The Michigan Supreme Court addressed the legality of rules established by the Commissioner of Financial Insurance Services (OFIS rules) that prohibited the practice of "insurance scoring" as defined under the Insurance Code. The trial court found these rules to be "illegal, invalid, and unenforceable," issuing a permanent injunction against their enforcement. The Court of Appeals later vacated this decision but did not reach a consensus on the reasoning behind their ruling. The Supreme Court determined that the Commissioner overstepped her authority in creating the OFIS rules, as they contradict the provisions of the Insurance Code. Consequently, the Supreme Court vacated the Court of Appeals' judgment and reinstated the trial court’s order.
Insurance scoring involves using credit information to help insurance companies set premiums for automobile and homeowners insurance. The practice began in Michigan after the enactment of MCL 500.2110a in 1997, which allows insurers to implement discount plans without prior legislative approval. A 2002 report by then-Commissioner Frank Fitzgerald acknowledged that while insurance scoring is permitted under Michigan law, it raised significant concerns regarding consumer rights that required legislative action rather than administrative remedies. The report did not advocate for a complete ban on insurance scoring but suggested various recommendations for legislative consideration.
On February 14, 2003, Commissioner Fitzgerald released OFIS Bulletin 2003-01-INS, which outlined directives from a December 2002 report regarding the regulation of insurance credit scoring practices. The bulletin mandated that insurance companies report detailed information about their credit scoring methods, including formulas, factors used, and annual actuarial certifications justifying discount levels. It also required insurers to recalculate credit scores at least annually and to inform policyholders of the scores used.
On the same day, Fitzgerald instructed OFIS staff to monitor compliance with these directives and initiate compliance actions as necessary. In May 2003, then-Commissioner Linda A. Watters issued an update stating that insurance scoring posed significant technical and social issues, prompting Governor Granholm to call for a complete ban on such practices. In February, two bills were introduced to prohibit insurance credit scoring for automobile and home insurance, advocating for either a ban or substantial reform to protect consumers.
Subsequently, OFIS proposed rules to ban insurance scoring altogether, holding public hearings for feedback. These rules were adopted following approval from the Office of Regulatory Reform. However, on February 17, 2005, the Joint Committee on Administrative Rules (JCAR) objected, claiming the agency exceeded its authority and the rules conflicted with existing law. Following this, bills to rescind the rules were introduced in the legislature but did not advance after the Governor indicated a veto. The rules were filed with the Secretary of State on March 25, 2005, and on March 29, 2005, lawsuits for declaratory and injunctive relief were initiated by plaintiffs, including the Michigan Insurance Coalition and Citizens Insurance Company of America.
Plaintiffs and proposed intervening plaintiffs sought a preliminary injunction, and the proposed interveners were subsequently allowed to join the case. The defendant requested a change of venue and asserted that the plaintiffs should file for judicial review rather than an original action in circuit court, citing MCL 500.244(1). On April 15, 2005, the trial court denied the motion for a change of venue. After the plaintiffs presented their arguments, the defense declined to provide additional evidence, maintaining that the review should rely solely on the administrative record. The court decided to consolidate the hearing with the final trial.
In its April 25, 2005 opinion and order, the trial court found the OFIS rules to be illegal, invalid, and unenforceable, issuing a permanent injunction against the Commissioner from enforcing them. The court refrained from reviewing the public hearings' record, deeming it largely comprised of inadmissible opinions and finding it unnecessary to consider the rules' potential arbitrariness. The key issue was the legality of the rules in light of the Commissioner's authority, with the court concluding that the Commissioner exceeded her authority by implementing a blanket industry-wide rate reduction instead of challenging rates individually through the proper contested case hearing process. Additionally, the court found the prohibition on insurance scoring in rating plans violated the Insurance Code due to established correlations between insurance scores and risk of loss.
