In Seminal FCRA (Fair Credit Reporting Act) Class Action Cases, Supreme Court Holds (1) “Willful” Failures Under FCRA § 1681n(a) Include Acts of “Reckless Disregard,” (2) “Adverse Action” in Determining Insurance Premiums Includes Setting First-Time Insurance Rates, (3) Review of Credit Report must have Impacted Rate Charged Consumer, and (4) Insurers did not Violate FCRA
Plaintiffs filed two separate putative class action lawsuits against GEICO and Safeco Insurance, respectively, alleging willful failure to give notice of adverse actions under the federal Fair Credit Reporting Act (FCRA) in violation of § 1681m(a). Safeco Ins. Co. of America v. Burr, __ U.S. __, 2007 WL 1582951 (June 4, 2007) [Slip Opn., at 4]. The questions before the United States Supreme Court in the consolidated cases were “whether willful failure covers a violation [of the FCRA] committed in reckless disregard of the notice obligation, and, if so, whether … Safeco and GEICO committed reckless violations.” Id., at 1. The Supreme Court held that a “willful” violation of the FCRA included “reckless disregard,” but that neither GEICO nor Safeco recklessly violated the FCRA, id., at 1-2.
The class action complaints were filed by individuals who purchased car insurance from GEICO and Safeco, each of which rely upon credit reports in setting insurance premiums. Safeco, at 4-5. In these consolidated class actions, defendants allegedly offered plaintiffs auto insurance at rates that were higher than the most favorable rates offered by the companies. Id., at 4. However, the insurers did not send plaintiffs notices of adverse action, id., at 4-5. The FCRA requires that “any person [who] takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report” must provide notice to the consumer. 15 U.S.C. § 1681m(a). For these purposes, an “adverse action” includes “a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for.” § 1681a(k)(1)(B)(i). The Supreme Court explained that these notices “must point out the adverse action, explain how to reach the agency that reported on the consumer’s credit, and tell the consumer that he can get a free copy of the report and dispute its accuracy with the agency.” Safeco, at did not allege actual damages; rather, it sought statutory and punitive damages under § 1681n(a). Id.
The district court granted GIECO’s motion summary judgment, concluding that there was no “adverse action” within the meaning of the FCRA. Safeco, at 4. With respect to Safeco’s motion for summary judgment the district court held that “offering a single, initial rate for insurance cannot be ‘adverse action’” and so granted judgment in favor of the defense. Id., at 5. The Ninth Circuit reversed both judgments, holding that a “reckless disregard” of a consumer’s right constitutes “willful” noncompliance under the FCRA. In the GEICO appeal, the Circuit Court held that because the customer “would have received a lower rate for his insurance had the information in his consumer report been more favorable, an adverse action has been taken against him.” Reynolds v. Hartford Fin. Servs. Group, Inc., 435 F.3d 1081, 1093 (9th Cir. 2006). As to the Safeco appeal, the Supreme Court explained at page 6 that the Circuit Court held “the notice requirement applies to a single statement of an initial charge for a new policy” and rejected defense arguments that Safeco’s violation was not willful. The Supreme Court consolidated the class action appeals and “granted certiorari to resolve a conflict in the Circuits as to whether § 1681n(a) reaches reckless disregard of FCRA’s obligations, and to clarify the notice requirement in § 1681m(a).” Id. (footnote omitted).
The Supreme Court first held that reckless disregard of one’s statutory obligations under the FCRA constitutes willful failure to comply within the meaning of § 1681n(a). Safeco, at 6. The High Court explained that the word “willfully” has “‘many meanings whose construction is often dependent on the context in which it appears.’” Id. (citation omitted). Based on its analysis of the statutory construction of the term “willfully” in § 1681n(a), id., at 6-10, the Court concluded that Congress intended the term to include “reckless disregard,” id., at 9.
The Supreme Court then turned to whether GEICO or Safeco had acted with reckless disregard. Preliminarily, the High Court addressed “whether either company violated the adverse action notice requirement at all” because both cases presented the question of whether an initial rate charged on an insurance policy is “an increase in any charge” or whether a “first-time premium” falls outside the scope of the FCRA. Safeco, at 10. The federal government filed an amicus brief in support of the Ninth Circuit’s conclusion that the term “increase” in § 1681a(k)(1)(B)(i) includes first-time premiums, id., at 11. The Supreme Court agreed, explaining that there was nothing to indicate that Congress intended to treat first-time insurance purchasers differently from purchasers of renewal policies, id., at 12, and holding that “the ‘increase’ required for ‘adverse action,’ … speaks to a disadvantageous rate even with no prior dealing; the term reaches initial rates for new applicants,” id., at 13.
Another preliminary question was whether a credit report need merely be consulted before the “adverse action” is taken, or whether consideration of the report was a necessary condition for the subsequent adverse action. Safeco, at 13. The Supreme Court held that the statutory construction “suggests that the duty to report arises from some practical consequences of reading the [credit] report, not merely some subsequent adverse occurrence that would have happened anyway.” Id., at 14. “If the credit report has no identifiable effect on the rate, the consumer has no immediately practical reason to worry about it,” id.
Turning to the merits of the class action claims, the High Court held that the rate GEICO charged the plaintiff in its case was the same rate that would have been charged even if the insured’s credit report had not been reviewed. Safeco, at 18. Accordingly, as a matter of law GEICO was not required to give notice of an adverse action because no adverse action occurred. Id. As to the merits of the class action claims against Safeco, the Supreme Court held that even if the company had violated the FCRA it did not do so “recklessly” because it believed in good faith that § 1681m(a) did not apply to first-time purchasers. Id. The Supreme Court explained the test for “recklessness” at page 19 as “action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should have been known,’” (citations omitted), and further explained that “[i]t is this risk of harm, objectively assessed, that is the essence of recklessness at common law,” id. (citation omitted). The Court summarized its holding as follows:
[A] company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute’s terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.
On the facts of this case, the Supreme Court held that Safeco did not act recklessly within the meaning of the FCRA, and accordingly Safeco was entitled to judgment. Id., at 19-20. The Ninth Circuit should not have remanded the class action complaints to the district court because both GEICO and Safeco were entitled to judgment as a matter of law. Id., at 21.
NOTE: The Supreme Court held that the FCRA does not require “hypernotification”: “Once a consumer learned that his credit report led the insurer to charge more, he has no need to be told over again with each renewal if his rate has not changed.” Safeco, at 17.