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Restriction on Use of Credit Reports By Insurance Companies – Maryland

Author: LegalEase Solutions 

Introduction

You have asked us to research what restrictions on the use of credit reports by insurance companies for underwriting and rating personal lines insurance policies, both at new business and renewal, exist in Maryland. These issues require discussion of:

  1. State statutes;
  2. Applicable case law in each state.

A state-by-state breakdown of the findings follows below:

MARYLAND

INSURANCE

TITLE 27.  UNFAIR TRADE PRACTICES AND OTHER PROHIBITED PRACTICES

SUBTITLE 5.  DISCRIMINATION

Md. INSURANCE Code Ann. §  27-501 (2005)

  • 27-501. Discrimination in underwriting

(a) In general. —

(1) An insurer or insurance producer may not cancel or refuse to underwrite or renew a particular insurance risk or class of risk for a reason based wholly or partly on race, color, creed, sex, or blindness of an applicant or policyholder or for any arbitrary, capricious, or unfairly discriminatory reason.

(2) Except as provided in this section, an insurer or insurance producer may not cancel or refuse to underwrite or renew a particular insurance risk or class of risk except by the application of standards that are reasonably related to the insurer’s economic and business purposes.

(b) Special conditions, facts, or situations prohibited. —

(1) An insurer may not require special conditions, facts, or situations as a condition to its acceptance or renewal of a particular insurance risk or class of risks in an arbitrary, capricious, unfair, or discriminatory manner based wholly or partly on race, creed, color, sex, religion, national origin, place of residency, blindness, or other physical handicap or disability.

(2) Actuarial justification may be considered with respect to sex.

(c) Prohibited inquiries. — An insurer or insurance producer may not make an inquiry about race, creed, color, or national origin in an insurance form, questionnaire, or other manner of requesting general information that relates to an application for insurance.

(d) Automobile liability insurance. —

(1) With respect to automobile liability insurance, an insurer may not:

(i) cancel, refuse to renew, or otherwise terminate coverage for an automobile insurance risk because of a claim, traffic violation, or traffic accident that occurred more than 3 years before the effective date of the policy or renewal; or

(ii) refuse to underwrite an automobile insurance risk because of a claim, traffic violation, or traffic accident that occurred more than 3 years before the date of application.

(2) With respect to homeowner’s insurance, an insurer may not:

(i) cancel, refuse to renew, or otherwise terminate coverage for a homeowner’s insurance risk because of a claim that occurred more than 3 years before the effective date of the policy or renewal; or

(ii) refuse to underwrite a homeowner’s insurance risk because of a claim that occurred more than 3 years before the date of application.

(3) An insurer may cancel a policy of homeowner’s insurance under which a onetime guaranteed fully refundable deposit is required for a stated amount of coverage, if the cancellation:

(i) takes effect on the anniversary date of the inception of the policy;

(ii) is not based on a claim that occurred more than 3 years before the anniversary date of the policy on which the proposed cancellation would take effect; and

(iii) is otherwise in accordance with this subtitle.

(4) This subsection does not apply to a claim involving conviction of the insured or applicant for fraud or arson.

(e) Prior coverage from authorized insurer or MAIF. — An insurer may not refuse to underwrite a private passenger motor vehicle insurance risk solely because the applicant or named insured previously obtained insurance coverage from any authorized insurer or the Maryland Automobile Insurance Fund.

(e-1) Payment plan based on credit history of insured not required. — An insurer may not require a particular payment plan for an insured for coverage under a private passenger or homeowner’s insurance policy based on the credit history of the insured.

(e-2) Payment plan based on credit history of insured not permitted. —

   (1) In this subsection, “credit history” means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s creditworthiness, credit standing, or credit capacity that is used or expected to be used, or collected in whole or in part, for the purpose of determining personal lines insurance premiums or eligibility for coverage.

(2) With respect to homeowner’s insurance, an insurer may not:

      (i) refuse to underwrite, cancel, or refuse to renew a risk based, in whole or in part, on the credit history of an applicant or insured;

      (ii) rate a risk based, in whole or in part, on the credit history of an applicant or insured in any manner, including:

  1. the provision or removal of a discount;
  2. assigning the insured or applicant to a rating tier; or
  3. placing an insured or applicant with an affiliated company; or

(iii) require a particular payment plan based, in whole or in part, on the credit history of the insured or applicant.

(3) (i) With respect to private passenger motor vehicle insurance, an insurer may not:

  1. refuse to underwrite, cancel, refuse to renew, or increase the renewal premium based, in whole or in part, on the credit history of the insured or applicant; or
  2. require a particular payment plan based, in whole or in part, on the credit history of the insured or applicant.

(ii) 1. An insurer may, subject to paragraphs (4) and (5) of this subsection, use the credit history of an applicant to rate a new policy of private passenger motor vehicle insurance.