The defendant appealed, and on August 21, 2008, the Court of Appeals issued three opinions. Judge WHITE voted to vacate the trial court's judgment due to errors in its review process and acceptance of additional evidence. Judge K. F. KELLY also supported vacating the order but based his reasoning on the plaintiffs' maintenance of an original action. Judge ZAHRA dissented, agreeing that while the trial court's reliance on the administrative record was erroneous, it was a harmless error since the legal question was clear. He concurred with the trial court's assessment that the rules were illegal due to the Commissioner's overreach.
In February 2009, despite pending appeals, the defendant began issuing notices disapproving new rate filings, acknowledging the trial court's injunction but claiming the disapprovals were based on the Insurance Code's prohibition of rates utilizing insurance scores, not on the enjoined rules. Consequently, plaintiffs sought to enforce the trial court's April 25, 2005 order.
On April 10, 2009, the court granted plaintiffs' motion, preventing the defendant from challenging rate filings based on the use of insurance scores as a rating factor. The court's order deemed the defendant's notices invalid, citing a prior injunction, and instructed the Commissioner to refrain from further actions that prohibited the use of insurance scores. Both parties sought leave to appeal, which was granted on May 7, 2009, to address procedural and substantive issues.
The defendant contended that the trial court erred by allowing plaintiffs to pursue an original declaratory judgment without first seeking a ruling from the Office of Financial and Insurance Services (OFIS) as required by the Administrative Procedures Act (APA). The defendant also claimed that judicial review of OFIS rules should be limited to the administrative record under MCL 500.244(1). However, these claims were deemed unnecessary to address, as the defendant waived any procedural errors by requesting the court to consider substantive issues. Furthermore, even if there was an error in reviewing beyond the administrative record, it was considered harmless since sufficient evidence existed to support the trial court's conclusion that insurance scoring is permissible under the Insurance Code.
The validity of the OFIS rules under the Insurance Code was examined, following a three-fold test for judicial review of agency rules: 1) whether the rule falls within the enabling statute, 2) whether it aligns with legislative intent, and 3) whether it is arbitrary or capricious. While an agency's interpretation of a statute is given deference, it cannot contradict the statute's plain meaning. The court concluded that the Commissioner overstepped her authority in creating the OFIS rules, which wrongly prohibited the use of insurance scoring, a practice allowed under the Insurance Code. Thus, the OFIS rules were found not to fall within the enabling statute's scope.
The OFIS rules govern 'personal insurance,' defined to include various types of policies such as automobile, homeowners, and recreational vehicle insurance, intended for personal, family, or household use. Three chapters of the Insurance Code are pertinent: Chapter 21 (individual automobile and home insurance), Chapter 24 (group insurance for similar policies), and Chapter 26 (group home insurance and related personal property lines). Insurers are responsible for developing their rate-setting plans under these chapters, which must consider past and prospective loss experiences as well as other relevant factors. Rates established must not be excessive, inadequate, or unfairly discriminatory, and classifications for automobile and home insurance must be based on specific factors outlined in MCL 500.2111, such as driver age and mileage.
Additionally, insurers can implement premium discount plans under MCL 500.2110a, provided these plans align with the act's goals and uniformly apply to all insureds. The Commissioner has rulemaking authority to enforce insurance laws as per MCL 500.210, with further provisions in MCL 500.2484 and MCL 500.2674 allowing for reasonable rules to effectuate the chapters' purposes.
The OFIS rules stipulate that 'insurance score'—a rating based on credit information predicting future loss exposure—cannot be employed by insurers as a rating factor or basis for coverage decisions for policies effective on or after July 1, 2005.
Insurers are required to adjust base rates for new and renewal policies effective July 1, 2005, by calculating earned premiums for 2004 both with and without insurance score discounts, then reducing base rates based on the calculated difference. Insurers must file a certification and supporting documentation with the commissioner by May 1, 2005. If an insurer fails to file as required, it will be presumed that the rate filing does not meet standards.
