Allstate Settles Over Use of Credit Scores

SACRAMENTO —  Allstate Corp. has agreed to pay $3 million to settle state charges that the giant property and casualty insurer used negative credit information as a reason to deny coverage to at least a thousand California car owners.

In a case filed in response to complaints from consumers, the state Department of Insurance alleged that Allstate violated Proposition 103 by effectively “redlining” poor and minority motorists. Among other restrictions, the 1988 ballot initiative prohibits the use of credit histories as a factor in setting auto insurance rates.

Although it agreed to the settlement, Allstate denied it broke any laws.

The use of so-called credit scores -- the three-digit number that lenders use to evaluate a consumer’s creditworthiness -- has become a controversial insurance underwriting tool in several states. Insurers claim there is a connection between a person’s credit history and the likelihood that he or she will file a claim.

State Insurance Commissioner John Garamendi contends that using credit scores to make decisions on insurance coverage is discriminatory. He has promised to fight efforts by California insurers to use credit scores when selling auto and homeowners’ policies.

“My view, and I’ve said it very clearly to the insurance companies, is you cannot use credit scoring in California until you prove it is not discriminatory,” Garamendi said. “We know of no one who has come to us and shown it is not discriminatory.”

Regulators in Texas this year put tight limits on using credit information to set rates on auto and homeowners’ policies. Maryland, Utah, Hawaii and Washington also have curbed some credit-related rate-making practices, according to A.M. Best, an international insurance rating and information agency.

California’s complaint named two Allstate subsidiaries, Allstate Indemnity Co. and Allstate Property & Casualty Insurance Co. The state alleged that Allstate violated state law between December 2001 and July 2003 by turning away prospective customers eligible for “good driver” discounts under Proposition 103. The company used a variety of methods, including checking credit scores and requiring 100% down payments on premiums, to discourage the new business, the complaint said.

Allstate, California’s fourth-largest auto insurer, with 9.1% of the market, said it used credit scores to determine only down payment amounts and payment plans, not rates or types of coverage.

The $3-million fine is “a significant warning shot” because “it’s important for the insurance industry to realize that it will be punished if it crosses the line on credit scoring,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, the Santa Monica-based advocacy group that spearheaded the campaign for Proposition 103.

Heller said that using credit scores when selling insurance was “a particularly insidious practice” that made it hard for lower-income motorists to obtain legally required auto insurance -- even if they had no history of being risky drivers. He likened using credit scores to insurers’ now-discredited practice of drawing a redline on a map around a poor community and refusing to sell insurance to anyone living within the area.

Although Garamendi’s action against Allstate may have quashed incipient efforts to use credit scores when selling auto liability insurance, it hasn’t resolved a debate about using them when rating risk for homeowners’ policies.

Currently, the issue remains unresolved in California. Garamendi last year failed to win passage in the Legislature of a bill that would have outlawed the use of credit scores by insurers selling homeowners’ coverage. Insurers, which must get all new rates approved by Garamendi, have been reluctant to challenge the commissioner on the issue.

For its part, Allstate said it would continue to press nationally for use of credit scoring for both auto and homeowners’ insurance.

Using credit scores “increases the accuracy of our risk evaluation, controls the cost of insurance and helps us make insurance more widely available,” Allstate spokeswoman Lisa Wanamaker said.