Texas state law allows insurance companies to use race-neutral credit scoring to price insurance policies, even if it has a disparate impact on racial minorities, the Texas Supreme Court said in a 8-0 ruling.
Basis of the Texas lawsuit
The ruling was issued in a case filed by Patrick Ojo against Farmers Group Inc. and its subsidiaries, affiliates and reinsurers. Ojo, who is African American, sued Farmers on behalf of himself and other racial minorities who saw their home insurance rates increase as a result of the insurer's use of credit scoring. Although Ojo had never made a claim on his home insurance policy, Farmers raised his premium by 9 percent. He alleged the increase was due to unfavorable credit information the insurer obtained through its automated credit-scoring system.
Ojo did not claim that Farmers intentionally discriminated against racial minorities, but alleged the system had discriminatory effects and violated the Fair Housing Act. The case went to the U.S. Court of Appeals for the Ninth Circuit, which issued a certified question to the Texas Supreme Court on whether state law permitted the use of credit scoring for insurance if it disproportionately resulted in higher prices for minorities.
Texas law prohibits insurers from "unfair discrimination"--charging someone a different rate for the same coverage because of the individual's race, color, religion or national origin. But Texas insurance law does not prohibit race-neutral credit scoring.
"The decision to either allow or prohibit the use of credit scoring in pricing insurance that creates disparate impacts properly rests with the Legislature," Justice Paul Green stated in the ruling.
Arguments against using credit scoring to set insurance rates
Critics of crediting scoring say it's unfair to people with limited incomes or those who have suffered financial setbacks in the tough economy. Consumer advocates have called on states to ban the practice for pricing insurance, saying credit information does not indicate risk for filing insurance claims. Insurers, however, say data shows people with poor credit are more likely to file insurance claims than people with clean credit records.
Forty-six states allow credit-based insurance scoring, David Snyder, vice president and associate general counsel of the American Insurance Association, said in a statement responding to the Texas ruling. "Its use allows insurance companies to give more favorable rates to consumers who are less likely to have costly losses."