The trial court found the Office of Financial and Insurance Services (OFIS) rules banning insurance scoring invalid, as insurance scoring is permissible under the Insurance Code. Plaintiffs established that insurance scoring can support premium discount plans under Chapter 21, which allows insurers to use additional factors if consistent with the act's purposes. Evidence, including a 2002 report from Commissioner Fitzgerald, indicates a correlation between insurance credit scores and claim likelihood, suggesting that better scores align with fewer claims and lower expenses. Affidavits from plaintiffs affirmed this correlation, with significant percentages of insureds benefiting from insurance score discounts. The ban on insurance scoring would result in premium increases for a substantial portion of policyholders.
Claramunt asserts that insurance premiums are influenced by the risk profiles of insureds, with low-risk insureds effectively subsidizing the rates of high-risk insureds. Affidavits from representatives of several insurance companies indicate a consistent correlation between insurance scores and risk, suggesting that rules from the Office of Financial and Insurance Services (OFIS) would exacerbate this issue. Allstate Insurance Company provided evidence indicating that credit information is a strong predictor of losses, supported by a chart showing that insureds with better credit scores have significantly lower claims. Farm Bureau Insurance of Michigan's data also reflects that insureds with higher scores experience better loss outcomes. Progressive Michigan Insurance Company's personal auto product manager confirmed that credit information effectively predicts loss. A comprehensive study by EPIC Actuaries, LLC, and findings from the Virginia Bureau of Insurance both support the conclusion of a statistical link between insurance scores and claim likelihood. The defendant acknowledges that while MCL 500.2110a permits premium discount plans based on factors reducing losses, it contends that insurance scoring does not correlate with overall loss reductions. The defendant cites public hearing admissions indicating that eliminating insurance scoring would not affect overall premiums. Exhibits from a June 2003 study present data from Michigan, reinforcing the national findings that credit-based scores correlate with the likelihood of insurance claims, underscoring the unreasonable assumption that no relationship exists between these scores and auto insurance claims.
Credit-based insurance scores are predictive of insurance losses, indicating that insurance rates set without considering these scores may be inadequate for some insureds, excessive for others, and inherently discriminatory. A ban on the use of credit scores will not affect the total premiums collected by insurance companies. Testimonies from insurers suggest that prohibiting insurance scoring would not lead to lower overall premiums for consumers. The defendant misinterprets MCL 500.2110a, which allows insurers to create plans reflecting anticipated reductions in their losses or expenses, not industry-wide impacts.
Individual insurers can reasonably expect that utilizing premium discount plans based on credit scores will help them attract low-risk customers by offering lower rates. Evidence shows a clear correlation between insurance scores and loss risk, validating that such discount plans reflect anticipated reductions in losses for individual insurers. The argument that the use of insurance scores is distinct from safety devices, which are already permitted under MCL 500.2111 for establishing premium discounts, fails to acknowledge the existing legal framework that allows for the consideration of various risk factors in insurance pricing.
The Legislature's addition of references to "overall" premiums and losses pertains to industry-wide figures. The defendant's argument distinguishing discounts for safety devices from those for good insurance scores is based on the assumption that safety discounts reduce overall losses more effectively than discounts for insurance scores. However, the defendant's illustration fails to demonstrate that insurance scores do not correlate with anticipated losses; it merely assumes expected losses remain constant regardless of discount plans. An insurer needing to collect $900 in premiums would still require that amount even after implementing insurance scoring, as there is no evidence indicating that it affects overall expected losses.
MCL 500.2110a, enacted in 1997, allows insurers to offer discounts based on additional factors beyond those in MCL 500.2111. The defendant's distinction overlooks that discounts for high insurance scores, like those for safety devices, attract lower-risk insureds and encourage them to improve their risk profiles, potentially reducing future premiums. The 2002 conclusion by the Insurance Commissioner noted that responsible behavior linked to credit histories might lead to fewer losses as insureds adjust their behavior to achieve better insurance scores.
