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You are here: Home . bulletins . 2003 . b-0048-3
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COMMISSIONER'S BULLETIN # B-0048-03

December 05, 2003


To: ALL AUTHORIZED PROPERTY AND CASUALTY INSURERS WRITING PERSONAL INSURANCE IN THE STATE OF TEXAS AND TO THEIR AFFILIATES, AGENTS AND REPRESENTATIVES, EXCEPT FARM MUTUAL INSURANCE COMPANIES


Re: USE OF CREDIT SCORING IN CERTAIN PERSONAL LINES OF INSURANCE

The purpose of this bulletin is to: (1) make you aware of new Article 21.49-2U, Insurance Code and new 28 TAC §§5.9940 and 5.9941 (the Rules), relating to the use of credit information or credit scoring in certain personal lines of insurance, and (2) notify you that the Texas Department of Insurance intends to strictly enforce the provisions of Article 21.49-2U, Insurance Code and the Rules. Article 21.49-2U, enacted by the Regular Session of the 78th Legislature in Senate Bill 14, Article 3, became effective June 11, 2003. The Rules became effective November 30, 2003.

The bulletin highlights aspects of Article 21.49-2U, Insurance Code and the Rules. To ensure compliance, it is essential that you review the entire texts of Article 21.49-2U and the Rules. You may access the text of Senate Bill 14, Article 3 at www.capitol.state.tx.us and the Rules at www.tdi.state.tx.us.

Applicability

Article 21.49-2U and the Rules implementing Article 21.49-2U:

  • Apply to:

    • An insurer writing personal insurance coverage and using credit information or credit reports for the underwriting or rating of that coverage.

    • The insurer's affiliates that are authorized to write personal insurance in the State of Texas.

    • A residential property or personal automobile insurance policy:

      • that is delivered, issued for delivery, or renewed on or after January 1, 2004;

      • the application for which is submitted on or after January 1, 2004; or

      • that is subject to determination of denial, cancellation, or nonrenewal on or after January 1, 2004.

  • Do not apply to:

    • Farm mutual insurance companies, or

    • Eligible surplus lines insurers.

Personal insurance means:

  • a personal automobile insurance policy;

  • a residential property insurance policy;

  • a residential fire and allied lines insurance policy; or

  • a noncommercial insurance policy covering a boat, personal watercraft, snowmobile, or recreational vehicle.

Credit information means any credit-related information:

  • derived from a credit report,

  • found on a credit report itself, or

  • provided in an application for personal insurance.

The term does not include information that is not credit-related.

Prohibited Use of Credit Information

An insurer may not:

  • use a credit score that is computed using factors that constitute unfair discrimination;

  • deny, cancel, or nonrenew a policy of personal insurance solely on the basis of credit information without consideration of any other applicable underwriting factor independent of credit information;

  • take an action that results in an adverse effect against a consumer because the consumer does not have a credit card account without consideration of any other applicable factor independent of credit information;

  • consider an absence of credit information or an inability to determine credit information for an applicant for insurance coverage or insured as a factor in underwriting or rating an insurance policy unless the insurer:

    • has statistical, actuarial, or reasonable underwriting information that:

      • is reasonably related to actual or anticipated loss experience; and

      • shows that the absence of credit information could result in actual or anticipated loss differences;

    • treats the consumer as if the applicant for insurance coverage or insured had neutral credit information, as defined by the insurer; or

    • excludes the use of credit information as a factor in underwriting and uses only other underwriting criteria.

Negative Factors

An insurer may not use any of the following as a negative factor in any credit scoring methodology or in reviewing credit information to underwrite or rate a policy of personal insurance:

  • a credit inquiry that is not initiated by the consumer;

  • an inquiry relating to insurance coverage, if so identified on a consumer's credit report; or

  • a collection account with a medical industry code, if so identified on the consumer's credit report.

Multiple lender inquiries made within 30 days of a prior inquiry, if coded by the consumer reporting agency on the consumer's credit report as from the home mortgage or motor vehicle lending industry must be considered by an insurer as only one inquiry.

Effect of Extraordinary Events

An insurer, on written request, must provide reasonable exceptions to the insurer's rates, rating classification, or underwriting rules for a consumer whose credit information has been directly influenced by a catastrophic illness or injury, by the death of a spouse, child, or parent, by temporary loss of employment, by divorce, or by identity theft.

The insurer may:

  • assign a neutral credit score or consider only credit information not affected by a catastrophic illness or injury, the death of a spouse, child, or parent; temporary loss of employment, divorce, or identity theft;

  • require reasonable written and independently verifiable documentation of the event and the effect of the event on the person's credit before granting an exception, but is not required to consider repeated events or events the insurer considered previously as an extraordinary event; and

  • consider granting an exception to an applicant for insurance coverage or an insured for an extraordinary event not listed in Article 21.49-2U, §5.

Dispute Resolution; Error Correction

An insurer must re-underwrite and re-rate a current insured if the dispute resolution process established under Section 611(a)(5), Fair Credit Reporting Act (15 U.S.C. Section 1681i), as amended, determines that the credit information of the insured was inaccurate or incomplete or could not be verified and the insurer received notice of that determination from the consumer reporting agency or from the insured.

