Despite the fact that the practice has drawn heavy criticism from consumer advocates across the nation, Missouri Gov. Bob Holden has signed a bill that allows insurers to use credit-based insurance scores to decide whether to issue auto and home insurance coverage and to determine premiums.

The new law does prohibit insurers from using a consumer's credit information as the sole factor in writing policies. In addition, insurers are required to inform applicants that their credit information will be used to formulate their policies. Read How your credit history affects your auto and home insurance premiums.

"This bill represents an important first step in protecting Missouri auto and home owners insurance consumers from possible abuses in the use of credit scoring," says Holden.

More than 90 percent of auto insurance companies, and an increasing number of home insurers, use your credit information, filtered through a formula to create an "insurance risk score," to determine how likely you are to file a claim on an insurance policy, according to Conning and Co.

Although insurers embrace credit scoring as a way to identify "higher risk" customers, consumer advocates are suspicious. Many don't see how using a customer's credit history can predict whether or not he or she will file a home insurance claim in the future, especially since the insurers will not divulge their credit-scoring formulas.

Inquiries don't count

The new law, which takes effect July 1, 2003, also dictates that insurers cannot take adverse action against an applicant or policyholder by:

• Basing decisions on credit information contained in a credit report that the insurer knows is in dispute.
• Using credit information in renewing a contract until at least three years after the policy was issued.

The legislation also prohibits insurers from using the number of insurance inquiries that an applicant makes as a negative factor in evaluating the application. It is standard practice among insurers to open a file on every policyholder or applicant who calls. The file is typically marked "closed, with no payment" if no claim is filed, even when the caller is just seeking information. See Past owner's claims haunt buyers.

Additionally, insurers must inform any applicant or policyholder who is adversely affected by his or her credit information and cite the specific reasons for that action. Missouri consumers who are negatively affected by incorrect credit information may request a reevaluation after the information is corrected.