  1. For purposes of this subsection, rating includes:
  2. the provision or removal of a discount;
  3. assigning the applicant to a rating tier; or
  4. placing an applicant with an affiliated company.

(4) With respect to private passenger motor vehicle insurance, an insurer that rates a new policy based, in whole or in part, on the credit history of the applicant:

(i) may not use a factor on the credit history of the applicant that occurred more than 5 years prior to the issuance of the new policy;

(ii) 1. shall advise an applicant at the time of application that credit history is used; and

  1. shall, on request of the applicant, provide a premium quotation that separately identifies the portion of the premium attributable to the applicant’s credit history;

(iii) may not use the following factors in rating the policy:

  1. the absence of credit history or the inability to determine the applicant’s credit history; or
  2. the number of credit inquiries about an applicant’s credit history;

(iv) 1. shall review the credit history of an insured who was adversely impacted by the use of the insured’s credit history at the initial rating of the policy:

  1. every 2 years; or
  2. on request of the insured; and
  3. shall adjust the premium of an insured whose credit history was reviewed under this subparagraph to reflect any improvement in the insured’s credit history; or

(v) shall disclose to the applicant at the time of the issuance of a policy that the insurer is required to:

  1. review the credit history of an insured who was adversely impacted by the use of the insured’s credit history at the initial rating or underwriting of the policy:
  2. every 2 years; or
  3. on request of the insured; and
  4. adjust the premium of an insured whose credit history was reviewed to reflect any improvement in the insured’s credit history.

(5) With respect to private passenger motor vehicle insurance, an insurer that rates a new policy based, in whole or in part, on the credit history of the applicant may, if actuarially justified, provide a discount of up to 40% or impose a surcharge of up to 40%.

(f) Policy to remain in effect. — Except as provided in §  27-505(a)(2) of this subtitle, in the case of cancellation of or refusal to renew a policy, the policy remains in effect until a finding is issued under §  27-505 of this subtitle if:

(1) the insured asks the Commissioner to review the cancellation or refusal to renew before the effective date of the termination of the policy; and

(2) the Commissioner begins action to issue a finding under §  27-505 of this subtitle.

(g) Burden of persuasion. — At a hearing to determine whether this section has been violated, the burden of persuasion is on the insurer to show that the cancellation or refusal to underwrite or renew is justified under the underwriting standards demonstrated.

(h) Underwriting standards. —

(1) This subsection applies to insurance underwriting standards for all health, life, disability, property, and casualty coverages provided in the State.

(2) At the request of the Commissioner, each insurer, nonprofit health service plan, and health maintenance organization shall file with the Commissioner a copy of its underwriting standards, including any amendments or supplements.

(3) The Commissioner may review and examine the underwriting standards to ensure compliance with this article.

(4) Each insurer, nonprofit health service plan, and health maintenance organization may request a finding by the Commissioner that its underwriting standards filed with the Commissioner be considered confidential commercial information under §  10-617(d) of the State Government Article.

(5) The Commissioner shall adopt regulations to carry out this subsection.

(i) Insurer cannot discontinue coverage due to weather-related claims. —

(1) Except as provided in paragraph (2) of this subsection, with respect to homeowner’s insurance, an insurer may not cancel or refuse to renew coverage for homeowner’s insurance based on the claims history of an insured for weather-related claims, unless there were three or more weather-related claims within the preceding 3-year period.

(2) An insurer may consider claims for weather-related events for the purpose of canceling or refusing to renew coverage if the insurer provided written notice to the insured for reasonable or customary repairs or replacement specific to the insured’s premises or dwelling which the insured failed to make and which, if made, would have prevented the loss for which a claim was made.

(j) Reasonable standards. —

(1) In the case of homeowner’s insurance, standards reasonably related to an insurer’s economic and business purpose under subsection (a)(2) of this section, include, but are not limited to, the following and do not require statistical validation:

(i) a material misrepresentation in connection with the application, policy, or presentation of a claim;

(ii) nonpayment of premium;

(iii) a change in the physical condition or contents of the premises or dwelling which results in an increase in a hazard insured against and which, if present and known to the insurer prior to the issuance of the policy, the insurer would not have issued the policy;

(iv) conviction:

  1. within the preceding 5-year period, of arson; or
  2. within the preceding 3-year period, of a crime which directly increases the hazard insured against;

(v) subject to subsection (i) of this section, the claims history of the insured where the insured makes more than three claims in the preceding 3-year period;

(vi) subject to subsection (o)(2) of this section, any other standard approved by the Commissioner that is based on factors that adversely affect the losses or expenses of the insurer under its approved rating plan and for which statistical validation is unavailable or is unduly burdensome to produce; and

(vii) subject to subsection (o)(2) of this section, any other standard set forth in regulations adopted by the Commissioner that is found to be reasonably related to the insurer’s economic and business purposes.

