Do Insurance Companies Do Background Checks?
Uncover how insurance companies assess applicants to determine policy eligibility and pricing. Learn about their evaluation processes and your consumer rights.
Insurance companies evaluate various factors to determine risk and the likelihood of a policyholder filing a claim. Insurers commonly review background information, a standard industry practice.
What Information Do Insurers Review?
Insurers access consumer information when evaluating applications. Motor Vehicle Reports (MVRs) are utilized for auto insurance, detailing an individual’s driving history over the past three to five years. These reports include traffic violations, accidents, license status, and any driving under the influence (DUI) convictions.
The Comprehensive Loss Underwriting Exchange (CLUE) report, generated by LexisNexis, provides a seven-year history of personal auto and property claims associated with an individual and a specific property. CLUE reports contain details such as the date of loss, type of claim, and the amount paid by the insurer.
Insurers also use credit-based insurance scores, distinct from traditional credit scores but derived from credit report data. These scores numerically represent a consumer’s credit profile and predict the likelihood of future insurance losses and claims. Factors influencing these scores include payment history, outstanding debt, and the length of credit history.
Criminal records may be accessed for certain types of insurance or when assessing specific risks. This check typically covers misdemeanor and felony records, including case nature and disposition. Public records, such as court records or property deeds, can also provide applicant background information.
Why Do Insurers Conduct These Checks?
Insurers conduct background checks for risk assessment. The information gathered predicts the likelihood of a future claim. For example, multiple auto accidents suggest a higher probability of future claims.
This risk assessment directly influences premium determination. Insurers use the data to set appropriate policy prices. Individuals deemed higher risk will typically face higher premiums.
Background checks also prevent fraud. By reviewing past claims and financial or criminal history, insurers identify patterns or red flags indicating potential fraudulent activity. This protects the company and policyholders from financial losses.
This information determines an applicant’s eligibility for coverage. Insurers have specific underwriting criteria, and background checks help them decide whether to offer a policy, offer limited coverage, or deny coverage.
Impact on Your Insurance Policy
Background check results directly influence your policy’s terms and cost. A clean driving record can lead to lower auto insurance premiums and discounts. Conversely, multiple violations or accidents on your Motor Vehicle Report typically result in significantly higher premiums.
A favorable claims history, as reflected in your CLUE report, can contribute to more competitive rates for home and auto insurance. Frequent or large claims, however, may lead to increased premiums or make it challenging to obtain coverage from some providers.
Your credit-based insurance score impacts premium rates; a higher score often correlates to lower costs. Conversely, a lower score can result in higher premiums or limit coverage options. Adverse information, such as severe criminal history or extensive claims, might lead to an insurer denying coverage. Applicants with elevated risk may also be placed into high-risk pools, which typically come with higher rates.
Your Rights and Data Privacy
Consumers have rights concerning the information collected during insurance background checks, primarily governed by the Fair Credit Reporting Act (FCRA). This federal law promotes the accuracy, fairness, and privacy of consumer information held by consumer reporting agencies. The FCRA applies to reports like credit-based insurance scores, CLUE reports, and Motor Vehicle Reports.
Under the FCRA, you have the right to request and review information used by an insurer for underwriting decisions. This includes obtaining a free annual copy of reports like your CLUE report from LexisNexis or your credit-based insurance score. If an insurer takes adverse action (e.g., denying coverage or increasing your premium) based on a report, they must notify you and identify the consumer reporting agency.
You also have the right to dispute any inaccurate or incomplete information found in these reports. If you identify an error, you can contact the consumer reporting agency to have it investigated and corrected.