Is Credit-Based Insurance Legal in California?

Credit-Based Insurance

Credit-based insurance helps consumers with the best credit receive the best possible rates for insurance. Consumers with better credit receive lower insurance rates because insurance companies believe those who make smart financial decisions also make more rational decisions when it comes to other areas of life, including highway safety, driving at reasonable speeds and avoiding situations where an auto accident is likely.

Credit Use Requirements

An insurance company intending to use consumer credit as a determining factor in extending coverage must register with the California Department of Insurance. The company must submit the credit rating of the business, location of the business and the company's insurance rates model. It is illegal for an insurer to consider credit score and credit history as the sole criteria for determining monthly premium and coverage eligibility. The insurer must consider other tangible factors when determining coverage, including driving record and medical history. Additionally, the insurer must recalculate policyholder rates every three years to reflect changes in credit history and score.

Discriminatory Actions

It is illegal in California and other states around the country for an insurer to discriminate against a consumer by using race, gender, ethnicity, age, religion, income and residence as criteria for making a determination of coverage. California also disqualifies marital status as useful criteria for an insurance company. It is illegal for an insurance company to use a policyholder's credit history or score as a means of extrapolating any of the above protected information. An insurance company that discriminates in this manner may be liable for compensatory and punitive damages in civil court.

Fraud/Inability to Find Coverage

A consumer who believes she is the victim of insurance fraud should report the incident to a regional office of the California Department of Insurance's Fraud Division. A consumer also may file a claim anonymously online by using the Department's FD-1 Referral Form. If a consumer's inability to find proper insurance coverage is not due to fraud, he may apply for a state-run insurance program. For example, the California Low Cost Insurance Program is in place to help pay for auto insurance as long as the consumer has a good driving record, a serviceable vehicle and low income.