The dissent argues that using insurance scoring reallocates premium costs among insureds, but fails to acknowledge that not considering insurance scores also reallocates costs by requiring responsible insureds to subsidize those who are less reliable. The analysis confirms a correlation between insurance scores and loss risk, clarifying that MCL 500.2110a does not mandate a specific risk assessment method, while emphasizing that discounts for high insurance scores effectively reduce loss risk.
The presence of insured individuals with high insurance scores correlates with a reduced risk of overall loss. The defendant asserts that a premium discount plan based on insurance scoring violates MCL 500.2110a, as it undermines the Insurance Code’s goal of ensuring insurance remains available and affordable for all. Specifically, the defendant argues that such plans must lower overall losses and prevent premium increases for some policyholders at the expense of others to be consistent with legislative intent. However, MCL 500.2110a allows insurers to implement plans that reflect anticipated reductions in losses or expenses. Commissioner Fitzgerald's 2002 report indicated that insurance credit scoring aids in maintaining the affordability and availability of automobile insurance by potentially lowering overall premiums. Evidence presented suggests that the majority of Michigan residents could face higher premiums if insurance scoring is banned, thus making insurance less affordable and available. Insurers warned that prohibiting insurance scoring would reduce competition in Michigan, leading to fewer options and higher rates for consumers. The Federal Trade Commission highlighted that accurate risk prediction through insurance scoring incentivizes competitive pricing, allowing insurers to offer lower rates to consumers who are overpaying based on their risk profiles.
Decreased competition among insurers is unlikely to lead to more affordable or available insurance. Instead, prohibiting insurance scoring will likely decrease both availability and affordability for Michigan residents. Evidence from Maryland's ban on insurance scoring for homeowners insurance showed that rates increased by as much as 20%, impacting many policyholders. Although banning insurance scoring may lower premiums for those with lower credit scores, it would raise premiums for those with higher scores who currently benefit from discounts. The use of insurance scoring aligns with the Insurance Code's goals of availability and affordability. Furthermore, insurance scoring is permissible for establishing premium discount plans under Chapter 21 and is consistent with Chapters 24 and 26, which allow insurers to consider various risk factors when determining rates. The law requires that rates must not be excessive, inadequate, or unfairly discriminatory. The defendant’s claim that insurance scoring leads to unfair discrimination is countered by evidence showing a correlation between insurance scores and risk of loss, supporting its use in rating plans under the relevant chapters of the Insurance Code.
Chapters 21, 24, and 26 define "unfairly discriminatory" rates for insurance coverage as those where the rate differentials lack reasonable justification based on losses, expenses, or uncertainty of loss for similar risks. Justifications must be supported by a reasonable classification system, sound actuarial principles, and credible loss and expense data, or anticipated experiences for new coverages. Rates are not considered unfairly discriminatory if they reflect expense differences among individuals with similar anticipated losses or loss differences among those with similar expenses. An existing regulation outlines a "reasonable classification system" as one grouping individuals or risks with similar characteristics to identify significant differences in anticipated losses or expenses. Rates averaged broadly among insured groups are also exempt from being deemed unfairly discriminatory.
The defendant argues against the use of insurance scoring based on credit reports, claiming they lead to misclassification due to their unreliability. However, the Commissioner of Insurance, who also oversees banking and finance, has not restricted the use of credit reports, which are utilized extensively by state agencies. In 2009, the state spent over $250,000 on credit reports, indicating legislative endorsement of their reliability. The defendant's reliance on a 2003 GAO report, which stated insufficient information exists on credit report errors, does not convincingly support claims of inaccuracy.
