Hartford to Issue Refunds in Delaware Over Error in Credit Scoring

October 24, 2005

In July, James Fry of Dagsboro, e-mailed Delaware Insurance Commissioner Matt Denn about an increase in his homeowner insurance premium that he knew couldn’t be right.

Fry asked for an explanation of a proposed annual increase in his homeowner premium from $642 to $868. He was told $43 of the $226 was the result of greater coverage under his policy, but the rest was due to being placed in a higher-priced “rating tier” based on his credit score.

“I knew I could not afford a 35 percent increase in my insurance. I also knew that nothing had happened with my credit to result in such an increase because, in fact, I don’t have any credit card balances or loans at all,” Fry said.

He contacted Denn directly by e-mail, whose office was given the same reasoning. Eventually Denn issued a subpoena for the specific reason behind Fry being placed in a higher-priced tier. The company disclosed that it had not correctly used its own credit scoring model for Fry, according to Denn.

Today, Denn said that Fry’s alertness and an investigation have resulted in an admission by The Hartford insurance company that it owes about 1,400 Delawareans a total of $135,000.

Denn’s probe showed that while negative credit factors were used to place policyholders in higher-risk categories, the positive credit factor of not having any credit card or loan balance was not used to lower the rating level. The company determined it had made the same error with other policyholders as well.

Many policyholders with no balances on their credit cards or loans, like Fry, were put in a higher risk category than they should have been, Denn said. While the company said almost 3,400 Delaware policyholders with no credit card or loan balances had the potential to be affected by the error, refunds are only due to 1,400 because the correction of the error did not actually result in a different insurance rate for the other 2,000.

The refunds, which will come in the form of credits for affected current policy holders and checks mailed to any affected former policyholders, should average $96 for the 1,400 policyholders. The Hartford has 27,000 policies in Delaware.

Denn used the occasion as an opportunity to continue his call for
a ban on the use of credit scores in setting insurance rates.

“This incident makes clear one of the criticisms I have consistently made about credit scoring: that it is fraught with opportunities for error. Credit scoring in the insurance field is both unfair and unnecessary, and I once again ask the General Assembly to pass Senate Bill 2, which would prohibit its use in auto and homeowners insurance,” Denn said.

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