(Article from Insurance Law Alert, September 2023)
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Holding
An Illinois district court granted in part and denied in part an insurer’s motion to dismiss a putative class action law suit alleging racial discrimination in claims handling practices based on the insurer’s use of algorithmic decision-making tools. Huskey v. State Farm Fire & Cas. Co., 2023 U.S. Dist. LEXIS 160629 (N.D. Ill. Sept. 11, 2023).
Background
Black homeowners alleged that State Farm’s use of certain algorithmic tools in its claims handling process resulted in discriminatory treatment. More specifically, Black homeowners alleged that State Farm took longer to process their claims, required additional paperwork and communication, and ultimately provided less coverage. The complaint alleged that these racial disparities stem from State Farm’s use of “machine-learning algorithms,” which consider race as one of many factors in predicting fraud and determining whether claims should be paid. The plaintiff homeowners alleged disparate impact race discrimination in violation of the Fair Housing Act (“FHA”), and also sought injunctive and declaratory relief, damages and attorneys’ fees.
Decision
The court dismissed two of the three FHA claims. Section 3604(a) of the FHA makes it unlawful to refuse to sell or rent, or otherwise make unavailable, a dwelling to any person because of race. The court ruled that plaintiffs’ claims were not within the scope of this provision because the complaint did not allege actual unavailability of the homes, but rather only a lack of habitability and diminution in property value due to damage not being promptly covered by State Farm. Similarly, the court ruled that plaintiffs’ allegations did not state a viable claim under Section 3605 of the FHA, which prohibits any “entity whose business includes engaging in residential real estate-related transactions” from discriminating based on race. Relying on a Seventh Circuit decision holding that insurers are not “entities who engage in covered transactions under [Section] 3605,” the court dismissed the claim.
However, the court declined to dismiss a claim under Section 3604(b), which prohibits discrimination “in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race.” The court explained that under the broad language of this provision, property insurance—in particular, claims handling operations—could plausibly constitute a service in connection with the sale of a home. Having reached that conclusion, the court addressed whether plaintiffs adequately alleged disparate impact. The court ruled that they did, based on the following three factors: (1) allegations of statistical disparities among a large cross section of insured homeowners, (2) State Farm’s utilization of algorithmic decision-making tools to automate claim processing, and (3) a purported causal connection between the policy and statistical racial disparities.
Additionally, the court declined to dismiss the suit based on the doctrine of reverse-preemption. State Farm argued that the federal FHA claims were reversed-preempted by Illinois state law under the McCarran-Ferguson Act, which holds that federal laws of general application may not displace state laws that specifically relate to the business of insurance. State Farm argued that Illinois statutes relating to claims handling procedures conflict with the FHA and therefore reverse preempt the federal statute. Rejecting this assertion, the court held that there was no conflict between state and federal law in this context and that application of the FHA would not disrupt Illinois’s insurance-related administrative regime.
Comments
Claims based on an insurance company’s use of computers to assist human decision-making are not new. However, claims are likely to proliferate in the near term as the perceived consequences of the use of such tools become more obvious to consumers, employees or other individuals. With respect to the FHA, Huskey emphasized that “disparate-impact liability must have limits” and should not be based solely on a showing of statistical disparity; instead, such claims require “careful examination” of the company policies at issue and the existence (or lack thereof) of a causal connection between the policies and any statistical disparities.