The GAO Report highlights the limited availability of information on credit report errors, making it impossible to conduct a comprehensive assessment of their accuracy. It indicates that the impact of credit report errors on consumers can vary based on individual circumstances. The report references three studies that express concerns about credit report accuracy, but concludes that these studies lack statistically representative methodologies and did not consult the credit reporting industry, which could have clarified the findings. The studies counted any inaccuracy as an error, including missing information, which may not significantly impact lending decisions. Additionally, most reported errors are minor, with evidence suggesting they have little effect on insurance scoring. The Fair Credit Reporting Act mandates that furnishers ensure the accuracy of information provided to consumer reporting agencies, and the FTC notes that credit reports can influence insurance premiums.
Consumers in Michigan have the right to obtain their credit report information without charge from credit reporting agencies (CRAs) to check for inaccuracies, as stipulated under 15 USC 1681j(a)(1)(A). When a consumer is denied credit, insurance, or other benefits based on their credit report, they receive an adverse action notice that includes the right to request a free copy of their credit report (15 USC 1681m(a)(3)). Even if they secure insurance at a higher premium due to considerations of their insurance score, they are still entitled to this notice.
The legal framework aims to ensure that consumers are notified and encouraged to challenge inaccuracies that could potentially benefit them if corrected. Minor errors that do not significantly impact insurance scoring are deemed irrelevant under the Insurance Code. For discrepancies in rates to be considered unfairly discriminatory, they must not be justifiable by differences in losses or expenses (MCL 500.2109(1)(c)), and a reasonable classification system must support any rate differentials.
Plaintiffs in this case have shown that insurance scoring can form a reasonable classification system, supported by credible loss statistics indicating significant differences in anticipated losses among different groups. For instance, data from Farm Bureau illustrates that from 2000 to 2004, policyholders with higher insurance scores filed fewer claims compared to those with lower scores. If a consumer disputes information with a CRA, the CRA is obligated to conduct a reasonable reinvestigation and must delete unverifiable or inaccurate information within 30 days (15 USC 1681i(a)(1)(A) and (a)(5)(A)).
Analyses indicate a direct linear correlation between insurance scores and risk for both automobile and homeowners insurance policies. Affidavits from Keith E. Jandahl, Vice President of Underwriting for Hastings, were submitted to the Office of Financial and Insurance Services (OFIS) and were not contested. Consequently, the argument that insurance scoring violates the Insurance Code's prohibition on unfairly discriminatory rates is rejected. The Commissioner lacks authority to ban practices permitted by the Insurance Code, rendering the OFIS rules invalid under the precedent set in Luttrell. The Commissioner can ensure compliance with the Insurance Code, but insurance scoring does not inherently violate it. The court vacated the Court of Appeals' judgment and reinstated the trial court's order declaring the OFIS rules invalid and enjoining their enforcement. The Court did not address potential due process violations or the arbitrary and capricious nature of the rules, as the resolution was based on statutory grounds. Justice Corrigan separately expressed a desire to overrule a previous decision that she believes was incorrectly decided.
Judicial review of administrative rules is restricted to the administrative record, as established in Home Builders, which categorized such rules as non-contested cases under MCL 24.203(3). The court clarified that, unlike contested cases, non-contested cases do not allow for record expansion upon remand. This limitation is supported by the legal principle expressio unius est exclusio alterius. Despite this, Professor Don LeDuc critiqued the decision for overlooking the nuances of administrative actions not categorized as contested cases and argued that the analysis should focus on the rulemaking process and its record. The court acknowledged that the prior decision was flawed, particularly regarding the definition of non-contested cases and their treatment under the Administrative Procedures Act (APA). While the court generally respects stare decisis, it recognized the need to reassess the precedent due to legitimate concerns about its correctness and the potential impact on reliance interests. The court concluded that the analysis in Home Builders was based on an incorrect assumption regarding the evidentiary nature of non-contested cases and indicated a willingness to amend the error.
The decision in Home Builders is not deeply entrenched or widely accepted, as only one Court of Appeals case has cited it. The author proposes overruling Home Builders, asserting that the trial court's review of the OFIS rules should not be restricted to the administrative record. The dissenting opinion, authored by KELLY, C.J., agrees with addressing substantive issues but disagrees with the majority's conclusions regarding the validity of rules that prevent insurers from using credit records for classification. KELLY expresses concern about the majority's harmless-error analysis, labeling it flawed and potentially dangerous.
