United States: Ninth Circuit Broadly Interprets Insurer’s Duties Under Fair Credit Reporting Act

The U.S. Court of Appeals for the Ninth Circuit recently interpreted the federal Fair Credit Reporting Act (FCRA) as imposing much broader duties upon insurers than many in the industry previously understood, including applying adverse action notice requirements to the issuance of initial insurance policies, imposing content requirements for such notices, and adopting a definition of "willfulness" that makes it very difficult for any insurer to rely on good faith interpretations of the statute.

In Reynolds v. Hartford Financial Services Group, Inc. (Reynolds), the Ninth Circuit¹ held that the FCRA requires an insurer to send an adverse action notice to a consumer whenever the insurer charges the consumer a higher rate due to the consumer’s credit information (or lack thereof), even where the higher rate is charged for an initial policy rather than a renewal policy.² Prior to the Ninth Circuit’s opinion in Reynolds, some insurers believed that adverse action notices were not required to be sent to consumers in connection with the issuance of new policies because the insurers — by definition — had not previously charged lower rates to those consumers, a practice that had been upheld in a 2003 ruling of the U.S. District Court for the District of Oregon in the case of Mark v. Valley Ins. Co. (Mark).³

Under the FCRA, an insurer must provide a consumer with an adverse action notice any time the insurer takes an "adverse action" that is based in whole or part on information contained in a consumer report^.4 In the context of insurance, the term "adverse action" means one of four things: a denial of coverage, cancellation of coverage, an increase in any charge for insurance, or a reduction or unfavorable change in the terms or amount of coverage, whether existing or applied for, in connection with the underwriting of insurance.⁵ The primary issue decided by the Ninth Circuit in Reynolds involved the interpretation of whether an "increase" in a charge for insurance was intended to apply to the initial issuance of policies where no prior rate had been charged to consumers.

In Reynolds consumers brought separate class actions in the U.S. District Court for the District of Oregon against insurers with respect to automobile policies issued by GEICO-affiliated insurers and homeowners policies issued by Hartford Financial Services Group. In both cases, the consumers did not receive the insurers’ best rates based in part upon the consumers’ credit information, yet the consumers did not receive adverse action notices from the insurers. The consumers alleged that the insurers violated the FCRA by failing to send adverse action notices in connection with determining the initial rates to be charged those consumers. The Oregon district court granted summary judgment to the insurers in both cases, and the consumers appealed to the Ninth Circuit. On appeal, the Ninth Circuit consolidated the cases into a single appeal and reversed the respective grants of summary judgment.

In reversing the grants of summary judgment, the Ninth Circuit abrogated the earlier ruling by the Oregon district court in Mark, which had interpreted the phrase "increase in any charge for insurance" as not applying to the rates charged to new insureds where the insurers had not previously charged a lower rate to the insureds. Instead, the Ninth Circuit held that the FCRA requires an insurer to send an adverse action notice to a consumer whenever the insurer charges the consumer a higher rate due to the consumer’s credit information, even where the higher rate is charged for an initial policy.⁶

In addition to this central holding, the Ninth Circuit also answered what it described as five "ancillary questions" that arose in connection with the underlying cases. Perhaps the most problematic for insurers are the statements imposing content requirements for adverse action notices issued under the FCRA, and adopting a definition of "willfulness" that makes it very risky for any insurer to rely upon good faith interpretations of the FCRA.

First, the Ninth Circuit claimed that "the term ‘notice of an adverse action’ is not defined in the statute," and held that, "at a minimum, such a notice must communicate to the consumer that an adverse action based upon a consumer report was taken, describe the action, specify the effect of the action upon the consumer, and identify the party or parties taking the action."⁷

The premise that the FCRA did not already specify what must be contained in an adverse action notice may be news to many in the industry. The FCRA expressly states that, when the user of a consumer report takes adverse action against a consumer based upon information in the report, the user must notify the affected consumer of the following: (i) the name, address, and telephone number of the agency that provided the consumer report upon which the adverse action was taken, (ii) a statement that the agency did not make the adverse decision and is not able to explain it to the consumer, (iii) a statement setting forth the consumer’s right to obtain a free disclosure of the consumer’s file from the agency, and (iv) a statement setting forth the consumer’s right to dispute directly with the agency the accuracy or completeness of any information in the report.⁸ Prior to Reynolds, many in the industry believed the foregoing requirements were the necessary components of an adverse action notice. In Reynolds, the Ninth Circuit concluded these requirements are in addition to a separate adverse action notice that meets the requirements outlined in Reynolds.⁹ This holding, if allowed to stand, likely calls into question the validity of adverse action notices sent by many insurance companies, banks, or other financial institutions located in the Ninth Circuit.

Second, in discussing the nature of the alleged FCRA violation, the Ninth Circuit adopted the Third Circuit’s test for willfulness described in Cushman v. Trans Union Corp. (Cushman)¹⁰ Under Cushman, a company is liable for a willful violation of the FCRA if it knowingly and intentionally commits an act in conscious disregard for the rights of others.¹¹ The term "conscious disregard" means "either knowing that policy to be in contravention of the rights possessed by consumers pursuant to the FCRA or in reckless disregard of whether the policy contravened those rights."¹²

The substance of the foregoing test is perhaps not as troublesome as the manner in which it was applied by the Ninth Circuit in Reynolds. The Ninth Circuit held that the insurers had willfully violated the FCRA under this test even though many of the legal issues were matters of first impression and even though the lower court had concluded that the insurer’s legal interpretation of the FCRA relative to those issues was not only reasonable, but correct.¹³ While the Ninth Circuit maintained that insurers can — in the absence of contrary authority — rely upon their own good faith, reasonable interpretations of the FCRA’s requirements,¹⁴ the Reynolds decision makes it clear that insurers do so at their peril.

Other "ancillary" holdings by the Ninth Circuit in Reynolds that insurers should take note of include the following:

• The FCRA’s adverse action notice requirement applies whenever a consumer would have received a lower rate for insurance had his credit information been more favorable, regardless of whether the consumer’s credit rating is above or below average or whether the insurer assigns a "neutral" credit score to the consumer.¹⁵

• Charging more for insurance on the basis of a transmission stating that no credit information or insufficient credit information is available triggers the adverse action notice requirement.¹⁶

• When a consumer applies for insurance with a family of companies and is charged a higher rate for insurance because of the consumer’s credit report, two or more companies within that family may be jointly and severally liable. The notice requirement applies to any company that makes a decision that a higher rate shall be imposed, issues a policy at a higher rate, or refuses to provide a policy at a lower rate, if the company’s action is based in whole or in part on the consumer’s credit information.¹⁷

Given the breadth of the Ninth Circuit’s holdings in Reynolds, and especially the willfulness standard adopted therein and the aggressive manner in which it was applied, insurers are well-advised to send adverse action notices to applicants or existing insureds any time an applicant’s or insured’s credit is considered and the assignment of a better credit score would result in the offer of a better rate to the applicant or insured. Furthermore, insurers should review the contents of their adverse action notices to ensure that they contain the new information regarding the "adverse action" as prescribed by the Ninth Circuit.

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