New PAID Act Bans Use of Credit Score, Job, and Education Level in Setting Car Insurance Rates

The Prohibit Auto Insurance Discrimination Act, or the PAID Act, is looking to fundamentally change how you pay for car insurance. Starting one year after it becomes law, this bill makes it illegal for auto insurers to use a long list of socioeconomic factors when deciding whether to insure you or how much to charge for your premium.

The End of Hidden Rate Hikes

What exactly is the PAID Act banning? It targets factors that insurance companies currently use as proxies for risk, but which actually just track your income or wealth. Specifically, insurers can no longer use your gender, education level, occupation, employment status, whether you own your home, your ZIP Code, marital status, or—and this is a big one—your credit score or any credit-based insurance score (Sec. 3). For example, if you’re an excellent driver but your credit took a hit during a layoff, your insurer can no longer use that credit score to push you into a higher rate bracket. The idea is simple: your driving record should set your rate, not your debt-to-income ratio or what degree you hold.

Why Your ZIP Code Won’t Matter Anymore

For years, people have complained that moving across town—sometimes just a few blocks—can drastically change their car insurance bill. This is because insurers use ZIP Codes and census tracts as a shortcut to assess risk, which often ends up punishing lower-income areas. The PAID Act explicitly bans the use of your ZIP Code or neighboring ZIP Codes in setting your rates (Sec. 3). This means a nurse living in an expensive suburb and a construction worker living in a more affordable urban neighborhood, both with identical driving histories, should theoretically pay the same rate from the same company. This provision aims to remove a significant source of geographic and economic discrimination in pricing.

The FTC Gets the Keys to the Algorithms

This bill isn't just about banning certain factors; it’s about making sure the whole system is fair. The PAID Act gives the Federal Trade Commission (FTC) a lot more oversight. Insurers must now submit reports to the FTC every two years, providing information to prove that the computer models and algorithms they use for rating, marketing, and claims handling don't unfairly discriminate based on protected characteristics like race, color, or sex (Sec. 3). Plus, all the rules and rate filings insurers use must be made public. This is a massive transparency boost, pulling back the curtain on how carriers decide who pays what.

Real Consequences for Breaking the Rules

If an insurer decides to ignore these new rules, the consequences are significant. Any violation is treated as an unfair business practice, and the civil penalty starts at no less than $2,500 per violation (Sec. 4). More importantly for consumers, if an insurer willfully breaks the law, they are liable for actual damages, punitive damages, and must cover your legal fees if you win your case. If they were just negligent (careless), they still have to cover your actual damages and legal costs (Sec. 4). This private right of action means regular people have a powerful tool to hold insurance companies accountable, ensuring the law isn't just a suggestion.

The Catch: Finding New Proxies

While the PAID Act is a major step toward equity, there is a practical challenge. Insurance companies are smart, and they are motivated to find the riskiest drivers. If they can’t use the banned factors, they might try to shift their risk assessment to other, non-explicit factors that still correlate with income, a practice called “proxy discrimination.” The success of this law will ultimately depend on the FTC’s ability to effectively audit complex, proprietary algorithms and catch insurers trying to use loopholes. However, the bill does offer insurers a compliance protection clause, meaning they won't be liable if they can prove they had 'reasonable procedures' in place to follow the law (Sec. 3), which could be a point of contention in future court cases.