The standard of review, established in Luttrell v Dep’t of Corrections, includes a three-pronged test for assessing the validity of administrative agency rules: 1) whether the rule falls within the enabling statute, 2) whether it aligns with legislative intent, and 3) whether it is arbitrary or capricious. KELLY criticizes the majority for incorrectly applying these standards, specifically arguing that the inquiry should focus on whether the rules prohibiting insurance scoring relate to MCL 500.210, rather than whether insurance scoring is permissible under the Insurance Code.
The Commissioner has the authority under MCL 500.210 to create rules that further the Insurance Code's objectives, which is a broader authority than merely verifying if a practice is permitted by the Code. The majority's reliance on this aspect of the Luttrell test is critical. Additionally, the majority unfairly transfers the burden of proof onto the defendant by dismissing arguments supporting the OFIS rules. It also fails to adequately consider the defendant's statutory interpretation as required by In re Rovas Complaint. The majority's harmless error analysis is flawed; it incorrectly states that any trial court error is harmless due to sufficient evidence in the administrative record, while simultaneously referencing evidence outside that record. For an error to be deemed harmless, it must not affect substantive rights or the outcome of the case. The majority’s conclusion lacks support from the administrative record alone, as it improperly includes external sources, which undermines its analysis. In contrast, upon conducting a proper harmless error analysis, it is concluded that any procedural error was indeed harmless, as the evidence in both the administrative and circuit court records does not invalidate the OFIS rules. The majority’s expansive review fails to treat the defendant equitably and introduces significant errors that impact the case's outcome.
The majority's refusal to rely solely on evidence X raises questions about the logical basis for asserting that X provides sufficient evidence for its conclusion. A review of the majority opinion indicates that only a minor portion of the evidence cited is part of the administrative record, with significant conflicting evidence regarding the predictive nature of insurance scoring. The majority seems inclined to overrule the defendant's decision based on disagreement rather than appropriate deference to administrative findings. Under the correct level of deference, the conclusion is that the defendant did not exceed her authority in establishing rules against the use of insurance scoring.
The circuit court erred by creating and considering an evidentiary record beyond the rulemaking process, contrary to the precedent set in Home Builders. Despite this error, it is not outcome determinative, as neither the circuit court's nor the administrative record supports the invalidation of the OFIS rules. The circuit court's independent factual conclusions, made without reviewing the administrative record, led to an erroneous ruling. Courts must afford due deference to administrative expertise and avoid substituting their judgment for that of agencies, as established in prior rulings. Judicial review should focus on the existing administrative record rather than a new record created in court, ensuring that the agency considered relevant factors and provided a rationale grounded in the record.
In Norwich Eaton Pharmaceuticals, Inc v Bowen, the court emphasized that if an agency's action lacks support from the record, fails to consider relevant factors, or the court cannot adequately evaluate the action based on the existing record, the appropriate action is typically to remand to the agency for further investigation or clarification, except in rare cases. It noted that reviewing courts do not have the authority to conduct a de novo inquiry into agency actions. Furthermore, agency actions in a judicial or quasi-judicial capacity are held to a stricter review standard compared to those in a quasi-legislative capacity, which enjoy more deference. The Luttrell standard delineates these differing levels of review and mandates that judicial and quasi-judicial actions must be legally authorized and based on substantial evidence. The Michigan Compiled Laws (MCL) 24.306 outlines specific grounds for reversing an agency's decision, including constitutional violations, exceeding statutory authority, procedural unlawfulness, lack of substantial evidence, and arbitrary or capricious actions. The validity of the Office of Financial and Insurance Services (OFIS) rules banning insurance scoring was analyzed, concluding that the plaintiffs failed to demonstrate that these rules were inconsistent with the Insurance Code. It was determined that the OFIS rules are within the scope of the regulatory authority granted by the Insurance Code, and the plaintiffs could not prove that the rules were arbitrary or capricious.
