When Might the Use of AI, Machine Learning, or Robotic Process-Enabled Insurance Models Result In an Adverse Action under the FCRA?

As insurers consider augmenting the quoting process with algorithmic predictive models, including those aided by artificial intelligence, machine learning, and/or robotic process automation (“Models”) for which core inputs are, or could be considered, a consumer report, one question that may arise is whether the Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681x (the “FCRA”) dictates the distribution of an adverse action notice when a Model is not implemented for the purpose of making “coverage and rating decisions” (determining whether to accept or decline a particular risk or the premium charged), but instead for the purpose of determining whether other actions can be taken with respect to consumers like routing applicants to certain payment methods or other designations unrelated to coverage and rating decisions (“administrative decisions”).

Under the FCRA, an “adverse action” can mean different things in the context of different industries or uses.  In the context of insurance, an “adverse action” is defined to mean “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, in connection with the underwriting of insurance.”¹  Under a different section of the FCRA, “If any person 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” that person must, among other things, provide an adverse action notice to the consumer.²

A “consumer report” is defined to mean “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for . . . (A) credit or insurance to be used primarily for personal, family, or household purposes; or . . . (C) any other purpose authorized [as a permissible purpose of consumer reports]”³  The “permissible purposes” of consumer reports include, in relevant part, the furnishing of a consumer report by a consumer reporting agency “to a person which it has reason to believe . . . intends to use the information in connection with the underwriting of insurance involving the consumer.”⁴

1. “Adverse Action”

First, insurers should consider whether an administrative decision could be considered “[1] an increase in any charge for . . . or other adverse or unfavorable change in the terms of coverage . . . applied for, [2] in connection with the underwriting of insurance.”

1.A “An increase in any charge for . . . or other adverse or unfavorable change in the terms of coverage . . . applied for”

An administrative decision could be considered an increase in the charge for coverage, because applicants subject to an administrative decision could be giving more value for the same level of coverage in some way.  Such additional value could be minimal to the point of appearing nominal, but could theoretically be construed as an “increase.”

An administrative decision could be considered an adverse or unfavorable change in the terms of coverage, because the burden of having to pay premium in a different way or obtain or interact with their coverage in a different way could be construed as “adverse or unfavorable” from the perspective of the applicant.  In many circumstances, particularly those affecting applicants with fewer resources, paying more at one time or in a different manner could mean the applicant has less funds on hand to contribute to other needs.  An administrative decision could therefore be considered “adverse” or “unfavorable.”

1.B “In connection with the underwriting of insurance”

Depending on the nature of the administrative decision, it could be construed as being undertaken in connection with the underwriting of insurance.  The only permissible purpose for which a consumer report may be provided to an insurer is to “use the information in connection with the underwriting of insurance.”  Further, it seems counterintuitive that the legislative intent of the FCRA would be to permit the provision of consumer reports without the attachment of attendant restrictions and obligations like the FCRA’s requirements in respect of adverse actions.

2. Adverse Action Notice

As stated above, according to the FCRA, if any person 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” the person must, among other things, provide an adverse action notice to the consumer.⁵  Insurers must therefore consider whether an administrative decision could be construed as being (1) based in whole or in part on (2) any information contained in a consumer report.

2.A “Based in whole or in part on”

The phrase “based in whole or in part on” has been interpreted to apply only when there is a “but-for” causal relationship.  An adverse action is not considered to be based in whole or in part on the consumer report unless “the report was a necessary condition” of the adverse action.⁶

Under certain caselaw, the baseline or benchmark for considering whether there has been a disadvantageous increase in rate (and, therefore an adverse action requiring notice to the applicant) has been interpreted to be “what the applicant would have had if the company had not taken his[/her] credit score into account.”⁷  It may be that the only purpose of a Model’s use of a consumer report is to determine whether an administrative decision will be engaged. In that case, the “baseline” could be considered to be the absence of the result of the administrative decision.  In other words, without use of the Model that integrates the consumer report, there might not be any possibility of the administrative decision impacting the applicant.

2.B “Any information contained in a consumer report”

An insurer must analyze whether particularized information used in a Model has been obtained from a consumer reporting agency based on the insurer’s permissible purpose.  An insurer should also analyze whether the information is: (i) a written communication of information derived from a consumer reporting agency; (ii) bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living; (iii) which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for insurance to be used primarily for personal, family, or household purposes.

3. State Insurance Scoring Laws & the NCOIL Model Act

Finally, an insurer should consider whether the above analysis would differ or whether additional considerations arise out of state insurance scoring laws promulgated based on the National Council of Insurance Legislators’ Model Act Regarding Use of Credit Information in Personal Insurance (“NCOIL Model”).  The NCOIL Model defines what constitutes an “insurance score” (which is similar to the FCRA’s definition of consumer report), what constitutes an “adverse action” in respect of such insurance scores (which is similar to the FCRA’s definition of adverse action), and when an adverse action notice must be sent in respect of such adverse actions (which trigger language is similar to the FCRA’s trigger language). This analysis will depend on the state-specific implementation of the NCOIL Model (where applicable), or on other related state laws and regulations addressing this subject matter (for those states that have not adopted some form of the NCOIL Model).

Of course, in analyzing these issues, insurers should consult extensively with insurance and federal regulatory counsel as to the specific nature of the administrative decisions, how Models are created and used, and what the impact of such administrative decisions and Models are on applicants and consumers.