October 9, 2009

Michigan Courts Argue Credit Rating Relevance In Auto Insurance Quotes

In early October, the Michigan Supreme Court heard arguments in a case aimed at determining whether or not auto insurance companies have the right to partially base auto insurance rates on credit score. This has been standard practice in the auto insurance industry for a long time, however, the Michigan Office of Financial and Insurance Regulation tried to put a stop to in, at least in their state. They did this by passing a law in 2005 forbidding insurance companies from using this information in calculating auto insurance quotes. Insurance companies challenged the new regulation, and were supported by a lower court. After the case was appealed, the appellate court reached a split decision. As a result, the state Supreme Court is now will make the ultimate resolution on the matter.

Insurance companies consider credit score when determining an Michigan auto insurance quote because a statistical correlation has been observed between individuals who have a poor history of paying their bills, and policyholders who tend to make the most claims. This fact may be because people with poor credit are generally considered less responsible than those with high credit scores, making them more likely to drive recklessly. In addition, policyholders struggling to pay bills may be more inclined to file an insurance claim in the event of an accident, not because of the situation but because of the potential money they may receive in settlement.

An argument in this case is that it is tricky to hypothesize about a cause and effect connection between statistics that could be entirely coincidental. Some people may have low credit scores because they made unfortunate investments. Others may have had health problems resulting in costly medical bills they couldn't pay. In the case of these individuals, a low credit score may have nothing to do with their driving tendencies, or even their likelihood of filing a claim. For the auto insurance companies, though, the fact that there is a potential correlation is reason enough to adjust rates based on credit history.

The practice of using credit score to calculate the auto insurance premiums charged to policyholders may seem potentially unfair to some drivers, particularly those whose inability to pay their bills has little to do with their ability to drive safely. But this practice does offer some potential benefits for consumers as well. The fact that insurance companies are able to use this information to generate auto insurance rates helps them to meet their basic company expenses and stay profitable, in turn enabling them to charge lower premiums overall.

Either way, the Supreme Court has a tough decision to make – one that could eventually affect auto insurance policyholders all over the U.S.