After re-underwriting or re-rating the insured, the insurer must make any adjustments necessary within 30 days, consistent with the insurer's underwriting and rating guidelines. If an insurer determines that the insured has overpaid premium, the insurer must credit the amount of overpayment, by computing the overpayment back to the shorter of:

  • the last 12 months of coverage; or

  • the actual policy period.

Disclosure to Consumers for Use of Credit Scoring

An insurer may use credit scoring to develop rates, rating classifications, or underwriting criteria, except for factors that constitute unfair discrimination.

An insurer that uses credit scoring in the underwriting or rating of personal insurance must issue Form CD-1, adopted by reference in 28 TAC §5.9940, indicating whether or not credit information pertaining to the applicant or the insured or other household member(s) will be obtained and used as part of the insurance credit scoring process. (Article 21.49-2U, §7(d))

Form CD-1 may be obtained from the department's website at www.tdi.state.tx.us or from the Automobile/Homeowners Section, Mail Code 104-1A, Texas Department of Insurance, 333 Guadalupe, Austin, Texas 78701.

An insurer may use a disclosure form that is not identical to Form CD-1 if the form is:

  • allowed or approved for use in another state, and

  • complies with all requirements of 28 TAC §5.9940 and Form CD-1. (28 TAC §5.9940(e))

A disclosure form that is not identical to Form CD-1 must be filed prior to its use with the Texas Department of Insurance, Property & Casualty Intake Unit, Mail Code 104-3B, P.O. Box 149104, Austin, Texas 78714-9104 or with the Texas Department of Insurance, Property & Casualty Intake Unit, 333 Guadalupe, Austin, Texas 78701.

Notice of Action Resulting in Adverse Effect

If an insurer takes an action resulting in an adverse effect with respect to an applicant for insurance coverage or insured based in whole or in part on information contained in a credit report, the insurer must provide to the applicant or insured within 30 days:

  • written or electronic notice of the action resulting in an adverse effect and the reasons for that action;

  • the name, address, and telephone number of the consumer reporting agency, including a toll-free number established by the agency and the consumer reporting agency's Internet website, if applicable;

  • written or electronic notice that the consumer reporting agency did not make the decision to take the action resulting in an adverse effect and will be unable to provide the applicant or insured the specific reasons why the action was taken; and

  • written or electronic notice of the applicant's or insured's right to:

    • obtain a free copy of the consumer report from the consumer reporting agency during the 60-day period after the date of the notice; and

    • dispute with the consumer reporting agency the accuracy or completeness of any information in the consumer report furnished by the consumer reporting agency; and

  • a description of not more than four factors that were the primary influences of the action resulting in the adverse effect. Use of a generalized term such as "poor credit history," "poor credit rating," or "poor credit score" does not constitute sufficient notice of the action resulting in the adverse effect.

Mandated Filing - Credit Scoring Models and Processes; Rates

Credit Scoring Models and Processes

  • An insurer that began using an insurance credit scoring system after June 11, 2003 must file its credit scoring models or other credit scoring processes with the Texas Department Insurance before using the models or processes.

  • An insurer (or entity acting on behalf of that insurer) that was using an insurance credit scoring system on June 11, 2003 (the effective date of Senate Bill 14) to underwrite or rate risks is required to have filed with the commissioner the credit scoring models, not later than September 9, 2003 (the 90th day after the effective date of Senate Bill 14).

Credit score or insurance score means:

  • a number or rating derived from an algorithm, computer application, model, or other process

  • that is based on credit information

  • and used to predict the future insurance loss exposure of a consumer.

Filings - Differences in Rates Charged Due Solely to Difference in Credit Scores

  • Differences in rates charged due solely to credit scoring must be based on sound actuarial principles and supported by data filed with the Texas Department of Insurance no later than March 1, 2004. Filings must be submitted to the Property & Casualty Intake Unit, Mail Code 104-3B, P.O. Box 149104, Austin, Texas 78714-9104 or to the Texas Department of Insurance, Property & Casualty Intake Unit, 333 Guadalupe, Austin, Texas 78701.

Public Information

A credit scoring model filed for purposes of compliance with Section 9 of Article 21.49-2U, as of the date the filing is received by the Texas Department of Insurance:

  • is public information;
  • is not subject to any exceptions to disclosure under Chapter 552, Government Code; and
  • cannot be withheld from disclosure under any other law.

Effect of Violation

An insurer that violates Article 21.49-2U, the Rules, or any other rule adopted under Article 21.49-2U:

  • commits an unfair practice in violation of Article 21.21, Texas Insurance Code; and
  • is subject to sanctions under Chapter 82, Texas Insurance Code.

Sanctions under Chapter 82, Texas Insurance Code include, but are not limited to: the imposition of an administrative penalty, and the issuance of an order requiring the insurer to cease and desist from the activity determined to be in violation of Article 21.49-2U, the Rules, any other rule adopted under Article 21.49-2U, or Article 21.21. The Texas Department of Insurance will investigate alleged violations of Article 21.49-2U, the Rules, any other rule adopted under Article 21.49-2U, or Article 21.21, and take administrative action to impose sanctions, as warranted.

Questions regarding this bulletin may be directed to David Nardecchia, Director, Personal and Commercial Lines Division, at (512) 322-2260 (david.nardecchia@tdi.state.tx.us).

Jose Montemayor
Commissioner of Insurance



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