South-Western Legal Studies in Business

Reckless Action Needed for Damages for FCRA Failure to Send Adverse Action Notices
Description

Supreme Court held that an insurance company may have violated the Fair Credit Reporting Act requirement to send a consumer an adverse action notice based on higher insurance premiums due to bad credit scores, but the failure was not in reckless disregard of the statute, so there were no damages.

Topic

Consumer Protection

Key Words

Fair Credit Reporting Act; Insurance Rates; Credit Reports; Adverse Action Notice

C A S E   S U M M A R Y
Facts

The Fair Credit Reporting Act (FCRA) requires notice to a consumer subjected to “adverse action … based in whole or in part on any information contained in a consumer [credit] report.” In the case of insurance companies, an adverse action is a denial or cancellation of a policy or the charging of higher rates than would be the case but for the negative information in the credit report. Safeco relies on credit reports to set initial insurance premiums. It offered Burr a policy at rates higher than the best rates possible without sending him an adverse action notice. Burr joined a class action suit against Safeco for this practice. GEICO uses credit reports similarly, but only sends adverse action notices to consumers if the rate they are offered is raised because of negative information. Edo received a policy quote from GEICO but did not receive an adverse action notice because his premium was the same whether the credit report was used or not. Edo joined a class action suit against GEICO for this practice. The district court dismissed the suits; the appeals court reversed. Insurance companies appealed.

Decision

Reversed and remanded. Liability for willfully failing to comply with the FCRA extends to reckless disregard of the duty imposed by the statute. The initial rates charged for new insurance policies may be adverse actions under the FCRA. GEICO clearly did not violate the statute. Since Edo was offered the same rate he would have received had his credit score not been taken into account, GEICO owed him no adverse action notice. Safeco may have violated the FCRA by failing to send Burr and adverse action notice, since his premium was higher based on his credit score. However, Safeco was not reckless in its behavior, as required by the statute for there to be damages. Recklessness is understood to be conduct violating an objective standard: action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Hence, the district court was correct to dismiss the suits.

Citation

Safeco Insurance Co. v. Burr, 127 S.Ct. 2201 (Sup. Ct., 2007)

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