United States: Safeco—U.S. Supreme Court Applies Fair Credit Reporting Statute In A Commercially Reasonable Manner

On June 4, 2007, the United States Supreme Court rendered its opinion in Safeco Insurance Company of America v. Burr.¹ This opinion will be of particular interest to insurance counsel for personal lines auto insurers. But this Supreme Court opinion should also be of interest to a broader group of attorneys practicing in the areas of financial services and other heavily regulated industries. Although, in this case, the Supreme Court interpreted the relevant statute—the Fair Credit Reporting Act ("FCRA")—in a traditional manner, the Court adopted a commercially reasonable approach in applying the statute to the matters under dispute. In other words, faced with a series of possible interpretations, all of which were consistent with the statute, the Court adopted a commercially reasonable approach.

In addition, while construing the willfulness standard in the FCRA in the traditional manner where willfulness is a statutory condition for civil liability—i.e., as applying not only to knowing violations but also to reckless ones—the Court looked to see whether the insurer’s interpretation of the statute was reasonable, not correct but reasonable. The Court then concluded that the insurer’s action taken consistent with its reasonable interpretation was not a willful failure to comply with the statute’s notice requirement. Finally, the Court left for another day the question whether reliance on legal advice should render companies immune to claims under the statute.

Attorneys are frequently faced with applying statutes which are ambiguous and where there is no guiding agency or court interpretation to help guide the client. Attorneys and clients can now take more comfort that their reasonable interpretation and application of a statute with a "willfully" standard might provide protection from liability.

The FCRA, a federal statute regulating the collection, reporting and use of consumer credit information, requires that a party taking "adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer [credit] report" provide notice to the consumer of the adverse action. 15 U.S.C. §1681m(a). Insurance companies have been using credit scores in setting rates for their customers for some time. This has been a controversial state insurance regulatory issue.² A consumer receiving notice of an adverse action from an insurer is informed about how to reach the credit agency issuing the credit report or score, obtain a free copy of the report, and dispute its accuracy with the agency.

With respect to insurance, "adverse action" means "a denial or cancellation of, an increase in any charge for, or a reduction in the terms of coverage or amount of, any insurance, existing or applied for, in connection with the underwriting of insurance." Section 1681a(k)(1)(B)(i). The consumer is granted a private right of action for actual damages against any person who is negligent in complying with the provisions of the FCRA. Section 1681o(a). However, if a person "willfully" fails to comply with the FCRA, the consumer may be granted: (i) actual damages or statutory damages ranging from $100 to $1,000, (ii) punitive damages, and (iii) if successful in an action to enforce liability, the costs of the action and reasonable attorneys’ fees. Section 1618n(a).

GEICO used the applicant’s credit score to select the subsidiary insurance company and rate at which the policy would be issued. GEICO did not send the applicant an adverse action notice because it only sent adverse action notices if a neutral credit score would put an applicant into "a lower price tier or company" and, in this case, the subject applicant’s did not. GEICO developed a way to neutralize the credit scores of applicants, by comparing the tier and company the applicant was assigned to with the tier and company the applicant would have been assigned with a neutral credit score. Unless a neutral credit score would have been beneficial to the consumer, GEICO would not send the consumer an adverse action notice. This means that GEICO would not send adverse action notices to consumers informing them that, if their consumer report had contained more favorable information (such as a better credit report rather than a neutral one), they would have received a more favorable policy.

Safeco offered rates to two subject applicants that were higher than the best possible rates without sending adverse action notices to the applicants. Safeco took this position as a result of its interpretation of the FCRA term "adverse action"—adverse action did not apply to first-time applicants as there was nothing to compare the action to, therefore it could not be deemed adverse in comparison to anything else.

The District Court granted GEICO summary judgment, finding no adverse action under the FCRA, because the premium would have been the same if the applicant’s credit score had not been considered. The District Court also granted Safeco summary judgment on the ground that offering a single, initial rate cannot be adverse action. The Ninth Circuit Court of Appeals reversed both judgments.³ With respect to the claim against GEICO, the Ninth Circuit held that GEICO’s failure to give notice was adverse action and remanded for a determination whether GEICO’s action was reckless. Based on its GEICO decision, the Ninth Circuit rejected the District Court’s Safeco opinion and also remanded for further proceedings.

