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Reynolds v. Hartford-Class Action Defense Cases: “Adverse Action” Under Federal FCRA (Fair Credit Reporting Act) Applies To Initial Premium Set By Insurer Ninth Circuit Holds In Case Of First Impression

Federal Court Also Holds that Liability for Violations of Fair Credit Reporting Act (FCRA), and that “Willful” Noncompliance Under FCRA’s Punitive Damage Provision Includes Reckless Disregard

In two class action lawsuits filed against insurance companies for alleged violations of the federal Fair Credit Reporting Act separate statement motion to compel responses, 15 U.S.C. §§ 1681 et seq., (1) class action defense attorneys representing Hartford moved for summary judgment on the grounds that the initial rate set for a new policy holder cannot constitute an “adverse action” because there is no “increase” in the rate charged; and (2) class action defense attorneys representing GEICO sought summary judgment claiming the class representative lacked standing, that it did not contract to issue the plaintiff a policy, and that the premium charged would have been the same even if it had not considered plaintiff’s credit history. In each case, the district court granted summary judgment in favor of the insurers; the Ninth Circuit consolidated the cases for purposes of its opinion.

In a case of first impression, the Ninth Circuit Court of Appeals held that if the rate initially set by an insurance company would have been lower but for its reliance on a consumer’s credit report, then a notice of adverse action must be provided under the FCRA. Reynolds v. Hartford Fin. Serv. Group, Inc., 435 F.3d 1081 (9th Cir. 2006). Congress enacted the FCRA to ensure fair and accurate reporting of credit information affecting consumers. The statutory scheme has been characterized by courts as both comprehensive and complex. One aspect of the FCRA requires that consumers be informed of “adverse actions” taken in reliance on credit reports so that they can dispute or explain any negative information contained in such reports. “Adverse action notices advise consumers that an adverse action has been taken against them, and the nature of that action, and alerts them that they may view a copy of the consumer report that triggered the adverse action free of charge and correct any errors affecting their economic well-being.” Id., at 1085.

The question presented in Reynolds was, “Does FCRA’s adverse action notice requirement apply to the rates first charged in an initial policy of insurance or is it limited to an increase in a rate that the consumer has previously been charged?” Reynolds, at 1090. While no court had yet addressed that issue, the Ninth Circuit found persuasive a Sixth Circuit opinion in a federal TILA (Truth in Lending Act) case. In Cornist v. B.J.T. Auto Sales, Inc., 272 F.3d 322, 327 (6th Cir. 2001), the Court explained, “An increase in the base price of an automobile tbhhat is not charged to a cash customer, but is charged to a credit customer, solely because he is a credit customer, triggers TILA’s disclosure requirements.” Reynolds, at 1091. Ultimately, the Ninth Circuit concluded at page 1092:

We hold that whenever because of his credit information a company charges a consumer a higher initial rate than it would otherwise have charged, it has increased the charge within the meaning of FCRA. Therefore, the fact that Reynolds’ policy was an initial one, and his rate was the initial rate charged, is of no consequence.

The Court also rejected Hartford’s claim that a “no hit” response cannot constitute an “adverse action”: specifically, if a request for consumer credit information fails to find the consumer, then Hartford categorizes it as a “no hit.” Hartford argued that this could not be an “adverse action” because it was not based on “information contained in a consumer report.” Reynolds, at 1093-94. The Ninth Circuit rejected the claim because a “no hit” designation means that the applicant is ineligible to receive the insurer’s best rates. Id.

With respect to the GEICO case, the Ninth Circuit held that FCRA requires an adverse action notice whenever a consumer pays a higher rate “because his credit rating is less than the top potential score,” not because “his credit rating is worse than the average consumer’s.” Reynolds, at 1093. “In other words, if the consumer would have received a lower rate for his insurance had the information in his consumer report been more favorable, an adverse action has been taken against him.” Id. Under GEICO’s then-existing policy, a consumer with above average credit would never receive an FCRA adverse action notice because the policy compared “adverse” to the insurance rate that would have been charged to an average consumer. The Ninth Circuit found this policy incompatible with FCRA.

The Reynolds opinion covers several other issues, only one of which we discuss here: “The defendants all contend that only one company can be liable when an insurance policy contains an increase in rates – the issuing company.” Id., at 1095. The Ninth Circuit disagreed, holding that “all the companies that take adverse action against a consumer [are] jointly responsible for issuing a notice” under FCRA. Id., at 1096.

Download PDF file of Reynolds v. Hartford