Texas Supreme Court Maintains Credit-Based Insurance Scores

A class-action lawsuit that reignited debate over the use of credit information to help price insurance came to an end on Monday when the Texas Supreme Court ruled in favor of allowing the controversial practice to stand.

The lawsuit had been filed against a number of entities associated with Farmers Group, Inc. over allegations that the insurer’s use of credit-based pricing variables “resulted in disparate impacts for minorities.”

The original case had been related to  coverage for homes, but the use of credit information by home insurers is similar to the way Texas auto insurance companies use the same information.

Credit and Texas auto insurance pricesA 2004 report from the Texas Department of Insurance indicated that certain racial groups do tend to have worse credit scores than others, which ends up affecting price of coverage for those groups. According to the department’s data analysis, Blacks and Hispanics constituted low, single-digit percentages of the policies classified under the best credit score range and about 30 percent each of the policies in the worst range.

When the results of the report initially came out, the then-commissioner acknowledged that there indeed was disproportionate impact, but that “all factors used in insurance have a disproportionate impact to some extent” and that he did not have the authority to ban the practice if it has “an actuarially supported result and is not unfairly or intentionally discriminatory.”

Members of the state Supreme Court expressed more or less the same sentiment as the former commissioner. While acknowledging in its decision that using credit information to set premiums may very well result in a disparate impact on certain racial and ethnic groups, the Court said that there is currently no prohibition against this, as long as the factors that led to the result were race-neutral.

To ban a practice that leads to a disparate impact in the insurance field would be up to the legislature, not the judiciary, the Court wrote in its opinion.

About Matthew Morisset
Matthew Morisset is a proud alumnus of the University of Redlands, where he obtained a degree in English Literature. Utilizing his passion for analysis and writing, Matthew looks for important trends in the auto insurance industry and their implications for consumers and the market as a whole.

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