Safeco Insurance Co. of America v. Burr
No. 06-84

Fair Credit Reporting Act, requiring insurers to notify customers who are charged more because of credit ratings, is not violated unless company's conduct entails unjustifiably high risk of harm that is either known or so obvious it should be deemed known.

The United States Supreme Court held the Fair Credit Reporting Act's ("FCRA" or "Act") requirement of notice to any consumer subjected to "adverse action ... based in whole or in part on any information contained in a consumer [credit] report" was not violated when the consumer would have received the same rate had the company not taken his credit report into consideration. The Supreme Court also found the Act's requirement for a willful failure includes a violation committed in reckless disregard of the notice obligation, that GEICO did not violate the statute and that, while Safeco might have, it did not act recklessly.

Congress enacted FCRA section 1681 in 1970 to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy. The Act requires, among other things, that "any person [who] takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report" must notify the affected consumer. As it applies to an insurance company, "adverse action" is "a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for." FCRA provides a private right of action against businesses that use consumer reports but fail to comply. If a violation is negligent, the affected consumer is entitled to actual damages. If willful, the consumer may recover actual damages or statutory damages ranging from $100 to $1,000, and possibly punitive damages.

GEICO writes auto insurance through four subsidiaries with different rates depending on the customer's risk. Potential customers call a toll-free number answered by an agent who takes information and, with permission, gets the applicant's credit score. This information goes into GEICO's computer system which selects an appropriate company and the particular rate at which a policy may be issued.

GEICO sent adverse action notices to all applicants who were not offered "preferred" policies. It changed its practice after a method to "neutralize" an applicant's credit score was devised - the applicant's company and tier placement is compared with the company and tier placement the applicant would have been assigned with a "neutral" credit score, that is, one calculated without reliance on credit history. Under this new scheme, GEICO sends an adverse action notice only if using a neutral credit score would have put the applicant in a lower priced tier or company.

Ajene Edo ("Edo") applied for auto insurance with GEICO. After obtaining Edo's credit score, GEICO offered him a standard policy at rates higher than the most favorable, which he accepted. Because Edo's company and tier placement would have been the same with a neutral score, GEICO did not give Edo an adverse action notice. Edo later filed a proposed class action in federal district court in Oregon against GEICO alleging willful failure to give notice in violation of section 1681m(a). The District Court granted summary judgment for GEICO finding there was no adverse action when "the premium charged to [Edo] ... would have been the same even if GEICO [] did not consider information in [his] consumer credit history."

Safeco also relies on credit reports to set initial insurance premiums. Applicants Charles Burr and Shannon Massey were offered higher rates than the best rates possible. Safeco sent them no adverse action notices. They later joined a proposed class action against the company alleging willful violation of section 1681m(a) and seeking statutory and punitive damages under section 1681n(a). The District Court held the initial rate for a new insurance policy cannot be an "increase" because there is no prior dealing and thus, no "adverse action" and granted summary judgment for Safeco.

The Ninth Circuit Court of Appeals reversed both judgments. In GEICO's case, it held that whenever a 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." Since a better credit score would have earned Edo lower rates, the appeals court held that GEICO's failure to give notice was an adverse action.

The Ninth Circuit also held that an insurer "willfully" fails to comply with FCRA if it acts with "reckless disregard" of a consumer's rights under the Act. It explained that a company would not be acting recklessly if it "diligently and in good faith attempted to fulfill its statutory obligations" and came to a "tenable, albeit erroneous, interpretation of the statute."

As to Safeco, the Ninth Circuit held the notice requirement applies to a single statement of an initial charge for a new policy. It found Safeco's conduct willful, relying on its decision in the GEICO case.

The United States Supreme Court granted Certiorari and consolidated the appeals. The Supreme Court held an "increase" required for "adverse action" includes a disadvantageous rate even with no prior dealing. Although offering the initial rate for new insurance can be an "adverse action," section 1681m(a) calls for notice only when the adverse action is "based in whole or in part on" a credit report. An increased rate is not "based in whole or in part on" the credit report unless the report was a necessary condition of the increase.

The Supreme Court also rejected the plaintiffs' argument the benchmark for determining whether a first-time rate is a disadvantageous increase should be the rate the applicant would have received with the best possible credit score. Instead, it accepted GEICO's position it should be what the applicant would have had if the company had not taken his credit score into account (the "neutral score" rate GEICO used in Edo's case). The initial rate GEICO offered Edo was the one he would have received if his credit score had not been taken into account. Thus, GEICO owed him no adverse action notice under section 1681m(a).

The Supreme Court held that where willfulness is a statutory condition of civil liability, it covers not only knowing violations of a standard, but reckless ones as well. The standard civil usage thus counsels reading the phrase "willfully fails to comply" in section 1681n(a) as reaching reckless FCRA violations. Thus, a company subject to FCRA does not act in reckless disregard unless the action is a violation under a reasonable reading of the statute's terms and the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.

The Court found Safeco's reading of the statute, albeit erroneous, was not objectively unreasonable. On the rationale that "increase" presupposes prior dealing, Safeco took the definition as excluding initial rate offers for new insurance and so sent no adverse action notices to Burr and Massey. Although the Supreme Court disagrees with Safeco's analysis, it found that due to the dearth of guidance, Safeco's reading was not objectively unreasonable, and so falls well short of raising the "unjustifiably high risk" of violating the statute necessary for reckless liability.

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