required to tell Minnesota consumers if they will use credit scores and must request permission to run a credit check on a person before doing so. They are also restricted from using any formula that incorporates gender, race, nationality, or religion of an applicant. But insurers don't have to tell people their credit or insurance scores and they don't have to explain how scores are formulated.

Claiming the information represents "trade secrets," insurance companies have resisted making their scoring methodology public. But in doing so, they also have neglected to provide hard data that supports their claims that there is a direct correlation between your credit score and the way you drive your car or take care of your home. Under the new law, that will also change. Insurance companies will now be required to provide their insurance scoring or credit scoring methodology and information supporting their use of those scores in setting premiums.

Minnesota has agreed, however, to maintain the information as a "trade secret," so consumers will still be unable to access their insurance scores. (You can buy your credit score from any of the three major credit-reporting agencies.)

Insurance companies have 120 days, or until September 2002, to file all of the required information with Bernstein's office. "The burden now is on those insurance companies that choose to use credit scoring in Minnesota and I intend to set the bar high."