How is it possible that two drivers, living just down the street from one another in Reston, Virginia, with similar cars and driving records, pay significantly different rates for automobile insurance? The reason would surprise most people. Many people believe that insurance companies set rates based on the insured’s driving record only. Others know that age, gender, and marital status are also considered as part of the underwriting calculation. But most folks are shocked to learn that their credit score is a major factor in rate setting. The truth is that the insurance industry has been using credit ratings as an underwriting tool for the last 20 years, claiming that drivers with low credit scores have a significantly higher rate of automobile liability claims against them.
Opponents of using credit reports for rate setting say that the practice preys on the poor and is discriminatory, that it is, in fact, another form of red lining, the banned banking practice of not making mortgage loans in defined undesirable neighborhoods. They accuse insurance companies of discriminating on the basis of race, ethnicity and other constitutionally impermissible criteria. The insurance industry counters that it does not know or use constitutionally protected details about its insured’s.
In recent years, there have been numerous legal challenges to the use of credit reports in state legislatures, including a recent challenge in Michigan, however most states, including Virginia, continue to permit it. At present, only California, Hawaii and Massachusetts ban the practice of considering credit scores when setting insurance rates.