UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Division of Financial Practices
Thomas E. Kane
October 20, 1998
Paula Greathouse, Esq.
Worker's Compensation Fund
Kansas Insurance Department
420 SW 9th Street
Topeka, Kansas 66612-1678
- Re: Sections 603(h) and 603(k) of the Fair
Credit Reporting Act
Dear Ms. Greathouse:
This is in response to your request for a staff opinion regarding
the Fair Credit Reporting Act ("FCRA"). You ask two
questions regarding investigations by your office of consumers
who make claims against the Kansas Worker's Compensation Fund
("the fund"), and one question regarding your office's
investigations of insurance agents. As you indicated in a recent
telephone conversation, the fund provides coverage for consumers
who had pre-existing injuries when they started a job and then
suffered a related injury. The fund also provides coverage for
employees whose employers are insolvent. I have summarized your
questions in italics and added our responses below each question.
1. When a consumer makes a claim against the fund,
this office investigates the claim and, on rare occasions, obtains
a consumer report regarding the consumer. The office uses the
reports to prove that information provided by the claimant was
incorrect or fraudulent. Does this use of consumer reports
constitute "employment purposes," as defined by Section
603(h) of the FCRA, 15 U.S.C. § 1681a(h)?
No. Section 603(h) states that "the term 'employment purposes'
when used in connection with a consumer report means a report
used for the purposes of evaluating a consumer for employment,
promotion, reassignment or retention as an employee." In
the situation you have described, the consumers are not being
evaluated for any of these purposes. Instead, the consumers are
being evaluated to determine whether their insurance claims should
be denied because they submitted incorrect or fraudulent information.
It is not clear that your office has a permissible purpose to
obtain consumer reports to determine whether consumers who submit
claims to the fund should have their claims denied. Section 604
of the FCRA, 15 U.S.C. § 1681b, lists the circumstances under
which a consumer reporting agency ("CRA") may furnish
a consumer report to a third party such as your office. Section
604(a)(2) permits the furnishing of consumer reports "in
accordance with the written instructions of the consumer to whom
it relates." You informed me during our telephone conversation,
however, that your office does not obtain such permission before
requesting consumer reports from CRAs. Section 604(a)(3)(B) permits
the furnishing of consumer reports for "employment purposes,"
but as we indicated above, your office does not have such a purpose.
Section 604(a)(3)(C) permits the furnishing of consumer reports
"in connection with the underwriting of insurance involving
the consumer." Because your office is obtaining the consumer
reports to evaluate consumers' insurance claims, rather than to
determine whether to underwrite the consumers' insurance in the
first instance, however, the office does not have a permissible
purpose to obtain consumer reports under this provision.(1)
It is possible that Section 604(a)(3)(D) gives your office a
permissible purpose to obtain consumer reports on consumers who
submit claims to the fund. That section permits the furnishing
of consumer reports "in connection with a determination of
the consumer's eligibility for a license or other benefit granted
by a governmental instrumentality required by law to consider
an applicant's financial responsibility or status." Because
your office is a governmental instrumentality, Section 604(a)(3)(D)
would seem to give the office a permissible purpose to obtain
consumer reports on consumers who submit claims to the fund if
(1) insurance payments paid by your office constitute a "benefit"
and (2) your office is "required by law to consider [the
claimants'] financial responsibility or status" when deciding
whether to make the payments. We are unable to provide an opinion
on that issue, absent more detailed information on the statutory
background and operation of the program that provides these payments
to injured workers.
2. Does this use of consumer report information fall
within the definition of an "adverse action" under Section
603(k), 15 U.S.C. § 1681a(k)?
For purposes of responding to this question, we will assume that
your office has a permissible purpose under Section 604(a)(3)(D)
to obtain consumer reports of consumers who submit insurance claims.
Section 603(k)(1)(B)(iii) provides that the term "adverse
action" means, inter alia, "a denial or cancellation
of, an increase in any charge for, or any other adverse or unfavorable
change in the terms of, any license or benefit described in section
604(a)(3)(D)." Because we have assumed for purposes of responding
to this question that insurance payments paid by your office constitute
a "benefit," your office's denial of an insurance claim
would constitute the "denial" of a "benefit"
and would thus meet the definition of an "adverse action."
Even if your office chooses instead to grant the claimant less
than he or she claimed, such an action would constitute an "adverse
change in the terms of [the] benefit" and would also meet
the definition of an "adverse action." If, however,
your office simply reviews the consumer report of a claimant and
neither denies the claim entirely nor grants the claimant less
than he or she claimed, such a review would not constitute an
3. The fraud unit of the Kansas Insurance Department
investigates insurance agents to determine whether their state
insurance license should be revoked due to insurance fraud. During
these investigations, the fraud unit sometimes obtains consumer
reports on the insurance agents. Does this use of consumer reports
meet the definition of "employment purposes" in Section
603(h) of the FCRA, 15 U.S.C. § 1681a(h)?
No. As noted above, Section 603(h) states that "the term
'employment purposes' when used in connection with a consumer
report means a report used for the purposes of evaluating a consumer
for employment, promotion, reassignment or retention as an employee."
When your agency reviews consumer reports to determine whether
insurance agents -- who perform no work at all for the agency,
directly or indirectly -- have committed insurance fraud, that
review is unrelated to any "employment purposes."
We note that the fraud unit may have a permissible purpose under
Section 604(a)(3)(D) to obtain consumer reports on insurance agents
it is investigating. The fraud unit is a governmental instrumentality
determining the agents' eligibility for a license. If it is "required
by law to consider [the agents'] financial responsibility or status"
as part of that process, it would have a permissible purpose.
Of course, the fraud unit may also have a permissible purpose
to obtain consumer reports on insurance agents, under Section
604(a)(2), if it previously has obtained the agents' written authorization
to do so as part of the licensing process.
The views set forth in this informal staff opinion are those
of the staff and are not binding on the Commission.
Thomas E. Kane
1. See Comment 604(3)(C)-2
of the Federal Trade Commission Commentary on the Fair Credit
Reporting Act ("FCRA Commentary"), 16 C.F.R. § 600
Appendix, 55 Fed. Reg. 18,804, 18,816 (May 4, 1990), which states
that "[a]n insurer may not obtain a consumer report for the
purpose of evaluating a claim (to ascertain its validity or otherwise
determine what action should be taken), because permissible purposes
relating to insurance are limited by this section to 'underwriting'
purposes." We note that reports provided to insurers by claims
investigation services solely to determine the validity of insurance
claims are not consumer reports. See Comment 603(d)-6C
of the FCRA Commentary at 18,810.