The excerpt outlines the authority and intentions behind the Michigan insurance laws, specifically highlighting the role of the Commissioner in enforcing these laws under the provisions of Act No. 88 of 1943 and Act No. 197 of 1952. MCL 500.210 grants the Commissioner broad discretion to create rules necessary for the enforcement of the Insurance Code. Although Judge Zahra's opinion suggested that certain rules might be invalid, it acknowledged that they generally do not violate the initial prong of the Luttrell standard. Furthermore, Judge White confirmed that the OFIS rules complied with the Administrative Procedures Act.
The title of the Insurance Code emphasizes the need for accessible and affordable automobile and homeowners insurance, indicating that any rules contrary to this intent would not satisfy the Luttrell standard. Specifically, the examination of Chapters 21, 24, and 26 reveals that insurance scoring is not listed as a permissible rating factor under MCL 500.2111, and thus can only be used for setting rates if it qualifies as a “premium discount plan” under MCL 500.2110a. The analysis shows that insurance scoring does not meet this criterion, as insurers indicated that removing it would not alter the total premiums collected. This suggests that the proposed discount plan based on insurance scoring does not reflect an expectation of reduced losses, implying that its implementation would not be justified under the legislative framework.
Setting premium rates based on insurance scoring redistributes the costs among policyholders rather than reducing the total premiums collected by insurers. For instance, if an insurer needs to collect $900 for expected losses and expenses, evenly distributing this would charge each class of insureds $300. However, with insurance scoring, the highest scoring insureds (Class A) are charged $200, while lower-scoring classes are charged $300 and $400, respectively, still totaling $900. This classification is deemed an unapproved rating factor, as it does not genuinely reflect anticipated reductions in losses or expenses.
The majority's assertion that insurers expect to lower losses from premium discount plans relying on insurance scoring is criticized as misleading. The argument does not necessitate that a discount plan must demonstrate anticipated reductions across the entire industry, but instead requires that it reflects reasonable expectations of reductions for individual insurers. Furthermore, if credit reports, which inform insurance scores, are unreliable, then insurers cannot reasonably anticipate reductions in losses based on such plans.
The document references Chapters 24 and 26 of the Insurance Code, which provide insurers with broader authority in premium setting compared to Chapter 21. It highlights that while insurers may group risks and adjust classification rates, they cannot impose excessive, inadequate, or unfairly discriminatory rates. Plaintiffs contend that MCL 500.2426 and MCL 500.2626 should not disapprove rates based on insurance scores, asserting that such scoring is actuarially sound.
Defendant argues that using insurance scores does not constitute a "reasonable classification system" as defined by MCL 500.2403(1)(d) and MCL 500.2603(1)(d). A reasonable classification system is intended to categorize individuals or risks with similar traits into rating classifications that can effectively identify significant differences in anticipated losses or expenses, based on sound actuarial principles and credible statistics. Rates become unfairly discriminatory if differences between them are not justified by variations in losses or expenses, or by the uncertainty of loss, and must be supported by a reasonable classification system.
Defendant asserts that rates based on insurance scores are unfairly discriminatory because they fail to accurately reflect significant differences in anticipated losses or expenses. The examination of court and administrative records supports this view, particularly regarding the questionable accuracy of credit reports that inform insurance scores. A cited GAO report indicates that a thorough assessment of credit report accuracy is unattainable, and evidence on this matter remains inconclusive. The majority opinion appears to shift the burden of proof onto the defendant, requiring them to demonstrate that inaccuracies in credit scores lead to unjustified rate differentials. In contrast, the conclusion drawn is that the uncertainty surrounding credit report accuracy inherently indicates that a classification system based on such reports is unreasonable.
