What to Know about Nevada Credit-Based Insurance Scores

If you live in Nevada and are wondering how a recent ding on your credit history could affect your financial life, you may have to look no further than your auto insurance renewal bill.

Nevada is one of the 47 states in the country that allow insurers to incorporate credit information into their pricing formulas. And, according to a recent study quantifying the effects of credit on Nevada insurance rates, a driver’s credit standing can make a significant impact on premiums.

If you’re a Nevada driver wondering why no one informed you of this, the truth is that your insurer likely did. For the majority of insurers that do look at credit, they are legally required to inform you, the policyholder, that credit can affect whether they end up offering you coverage and how much your policy will cost. On Progressive’s standard application for coverage, for example, the company includes the following declaration:

“I understand that to calculate an accurate price for my insurance, the Company may obtain information from third parties, such as consumer reporting agencies that provide driving, claims and credit histories. The Company may use a credit-based insurance score based on the information contained in the credit history.”

That score tells an insurer something about your likelihood of filing a claim and how much they should charge you for a policy.

According to the Division of Insurance (DOI), when insurers deny you coverage or raise your rates on account of your credit, they must provide you with an “adverse action” notice. The notice will “describe no more than four credit-related factors that were the primary influences of the insurer’s decision.”

While most of the state’s major insurers have credit as part of their pricing structures, not all of them do. In the OnlineAutoInsurance.com study, 19 out of 21 insurers adjusted a policyholder’s rate in response to a change in credit status.

What Makes Up My Insurance Score?

A credit-based score is a numerical value that’s assigned to you based on your financial history. According to the DOI, most credit-based insurance scores are made by looking at some or all of the following types of information, and then weighing them according to the scoring model:

• How many late payments you have on credit accounts
• How many adverse public records you have (e.g.: bankruptcies, tax liens, foreclosures)
• How extensive your credit history is
• How many credit accounts you’ve recently opened in the past one to three years
• How many inquiries have been made on your credit in the past one to three years
• Whether you get credit through major credit cards or through other types of credit
• How often you make use of available credit
• The size of your account balances
• The total number and makeup of your credit accounts
• How many open accounts you have

How each of those categories ultimately affects your score—and, consequently, your premiums—will depend on the structure of the particular scoring model your coverage provider uses.

By law, insurers must update consumers’ credit information and re-score them at least once every three years.

When Bad Credit Can’t Affect Your Nevada Insurance Score

In 2011, Nevada legislators put a set of restrictions on insurers’ credit-based pricing practices when a resident’s bad credit was associated with an “extraordinary life event.” If one of the following scenarios has happened to you and has triggered a downgrade in your credit, an insurer is required to provide “reasonable exceptions” for you:

• You’ve been affected by a catastrophic event, as declared by the federal or state government.
• You or an immediate family member has suffered a serious illness or injury.
• Your spouse, child, or parent has died.
• You’ve gone through a divorce or “involuntary interruption of legally owed alimony or support payments.”
• Your identity has been stolen.
• You involuntarily lost your job for three months or more.
• You were deployed overseas for the military.

Policyholders asking their insurer for an exception based on these circumstances should be prepared to prove that events happened and to show the link to the downgrade in their credit.

Credit-Related Insurance Legislation

According to the National Conference of State Legislatures, most of the state statutes regulating insurers’ use of credit information went into effect in 2003. It was that year that the requirement of an adverse-action notice went into effect.

In 2011, the Legislature saw a move to block insurers from using credit information for determining whether to cover a particular driver and how much to charge him or her for coverage. The Property Casualty Insurers Association of America (PCI) came out in strong opposition to the bill, saying the proposed legislation “would take away discounted rates for the majority of Nevada policyholders.”

The DOI, meanwhile, expressed a neutral position on the bill. A DOI representative, Rajat Jain, spoke at one of the bill’s legislative hearings. He commented that insurance scoring had become much more complicated between the 1990s, when insurers first started using credit information, and 2011, the time of the hearing.

“Most of the models used in the 1990s and even in 2003 were based upon the concept that if somebody had a bankruptcy or foreclosure on their credit report, it would indicate financial irresponsibility,” Jain said, but went on to say that the models had evolved and that many other variables had been added since then.

One example Jain gave was of a scoring model that would penalize policyholders if they had no auto loan while also penalizing them if they had an auto loan that exceeded a certain dollar value. In some cases, the complexity of the models caused problems.

“There was one model where the consumers whose credit history could not verify whether or not they had foreclosures were penalized more than consumers who actually had foreclosures on their credit history,” Jain said. “We were able to correct that problem.”

The bill, though, ultimately died after being passed out of committee.