In California, the most recent Insurance Commissioner forbade auto insurers to use credit rating as a criterion for auto insurance rates. Virtually all major auto insurers engage in this practice. Generally speaking, the better your credit rating the lower your car insurance cost.

In the rest of the country, however, the practice remains legal and all that is required of the insurance companies is that they notify customers whose credit rating has impacted their insurance rate. The stringency of this requirement has been in question – and in court. Recently, a federal appeals court ordered Geico and Safeco – among the largest of the nation’s auto insurers – to notify virtually all of their customers about the impact of their credit rating on their car insurance premiums.

The lawsuit was filed by consumers who felt that the companies had been lax in observing the requirement and had notified far fewer customers than other insurance carriers. The case is currently before the Supreme Court and while the debate is over the legal intent of the notification law, one court observer reported that “During an hour of argument, several justices seemed taken aback at the magnitude of the federal appeals court ruling. Under that ruling, Geico Corp. and Safeco Insurance Co. would have to notify nearly all their customers that they aren’t getting the best rates because their credit scores aren’t the highest.”

The facts that emerged are that 80 percent of Safeco’s customers would have to be notified of “adverse action” as a result of their credit ratings. At Geico, ten percent of their customer base qualifies for best credit rating rates. In other words, the huge majority of insurance customers at these companies are paying higher rates because of their credit scores. Eighty to ninety percent of applicants at these companies are considered, to some degree, high risk. That’s a preposterous benchmark.