Cloud Hosting

To print this article, all you need is to be registered or login on Mondaq.com.

As insurers consider augmenting the quoting process withalgorithmic predictive models, including those aided by artificialintelligence, machine learning, and/or robotic process automation(Models) for which core inputs are,or could be considered, a consumer report, one question that mayarise is whether the Fair Credit Reporting Act, 15 U.S.C. 1681-1681x (the FCRA)dictates the distribution of an adverse action notice when a Modelis not implemented for the purpose of makingcoverage and rating decisions(determining whether to accept or decline a particular risk or thepremium charged), but instead for the purpose of determiningwhether other actions can be taken with respect to consumers likerouting applicants to certain payment methods or other designationsunrelated to coverage and rating decisions(administrative decisions).

Under the FCRA, an adverse action can meandifferent things in the context of different industries oruses. In the context of insurance, an adverseaction is defined to mean a denial orcancellation of, an increase in any charge for, or a reduction orother adverse or unfavorable change in the terms of coverage oramount of, any insurance, existing or applied for, in connectionwith the underwriting of insurance."1 Under adifferent section of the FCRA, If any person takes anyadverse action with respect to any consumer that is based in wholeor in part on any information contained in a consumer reportthat person must, among other things, provide an adverse actionnotice to the consumer.2

A consumer report is defined tomean any written, oral, or other communication of anyinformation by a consumer reporting agency bearing on aconsumer's credit worthiness, credit standing, credit capacity,character, general reputation, personal characteristics, or mode ofliving which is used or expected to be used or collected in wholeor in part for the purpose of serving as a factor in establishingthe consumer's eligibility for . . . (A) credit or insurance tobe used primarily for personal, family, or household purposes; or .. . (C) any other purpose authorized [as a permissible purpose ofconsumer reports]"3 Thepermissible purposes of consumerreports include, in relevant part, the furnishing of a consumerreport by a consumer reporting agency to a person which ithas reason to believe . . . intends to use the information inconnection with the underwriting of insurance involving theconsumer."4

First, insurers should consider whether an administrativedecision could be considered [1] an increase in any chargefor . . . or other adverse or unfavorable change in the terms ofcoverage . . . applied for, [2] in connection with the underwritingof insurance.

An administrative decision could be considered an increase inthe charge for coverage, because applicants subject to anadministrative decision could be giving more value for the samelevel of coverage in some way. Such additional value could beminimal to the point of appearing nominal, but could theoreticallybe construed as an increase.

An administrative decision could be considered an adverse orunfavorable change in the terms of coverage, because the burden ofhaving to pay premium in a different way or obtain or interact withtheir coverage in a different way could be construed asadverse or unfavorable from the perspective of theapplicant. In many circumstances, particularly thoseaffecting applicants with fewer resources, paying more at one timeor in a different manner could mean the applicant has less funds onhand to contribute to other needs. An administrative decisioncould therefore be considered adverse orunfavorable.

Depending on the nature of the administrative decision, it couldbe construed as being undertaken in connection with theunderwriting of insurance. The only permissible purpose forwhich a consumer report may be provided to an insurer is touse the information in connection with the underwriting ofinsurance. Further, it seems counterintuitive that thelegislative intent of the FCRA would be to permit the provision ofconsumer reports without the attachment of attendant restrictionsand obligations like the FCRA's requirements in respect ofadverse actions.

As stated above, according to the FCRA, if any person takes anyadverse action with respect to any consumer that is based in wholeor in part on any information contained in a consumer reportthe person must, among other things, provide an adverse actionnotice to the consumer.5 Insurers must thereforeconsider whether an administrative decision could be construed asbeing (1) based in whole or in part on (2) any informationcontained in a consumer report.

The phrase based in whole or in part on has beeninterpreted to apply only when there is a but-forcausal relationship. An adverse action is not considered tobe based in whole or in part on the consumer report unlessthe report was a necessary condition of the adverseaction.6

Under certain caselaw, the baseline or benchmark for consideringwhether there has been a disadvantageous increase in rate (and,therefore an adverse action requiring notice to the applicant) hasbeen interpreted to be what the applicant would have had ifthe company had not taken his[/her] credit score intoaccount."7It may be that the onlypurpose of a Model's use of a consumer report is to determinewhether an administrative decision will be engaged. In that case,the baseline could be considered to be the absence ofthe result of the administrative decision. In other words,without use of the Model that integrates the consumer report, theremight not be any possibility of the administrative decisionimpacting the applicant.

An insurer must analyze whether particularized information usedin a Model has been obtained from a consumer reporting agency basedon the insurer's permissible purpose. An insurer shouldalso analyze whether the information is: (i) a writtencommunication of information derived from a consumer reportingagency; (ii) bearing on a consumer's credit worthiness, creditstanding, credit capacity, character, general reputation, personalcharacteristics, or mode of living; (iii) which is used or expectedto be used or collected in whole or in part for the purpose ofserving as a factor in establishing the consumer's eligibilityfor insurance to be used primarily for personal, family, orhousehold purposes.

Finally, an insurer should consider whether the above analysiswould differ or whether additional considerations arise out ofstate insurance scoring laws promulgated based on the NationalCouncil of Insurance Legislators' Model Act Regarding Use ofCredit Information in Personal Insurance (NCOILModel). The NCOIL Model defines whatconstitutes an insurance score (which is similar tothe FCRA's definition of consumer report), what constitutesan adverse action in respect of such insurance scores(which is similar to the FCRA's definition of adverseaction), and when an adverse action notice must be sent in respectof such adverse actions (which trigger language is similar to theFCRA's trigger language). This analysis will depend on thestate-specific implementation of the NCOIL Model (whereapplicable), or on other related state laws and regulationsaddressing this subject matter (for those states that have notadopted some form of the NCOIL Model).

Of course, in analyzing these issues, insurers should consultextensively with insurance and federal regulatory counsel as to thespecific nature of the administrative decisions, how Models arecreated and used, and what the impact of such administrativedecisions and Models are on applicants and consumers.

1 15 U.S.C.A. 1681a(k)(1)(B)(i).

2 15 U.S.C.A. 1681m(a).

3 15 U.S.C.A. 1681a(d)(1)(A) and (C).

4 15 U.S.C.A. 1681b(a)(3)(C).

6 Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 63, 127 S.Ct. 2201, 2212, 167 L. Ed. 2d 1045 (2007). This case is alsosometimes referred to asGeico v. Edo.

7 Id.at 2213.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

Here is the original post:
When Might The Use Of AI, Machine Learning, Or Robotic Process-Enabled Insurance Models Result In An Adverse Action Under The FCRA? - Insurance -...