(2) An insurer is not required to produce statistical validation that excludes weather-related claims or that makes any distinction between weather-related claims and nonweather-related claims in order to sustain the insurer’s burden of persuasion under subsection (g) of this section with respect to a cancellation or refusal to renew for a reason that is not listed in this subsection.

(k) Insurer may not cancel coverage for accidents where insured was not at fault. — With respect to private passenger motor vehicle insurance, an insurer may not cancel or refuse to renew coverage based on the claims history of an insured where two or fewer of the claims within the preceding 3-year period were for accidents or losses where the insured was not at fault for the loss.

(l) Standards related to economic and business purposes. —

(1) In the case of private passenger motor vehicle insurance, standards reasonably related to the insurer’s economic and business purposes under subsection (a)(2) of this section include, but are not limited to, the following and do not require statistical validation:

(i) a material misrepresentation in connection with the application, policy, or presentation of a claim;

(ii) nonpayment of premium;

(iii) subject to §  27-606 of this title, revocation or suspension of the driver’s license or motor vehicle registration within the preceding 2-year period:

  1. of the named insured or covered driver under the policy; and
  2. for reasons related to the driving record of the driver;

(iv) subject to §  27-606 of this title, two or more motor vehicle accidents or any combination of three or more accidents and moving violations within the preceding 3-year period for which the insured was at fault for the accidents;

(v) subject to §  27-606 of this title, three or more moving violations against the insured or a covered driver under the policy within the preceding 2-year period;

(vi) subject to §  27-606 of this title, conviction of the named insured or a covered driver under the policy of any of the following:

  1. a violation of § 21-902(a), (c), or (d) of the Transportation Article;
  2. homicide, assault, reckless endangerment, or criminal negligence arising out of the operation of the motor vehicle; or
  3. using the motor vehicle to participate in a felony;

(vii) subject to subsection (o)(1) of this section, any other standard approved by the Commissioner that is based on factors that adversely affect the losses or expenses of the insurer under its approved rating plan and for which statistical validation is unavailable or is unduly burdensome to produce; and

(viii) subject to subsection (o)(1) of this section, any other standard set forth in regulations adopted by the Commissioner that is found to be reasonably related to the insurer’s economic and business purposes.

(2) An insurer is not required to produce statistical validation that excludes at fault accidents or that makes any distinction between not at fault accidents and at fault accidents in order to sustain the insurer’s burden of persuasion under subsection (g) of this section with respect to a cancellation or refusal to renew for a reason that is not listed in this subsection.

(m) Statistical validation not required. — In the case of commercial insurance or insurance issued or provided by nonadmitted insurers, an insurer is not required to produce statistical validation of its underwriting standards in order to meet its burden of persuasion under this section.

(n) Factors to be considered in mitigation. —

(1) Subject to the requirements of this article, if an insurer considers claims history for the purposes of canceling or refusing to renew coverage, the insurer may consider the following factors in mitigation of the proposed decision without producing statistical validation:

(i) the severity of the losses;

(ii) the length of time that an insured has been a policyholder with the insurer;

(iii) loss mitigation of previous losses; and

(iv) the availability of a higher deductible for the particular policy and types of losses.

(2) If an insurer considers claims history for purposes of canceling or refusing to renew coverage, the insurer shall disclose the practice to an insured at the inception of the policy and at each renewal.

(o) Military personnel returning from active duty overseas — Continuous coverage requirement. —

(1) With respect to private passenger motor vehicle insurance, an insurer may not deny, refuse to renew, or cancel coverage or increase rates for applicants or policyholders who are military personnel returning from active duty overseas solely because they fail to meet underwriting standards that require continuous coverage unless the failure to maintain continuous coverage existed prior to the applicant’s or policyholder’s assignment to active duty overseas.

(2) With respect to homeowner’s insurance, an insurer may not deny, refuse to renew, or cancel coverage or increase rates for applicants or policyholders who are military personnel returning from active duty overseas solely because they fail to meet:

(i) underwriting standards that require continuous coverage unless the failure to maintain continuous coverage existed prior to the applicant’s or policyholder’s assignment to active duty overseas; or

(ii) occupancy requirements if the military personnel can demonstrate that reasonable steps were taken to maintain and protect the property during the applicant’s or policyholder’s assignment to active duty overseas.

SUMMARY

 The statute under Maryland Code is different in many respects, since the credit information has not been dealt with in particular, but only in the light of how such information is not necessary to decide on the payment plan for any class of risks. Basically, the insurer cannot refuse to underwrite, cancel, or refuse to renew a risk based on the credit history of an applicant or insured, which eliminates any possibility of using credit information obtained by an independent consumer reporting agency. Further, the insurer shall not rate a risk based on the credit history of an applicant.