Reckless
behavior is ‘willful’
Reckless
disregard can lead to punitives
By
David Ziemer
david.ziemer@wislawjournal.com
June
11, 2007
The
U.S. Supreme Court held on June 4 that reckless disregard of the notice requirements
in the Fair Credit Reporting Act (FCRA) can entitle the consumer to actual, statutory,
and punitive damages, reversing the current law in the Seventh Circuit.
The
case Safeco Ins. Co of America v. Burr, is a consolidation of two cases involving
insurers who failed to inform consumers that their automobile insurance rates
were based on credit reports containing adverse information.
The
FCRA requires that notice be given to any consumer subjected to “adverse
action ... based in whole or in part on any information contained in a consumer
[credit] report.” 15 U.S.C. 1681m(a).
Negligent
failure to send notice results only in actual damages, but anyone who “willfully
fails” to file notice is liable for actual damages, statutory damages of
$100 to $1,000, and punitive damages.
When
an applicant applies for auto insurance from GEICO, the insurer compares the rate
it is offering the customer with the rate he would have been given had credit
history not been considered, and only sends a notice if using a neutral credit
score would have resulted in a lower rate.
| What
the court held Case:
Safeco Ins. Co. of America v. Burr, Nos. 06-84 & 06-100. Issue:
Is reckless conduct included in the FCRA's definition of “willful” action? Holding:
Yes. In civil
statutes, “willful” generally includes reckless behavior as well as knowing violations,
and nothing in the statute shows intent by Congress to depart from the general
rule. |
Safeco
Insurance also relies on credit reports to set initial insurance premiums, but
does not send adverse action notices when reports result in higher rates.
Both
insurers were sued for violating the FCRA. On appeal from district court dismissals
of the actions, the Ninth Circuit reversed both.
The
Supreme Court granted review and reversed in both cases, in a majority opinion
by Justice David H. Souter.
The
court held as follows:
1.
Willful failure includes violations committed in reckless disregard of the notice
obligation, not just knowing violations; and
2.
Initial rates charged for new insurance policies may be adverse actions, as well
as increases to existing policies.
Applying
the holdings to the insurers, the court held that GEICO did not violate the statute
at all, and that, while Safeco may have, it did not act recklessly.
Willful
Failure
The
court concluded that willful failure includes reckless conduct, because, in civil
statutes, as opposed to criminal ones, willfulness is generally construed to include
not only knowing violations of a standard, but reckless ones, as well.
In
addition, at common law, actions in reckless disregard of the law were treated
as willful violations.
The
insurers argued that Congress intended to change the standard in the FCRA, citing
legislative history, but the court found the history was ambiguous, and so gave
the language its common meaning for civil statutes.
Initial
Rates
The
court also held that setting an initial insurance rate can be an adverse action,
and the statute is not limited to increases to existing rates.
The
court reasoned, “The descriptions of systemic problem and systemic need as
Congress saw them do nothing to suggest that remedies for consumers placed at
a disadvantage by unsound credit ratings should be denied to first-time victims,
and the legislative histories of FCRA’s original enactment and of the 1996
amendment reveal no reason to confine attention to customers and businesses with
prior dealings.”
However,
the court concluded that basing insurance on an assumed neutral credit report,
as GEICO does, is not an adverse action, even though this may prevent some applicants
who actually deserve better-than-neutral credit scores from getting notice.
The
court acknowledged that the neutral-score baseline will leave some consumers without
a notice that might lead to discovering errors, most likely young people who have
not yet established a good credit history.
However,
the court concluded this problem was not as bad as the alternative problems attendant
with “hypernotification.”
If
notification was required because of an assumed neutral score, the court found,
insurers would have to send notice to every applicant who had not yet established
a credit history, stating that his rate was based on bad credit.
The
court concluded, “We think that the consequence of sending out notices on
this scale would undercut the obvious policy behind the notice requirement, for
notices as common as these would take on the character of formalities, and formalities
tend to be ignored.”
Application
Applying
the holdings to the cases, the court held that GEICO’s policy did not violate
the FCRA, because the initial rates it offers are the same as they would be if
credit was not taken into account.
The
court then held that Safeco was not liable, because even if it should have sent
notices, its failure to do so was not reckless.
Although
the court disagreed with Safeco’s interpretation of the statute — that
initial rates can never be an adverse action — it found that the interpretation
was reasonable and had foundation in the text of the statute; thus, its actions
could not be deemed reckless. The court also noted that none of the circuit courts
of appeals or the Federal Trade Commission had yet spoken on the issue.
Accordingly,
the court reversed both decisions.
Concurrences
Justice
John Paul Stevens penned a concurrence, joined by Justice Ruth Bader Ginsburg,
taking issue with the court’s analysis on whether using a neutral credit
score can require a notice.
Stevens wrote, “I find it difficult to believe
that Congress could have intended for a company’s unrestrained adoption of
a ‘neutral’ score to keep many (if not most) consumers from ever hearing
that their credit reports are costing them money.”
Justice
Clarence Thomas wrote a concurrence, joined by Justice Samuel A. Alito, asserting
that the court should have only held that Safeco did not act recklessly, without
deciding the merits of Safeco’s argument that the notice requirement does
not apply to the setting of initial rates.
Justice
Antonin Scalia joined all of the lead opinion, save for two footnotes citing legislative
history to support the decision.
Click
here for Case Analysis.
David
Ziemer can be reached by email.
