TALLAHASSEE, Fla. -- July 13, 2006 -- The state of Florida and insurance companies are in a standoff about how insurance companies determine what to charge you for auto or homeowners insurance.

The fight is coming to a head this summer. The question is whether insurance companies can continue to use credit scores -- a measure of how well a consumer handles debt -- to help set insurance premiums or decide who gets a policy.

Insurers say credit scores show them how much risk they take on with each new customer. The state wants to make sure that using credit scores doesn't amount to a smokescreen that covers up discrimination against minorities and other groups.

Florida has a little-known law in place to limit insurers' use of credit scores in insurance decisions, but it has been battling the industry in court over a proposed rule under the law. The law is in effect despite the court challenge. More than a dozen other states have tried to pass similar or stronger laws restricting the use of credit reports by insurers.

The issue is a big one in court. Allstate in June settled a nationwide class action lawsuit that alleged the company charged black and Hispanic customers higher rates based on information drawn from their credit reports. Allstate, which is Florida's second-largest auto insurer, denies that it discriminates against minorities in the pricing of its policies. Progressive Insurance in April settled another class action suit, covering an estimated 10 million customers. The allegation was that the company didn't properly notify customers that their personal information drawn from credit and other reports was used when Progressive cancelled policies, denied coverage or charged high rates. The company did not admit wrongdoing and denies that the claims were valid.

In Florida, the focus is on a proposed state rule that would force insurers in Florida to prove they don't discriminate. If the rule is adopted, the industry says that would effectively ban its use of credit scores. That's because they don't collect information on customers' race and religion and other factors that the state wants to see. The insurance industry is challenging the rule in an administrative law court.

The next hearing on the issue is set for Aug. 8.

There's no middle ground in this fight. The industry is adamant that consumers will be the losers if the state prevails and prohibits the use of credit scores.

"If we can no longer use this tool to measure people, auto insurance rates will go up 70 percent," says Sam Miller, executive vice president of the Florida Insurance Council, a trade association representing the industry.

The state is holding firm, too. "The bottom line is, we believe the lowest income strata has the worst credit scores and they are paying higher rates as a result of that," said Steve Parton, general counsel for the Office of Insurance Regulation.

In May, the state told property and casualty insurers that the time is approaching when they will have to prove that use of credit scores doesn't "disproportionately affect" persons of any race, color, religion, marital status, age, gender, income, national origin or place of residence."

Parton said Gov. Jeb Bush and the Cabinet felt it was time to issue the rule because the public was being harmed by the use of credit-based insurance and by the delays caused by the industry's court challenge to the law.

There's a two-step timetable for complying with this directive, starting in September.

Florida's Office of Insurance Regulation says any property and casualty insurance company that is seeking state approval for a change in auto or homeowner insurance rates or underwriting guidelines has a Sept. 1 deadline to prove that credit scores don't hurt the protected groups.

All other insurance companies must comply by Dec. 1.

Florida consumers, meanwhile, barely seem to have noticed that they are shielded by a law prescribing how insurance companies can use credit scores. Fewer than three dozen complaints about this issue have been logged at the Florida Department of Financial Services in three years.

The Insurance Industry Institute says several studies have shown that people who have low credit scores tend to file more insurance claims.

Consumer advocates are skeptical about the connection between credit scores and insurance claims. They point out that errors are so common in credit reports that credit scores are often based on bad information. Scores also tend to be lower for those who simply don't have a long history of borrowing.

The Consumer Federation of America has applauded moves to ban the use of credit scores in insurance. Congress has asked the Federal Trade Commission to study the effect of credit scores on insurance availability and prices.

"Credit scores are dangerous and it's almost impossible for insurance companies to use them fairly," said Bill Newton, Florida Consumer Action Network executive director. "They can just write off whole neighborhoods where people don't have good enough credit."

Among the states, Maryland bans the use of credit scores in homeowners insurance and California bans their use in auto insurance. Hawaii has a ban on both types, according to the National Association of Mutual Insurance Companies. Last year, 18 states tried to enact some sort of limitation, according to BestWeek, an insurance trade publication.

For now, the insurance industry in Florida isn't planning to change its ways, despite the contested state rule. Spokesmen for State Farm and Allstate said they are waiting for the outcome of the court challenge.

Copyright © 2006, South Florida Sun-Sentinel, Harriet Johnson Brackey. Distributed by McClatchy-Tribune Business News.