(Article from Insurance Law Alert, May 2024)
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Holding
An Illinois district court ruled that the Department of Housing and Urban Development’s (“HUD”) rulemaking as to disparate impact claims against insurers was not “arbitrary and capricious” and that insurers may face liability under the Fair Housing Act (“FHA”) for risk-based decisions that disparately impact protected classes of people. Property Casualty Insurers Assoc. of America v. Todman, 2024 U.S. Dist. LEXIS 53688 (N.D. Ill. Mar. 26, 2024).
Background
In 2013, HUD refused to exempt risk-based insurance practices from its new Disparate Impact Rule, which created a legal framework for resolving discriminatory effects FHA claims. Property Casualty Insurers Association of America (“PCI”) sued, alleging that HUD’s refusal to recognize such an exemption was arbitrary and capricious and contrary to law. In 2014, an Illinois district court dismissed several of PCI’s claims, ruling that HUD had authority to formulate a rule that left the question of disparate impact liability against insurers to be decided “ex post” by courts, rather than “ex ante” via an exemption or safe harbor provision. However, the court concluded that HUD had not adequately considered several critical issues relating to disparate impact liability, including reverse preemption under the McCarran-Ferguson Act and the filed-rate doctrine. In 2023, HUD reinstated its 2013 Disparate Impact Rule and PCI again argued that its decision to do so was arbitrary and capricious.
Granting HUD’s summary judgment motion, the court ruled that “HUD 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 FHA.”
Decision
As a preliminary matter, the court ruled that PCI had standing to assert claims against HUD based on “a sufficiently persuasive likelihood of concrete and imminent harm to its members” and that the claims were ripe for resolution. Turning to the merits of the suit, the court concluded that HUD’s decision to reinstate the 2013 Rule to risk-based insurance practices was not arbitrary and capricious.
With respect to the McCarran-Ferguson Act, under which state insurance laws reverse-preempt more generalized federal law, the court ruled that HUD’s refusal to establish a blanket exemption or safe harbor provision for insurers was not arbitrary or capricious. Finding the framework in which such determinations are made on a case-by-case basis to be reasonable, the court noted that a blanket exemption establishing reverse preemption of state law over FHA claims would be overbroad, particularly in light of variation among states’ insurance regulatory frameworks and the fact that some states allow for disparate impact claims against insurers.
Along similar lines, the court ruled that HUD’s consideration of the filed-rate doctrine was not arbitrary and capricious. As HUD noted in its 2023 Reinstatement of the Rule, the filed-rate doctrine has not been successfully used to defeat a FHA claim. Further, the court deemed persuasive HUD’s assertion that the link between the filed-rate doctrine and disparate impact liability under the FHA to be “attenuated, at best” because disparate impact claims do not challenge the reasonableness of rates, but rather the discriminatory impact of rates. In any event, the court noted the reasonableness of HUD’s case-by-case approach to evaluating filed-rate doctrine challenges to disparate impact claims given the state-specific nature of regulatory filing procedures.
Finally, the court rejected PCI’s argument that HUD’s consideration of the overall nature of insurance was arbitrary and capricious. PCI argued that as a matter of public policy, the inherent nature of risk-based decision making is “fundamentally incompatible” with disparate impact liability. While the court’s 2014 opinion concluded that HUD’s original rulemaking had “failed to meaningfully engage with this thorny issue,” the court ruled that HUD adequately responded to this issue in its 2023 Reinstatement. In particular, the court noted that the Rule does not interfere with legitimate risk-based practices because it protects insurers’ objective risk-based decisions pursuant to a “business necessity” defense.
Comments
While the decision rejected a blanket exemption for insurers from disparate impact liability, it by no means lowers the bar for establishing liability under the FHA or prevents insurers from utilizing risk-based classifications in premium pricing. As the court acknowledged, “states allow (or mandate) insurers to ‘fairly’ discriminate by treating people with similar risks similarly and different risks differently.” The framework for HUD’s Disparate Impact Rule, which requires case-by-case determinations, entails a three-step burden shifting approach under which claimants bear the burden of providing factual evidence of disparate impact and which allows insurers to successfully refute such claims based on legitimate business justifications.