updated 1/16/2007 4:59:40 PM ET 2007-01-16T21:59:40

Two large insurers Tuesday defended their decision not to tell customers about their less-than-perfect credit, as the Supreme Court debated the legal standard for finding the companies liable under federal law.

During an hour of argument, several justices seemed taken aback at the magnitude of a federal appeals court ruling. Under that ruling, Geico Corp. and Safeco Insurance Co. would have to notify nearly all their customers that they aren’t getting the best rates because their credit scores aren’t the highest.

The consumers sued Geico and Safeco because the companies used a less stringent policy and thus notified far fewer customers.

The case casts a spotlight on the business world’s vast credit reporting system, which has compiled files on 200 million Americans.

Congress passed the Fair Credit Reporting Act in 1970 to protect consumers from flaws in the system and improve the reliability of reports.

Chief Justice John Roberts pointed out that federal law entitles consumers to a free copy of their report. Scott Shorr, a lawyer representing the customers who sued, said alerting the consumer at a critical time when money is at issue is important so that the customer can send for a copy and check it for accuracy.

If the appeals court ruling stands, Safeco would be required to send notices of “adverse actions” to 80 percent of the company’s new customers, said Maureen Mahoney, an attorney defending the two companies. At Geico, 10 percent of new customers qualify for the top tier of credit, Mahoney said.

Justice Stephen Breyer said implementing an expansive notification requirement would be like the “boy who cried wolf” and that notices likely would “go right in the wastebasket.”

The major issue in the case is the legal standard for finding that the insurance companies willfully violated the 37-year-old credit reporting law. The 9th U.S. Circuit Court of Appeals said the standard is reckless disregard for the statute’s notification requirement. The companies say the standard is higher — actual knowledge on the part of the companies that they are breaking the law.

Pending lawsuits against various insurance companies on behalf of consumers over the notification issue potentially involve billions of dollars, Mahoney told the justices.

Shorr, the lawyer representing consumers, said internal Geico documents show the company initially interpreted the law “the same way we do.”

Roberts suggested that just because someone at the company might have felt that way hardly decides the matter.

Shorr said the documents expressed the view of top-level executives.

Roberts asked how Shorr could argue the insurance companies had acted willfully to violate the law. Shorr pointed to a letter by the Federal Trade Commission staff saying the notification requirement is to be interpreted broadly.

The letter isn’t even binding on the commission, Roberts replied.

Geico is an indirect subsidiary of Omaha, Neb.-based Berkshire Hathaway. Safeco Insurance Co. of America is based in Seattle.

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