Ninth Circuit Holds That “Willful Noncompliance” Under Fair Credit Act Does Not Require Malice Or Evil Motives But Only Conscious Or Reckless Disregard
December, 2005
The United States Court of Appeals for the Ninth Circuit recently held that the Fair Credit Reporting Act requires insurers to send adverse action notices to consumers whenever insurance rates are increased on the basis of information contained in a credit report and that punitive damages will be awarded for violation of this requirement when an insurer exhibits willful noncompliance. “Willful noncompliance” requires that the act was performed knowingly and intentionally but not necessarily due to malice or evil motives. Reynolds v. Hartford Fin. Serv. Group, Inc., 426 F.3d 1020 (9th Cir. 2005).
Facts
This case involves two consolidated class action appeals. Plaintiff Jason Reynolds was the only remaining named plaintiff in a class action against Hartford Fire Insurance Company (“Hartford”). Reynolds’ claims related to two insurance policies for homeowners and automobile insurance, respectively. Hartford had an agreement with the American Association of Retired Persons (“AARP”) under which Hartford would issue automobile and homeowners insurance to AARP members at a lower rate if the members had favorable credit ratings. Hartford would obtain the credit information from Trans Union through a data supply firm in the form of an insurance score. If a consumer had a high enough insurance score based on a good credit report, he/she would qualify for discounted insurance rates. If Hartford sent a request for an insurance score and insufficient credit information was available, the consumer would be designated as a “no hit” or “no score” and would not be assigned an insurance score. As a result, without an insurance score, the consumer would not qualify for the discounted insurance rates.
The second case involved an automobile insurance policy obtained by Ajene Edo who was also the only remaining named plaintiff in a class action against GEICO Casualty Company. In order to assess a consumer’s insurance rate, a sales representative obtained basic information from the consumer and requested permission to use the customer’s credit information. Like Hartford, the GEICO representative obtained the credit information in the form of an insurance score calculated by a data analysis firm that relied on information supplied by Trans Union. The representative converted the insurance score to a credit weight and combined it with several other factors. After arriving at a final weight, the GEICO representative assigned the consumer to one of its several insurance companies which are organized by tiers. A customer’s rate is dependent on what tier he/she falls into.
The Fair Credit Reporting Act (“FCRA”) was implemented to ensure the accuracy and fairness of credit reporting. The FCRA limits the persons or entities which may obtain a consumer’s credit report and requires anyone who obtains such reports to notify the consumers when “adverse action” has been taken in reliance on a consumer credit report. This alerts consumers of an adverse action so that they can obtain a copy of their credit report and correct any errors to improve their credit score. In Reynolds, the main issue was whether the FCRA notice requirement applied when the rate charged in an initial policy of insurance was affected by a consumer’s credit report (i.e. insurance company issues a policy at a higher rate than it would have issued to another consumer who may have a better credit score). In Edo, the central issue was whether an adverse action occurs when a consumer would have obtained a lower rate if his credit information had been more favorable or whether notice must be provided if the consumer’s credit information is below average resulting in a higher rate. The insurers in both Reynolds and Edo sought summary judgment on the grounds that their actions were not willful in order to avoid actual, statutory and punitive damages under FCRA.
Analysis
The Ninth Circuit held that whenever a company charges a consumer a higher initial rate than it otherwise would have charged due to a consumer’s credit information, that is considered an adverse action under FCRA, requiring notice to the consumer. Such adverse action notice is required regardless of whether the rate is contained in an initial policy or is a renewal or change from a previously charged lower rate.
With respect to the definition of “willfully” as it pertains to the FCRA, the Ninth Circuit adopted the position of the Third, Fourth, Fifth, Sixth, and Eighth Circuits and held that although the act must be intentional, it does not necessarily need to be the product of malice or evil motive. A willful act under FCRA is a “‘conscious disregard’ of the law which means ‘either knowing that policy [or action] to be in contravention of the rights possessed by consumers pursuant to the FCRA or in reckless disregard of whether the policy [or action] contravened those rights.” Reynolds, 426 F.3d 1020, 1037 (9th Cir. 2005), citing Cushman v. Trans Union Corp., 115 F.3d 220, 227 (3d Cir. 1988).
Unlike a criminal proceeding where actual knowledge of illegality is required for a willful violation of a statute, willfulness for civil liability requires knowledge or reckless disregard. Therefore, if a company knowingly and intentionally violates FCRA, the company will be liable for willfully violating consumers’ rights and will be subject to punitive damages. A company will not be considered to have acted in reckless disregard of a consumers’ credit rights if it has diligently attempted to comply with the requirements of FCRA. This rationale is designed to encourage companies to use consumers’ credit reports for their own benefit while at the same time ensuring that consumers are adequately notified when their credit information has been used against them.
Learning Point:
Judge Bybee dissented, opining that the facts of the case did not demonstrate that the insurance companies' actions constituted reckless disregard of the law and that the companies' willfully failed to comply with FCRA as a matter of law. This case, and its dissent, make clear that because a reckless failure to comply with FCRA can result in punitive damages, companies should make every effort to determine the correct legal meaning of a statute in order to fulfill its statutory obligations diligently and in good faith. If a company deliberately fails to determine the true extent of its obligations or relies on “creative lawyering” to avoid true compliance with a statute’s requirements, courts will likely find that such actions constitute reckless disregard for the law, and therefore amount to a willful violation of the civil statute. •
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