Federal Judge Finds Home Insurers Can Be Sued for Discriminatory Risk Assessment - Real Estate, Updates, News & Tips

Federal Judge Finds Home Insurers Can Be Sued for Discriminatory Risk Assessment

The judge's ruling supports a federal rule that opens insurers to legal liability for disparate-impact claims.

A federal judge in Illinois ruled in favor of the U.S. Department of Housing and Urban Development on Tuesday, concluding a 10-year-old case brought against it by a major insurance industry lobbyist group.

The Property Casualty Insurers Association of America first filed the suit against the Housing Department in November 2013, asking the court to consider the extent of home insurers' legal liability for systemic housing inequality in the country. Specifically, the group's challenged a February 2013 Housing Department rule that formalized how to recognize unintentionally discriminatory housing practices prohibited by the 1968 Fair Housing Act.

The 2013 rule establishes a three-step burden-shifting process to determine if a housing practice violates the Fair Housing Act. A claimant first has to prove how a practice would or does result in discrimination based on protected characteristics such as race or gender. A respondent then has to explain how the practice is necessary to achieve its legitimate, non-discriminatory interests. If the court buys that explanation, the claimant still has an opportunity to argue that the same interest could be served by a non-discriminatory practice.

The Association objected to how, under that rule, homeowner insurance providers could be sued for disparate-impact claims based on how they assess the risk of given policyholder, and how they adjust their pricing and underwriting to account for that risk. Black homeowners, for example, may have standing to sue their home insurance provider under the 2013 rule if they can show that the provider considered their race a risk factor and used it to charge them more than white policyholders.

Arguing "risk discrimination is not race discrimination," the Association claimed in its 2013 complaint that "a rate is not unfairly discriminatory ... if it is based on actuarial data reflecting past losses that reveals differences in the risks posed by different insureds."

It added that risk-based underwriting and pricing is "fundamental to the business of insurance" and adherence to the 2013 rule would drastically alter how insurance companies operate and are regulated.

"Rather than allow insurance decisions to be guided by objective actuarial data regarding risk — as contemplated by state law — the disparate impact rule would require insurers to attempt to determine whether their underwriting and pricing decisions have a disparate impact on customers falling within a protected class," the Association wrote.

The Housing Department responded to these concerns in April 2014, but not well enough to satisfy then-U.S. District Judge Amy St. Eve. She issued a split decision in the case in September 2014, handing both the Association and the Housing Department summary judgment on different elements of the suit. The complex decision initiated an even more complex legal saga that outlasted St. Eve's tenure in the U.S. District Court for the Northern District of Illinois. In 2018, then-president Donald Trump appointed her to the Seventh Circuit.

The case passed to U.S. District Judge Rebecca Pallmeyer, who became the first female chief judge for Northern District of Illinois in July 2019. In her decision Tuesday, she found the Housing Department had sufficiently addressed the issues that troubled St. Eve a decade prior, and granted it summary judgment on all the Association's claims.

She praised the Housing Department for collecting extensive public commentary on the rule over the past several years and collating an extensive log of issues the rule may address; a full 17 pages were dedicated solely to insurance concerns.

"[The Housing Department] has supplied what was missing before: a thorough and well-reasoned explanation for its decision to allow disparate impact claims against risk-based insurance practices under the Fair Housing Act." Pallmeyer wrote in her 50-page ruling.

In putting so much effort into addressing the court's concerns, she further said, the Housing Department had effectively beaten the Association's accusation that the 2013 rule was "capricious."

"If the court had believed that no amount of reappraisal could have cured the defects ... it would simply have vacated the rule. Instead, it gave the agency an opportunity to take a 'hard look' at the relevant issues and present a well-reasoned case for applying disparate-impact liability to the insurance industry," she wrote. "That is all the arbitrary-and-capricious standard demands, and [the Housing Department] has amply done so here."

Pallmeyer did acknowledge, as the Association argued, that state and federal law often collide over the issue of insurance risk assessment, and that all states "permit insurers to use risk-based pricing and underwriting methods." However, she also recognized the "objective risk factors" insurance companies rely on to set rates "can themselves strongly correlate with protected-class membership."

Pallmeyer was also less than sympathetic over what she called the Association's "parade of horribles" — its list of adverse effects the rule could have on the insurance industry. More than just insurers, she concluded, might bear increased costs to ensure more equitable housing for U.S. residents.

"It is certainly possible that filtering insurers’ risk-based practices through a disparate-impact analysis will impose costs on the industry that would not otherwise exist. But achieving the Fair Housing Act’s remedial goal of 'provid[ing], within constitutional limitations, for fair housing throughout the United States' can be costly for any sector subject to the Act, from landlords to mortgage lenders to local governments," Pallmeyer wrote.

Precipitating Pallmeyer's ruling, the 2013 rule was rescinded in 2020 in favor of a more byzantine regulation — one that technically never took effect due to an injunction in a federal lawsuit out of Massachusetts. The Housing Department officially reinstated the 2013 rule earlier this month, accompanied by the long summary of public comment and explanation that the chief judge praised so heavily.

"The 2020 rule complicated that analysis by adding new pleading requirements, new proof requirements, and new defenses, all of which made it more difficult to establish that a policy violates the Fair Housing Act and harder for entities regulated by the Fair Housing Act to assess whether their policies were lawful," the Housing Department wrote in prepared comments accompanying the reinstatement. "[The Housing Department] now returns to the 2013 rule’s straightforward analysis."

"Today’s rule brings us one step closer to ensuring fair housing is a reality for all in this country," then-U.S. Housing Secretary Marcia Fudge said in the same news release. The reinstatement was one of the last developments Fudge oversaw in the office; she retired last Friday.

Source: courthousenews.com

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