The Court, in an opinion by Justice Souter joined to varying degrees by the other Justices, went to great pains to describe how it usually interprets the term "willfully" in both civil and criminal statutes penalizing willful conduct. The Court stated that, when "willful" or "willfully" is used in a criminal statute, the Court has regularly read the modifier as limiting liability to knowing violations. The Court went on to state that use of these terms in civil statutes typically presents neither textual nor substantive reasons for pegging the threshold of liability at knowledge of wrongdoing. The Court concluded that it had generally taken "willfully" in a civil context to cover not only knowing violations, but reckless ones as well.

Both the Safeco and GEICO claims involved the question whether the actions taken by the insurers with respect to new insurance policies were "adverse actions" (i.e., an increase in premium or narrower coverage) under FCRA Section 1681a(k)(1)(B)(i). This question arises because the statute refers to a quote or charge for a first-time premium as "an increase in any charge for…any insurance, existing or applied for." The Court concluded that "increase" speaks to a disadvantageous rate even with no prior dealing. Simply stated, "increase" reaches initial rates for new applicants. Justices Thomas and Alito, in their concurring opinion, saw no need for the court to address the "increase" issue because, as set out below, Safeco’s interpretation of the statute was reasonable.

The Court went on to conclude that the statute contained a causation requirement (a view not shared by concurring Justices Stevens and Ginsberg). The Court noted that the statute calls for notice of adverse action only when that action is "based in whole or in part on" a credit report. Consideration of the credit report must, therefore, be a necessary condition for the increased rate. The Government and respondentplaintiffs argued that the baseline for determining adverse action should be the rate the applicant would have received if he or she had the best credit rating. It is here that the Court raises the flag of commercial reasonableness, stating: "Congress was . . . more likely concerned with the practical question whether the consumer’s rate actually suffered when the company took his credit report into account than the theoretical question whether the consumer would have gotten a better rate with perfect credit."

The Court virtually uses a cost/benefit analysis to support its conclusion, stating:

Since the best rates (the Government’s preferred baseline) presumably go only to a minority of consumers, adopting the Government’s view would require insurers to send slews of adverse action notices; every young applicant who had yet to establish a gilt-edge credit report, for example, would get a notice that his charge has been "increased" based on his credit report. We think that the consequence of sending out notices on this scale would undercut the obvious policy behind the notice requirement, for notices as common as these would take on the character of formalities, and formalities tend to be ignored. It would get around that new insurance usually comes with an adverse action notice, owing to some legal quirk, and instead of piquing an applicant’s interest about the accuracy of his credit record, the commonplace notices would mean just about nothing and go the way of junk mail. Assuming that Congress meant a notice of adverse action to get some attention, we think that the cost of closing the loophole would be too high.

The above discussion eliminated the claim against GEICO without a need to ascertain whether its action was done willfully. The Court then went on to address Safeco’s issue, an issue commonly faced by those operating in a heavily regulated sphere where willful misconduct can result in a remedial proceeding. Safeco read the statute as not applying to initial applications for insurance. As set out above, we now know that Safeco’s reading of the statute may not have been correct. The Court concluded: "it is clear enough that if Safeco did violate the statute, the company was not reckless in falling down in its duty." The Court, quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994), stated that "the common law has generally understood [reckless] in the sphere of civil liability as conduct violating an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’"

The Court went on to flesh out the standard:

The Court also noted that neither a court of appeals nor the Federal Trade Commission had given guidance on this issue.

The respondent-plaintiffs unsuccessfully argued that evidence of subjective bad faith should be taken into account in determining whether a company acted knowingly or recklessly for the purposes of FCRA Section 1618n(a). The Court cut off that line of argument, noting it would defy history and current thinking to treat a defendant who merely adopts one reasonable interpretation as a knowing or reckless violator. The Court also observed that both Safeco and GEICO argued that good-faith reliance on legal advice should render companies immune from claims raised under Section 1681n(a). The Court did not foreclose that possibility but saw no need to address that issue in light of its holding.

It is heartening to see an opinion in matters involving creative and reasonable ways of complying with a consumer protection statute not being saddled with punitive damages. In creating new products or reviewing compliance concerning existing products, it may well be prudent to build a record showing the effort to comply with the statute’s provisions. Although the Court did not rule on the issue, it seemed to suggest that supplementing that effort with the assistance of outside counsel may also be helpful in demonstrating the reasonableness of the company’s efforts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.