Plaintiffs bear the responsibility to provide evidence demonstrating that classifying individuals based on insurance scores is a reasonable method, specifically that it can identify significant differences in anticipated losses or expenses. The existing record fails to establish a correlation between credit scores and loss risk, rendering insurance scoring an unreasonable classification system as per MCL 500.2403(1)(d) and MCL 500.2603(1)(d). The defendant justifiably dismissed several studies presented against the OFIS rules due to their reliance on "univariate analysis" and data from states outside Michigan. Among the studies cited by plaintiffs, only one included Michigan data but showed no correlation between credit scores and claim frequency. The actual data indicated that while claimants with the highest insurance scores had the lowest claim rates (0.5%), those with the third-highest scores exhibited a higher claim rate (0.8%), contradicting the conclusions drawn by the study's authors. The majority's reliance on an affidavit to reconcile this discrepancy is questioned, as it lacks support from the underlying data.
The affidavit indicates that the limited number of claims caused significant random variations in the data, obscuring the relationship between credit-based insurance scores and losses in Michigan. It critiques the majority's reliance on Michigan data, arguing that it does not adequately support the connection between credit scores and loss propensity. Although five graphs were attached to the affidavit to reinforce the EPIC study’s conclusions, the data depicted often deviated from expected patterns, failing to show a strong correlation as claimed.
The majority is accused of selectively interpreting data while disregarding the factual findings established during public hearings, which do not undermine the defendant's conclusions. Plaintiffs relied heavily on studies rejected by the defendant, and new affidavits from insurance executives, while supportive of the plaintiffs' stance, do not counter the defendant's assertion that using insurance scoring for rate setting is not a reasonable classification system.
The majority's arguments presuppose its conclusion that insurance scoring predicts loss, which diminishes their effectiveness. Speculation about potential future premium reductions from insurance scoring discounts is criticized as an inadequate basis for administrative rule-making. Furthermore, the plaintiffs' assertion that insurance scoring qualifies as a "discount plan" under MCL 500.2110a is challenged, as it merely reallocates rates without resulting in overall premium reductions. No argument has been made that setting rates without considering insurance scoring constitutes a "discount plan" under the statute, as it simply redistributes costs based on legitimate rating factors.
The defendant's rejection of the analysis presented is deemed reasonable. The majority's reliance on external sources beyond the administrative and circuit court records is criticized, particularly when citing inapplicable statutes as evidence. The interpretation of statutory provisions from Chapters 24 and 26 by the defendant is acknowledged as deserving "respectful consideration." It is concluded that using insurance scoring for rate setting is not clearly permissible, and therefore, the OFIS rules do not contravene the legislative intent of the Insurance Code.
Regarding the argument that the OFIS rules are arbitrary and capricious, the majority's decision to avoid this issue is contested. A rule is not arbitrary if it has a rational relationship to the enabling act's purpose, which in this case aims to ensure the availability and affordability of insurance.
On the due process claim, it is asserted that the OFIS rules do not invalidate existing insurance rates and are only applicable to new or renewal policies post-effective date. The rules are not self-enforcing, and insurers will receive notice and a hearing before any rate filing can be disapproved. The plaintiffs’ assertion conflates their right to a contested hearing regarding rate filings with the right to challenge the promulgation of new rules, which would undermine agency authority and is redundant under the Administrative Procedure Act (APA).
The claim that rate hearings would be meaningless is dismissed; the plaintiffs opted for a declaratory judgment on the rules' validity rather than individual hearings. This argument is seen as disingenuous, particularly when similar concerns could be raised about rates based on impermissible factors like race or gender.
In conclusion, agreement is expressed with the majority on addressing substantive issues, but dissent is noted regarding the majority's stance on the Insurance Commissioner's rulemaking authority, asserting that the OFIS rules are valid and should be upheld, aligning with the Court of Appeals' judgment to vacate the circuit court’s injunction against the rules. CAVANAGH and HATHAWAY, JJ. concurred with the opinion.
