Fairness in Disparity: Challenging the Application of Disparate Impact Theory in Fair Housing Claims Against Insurers
54 Pages Posted: 27 Jan 2010 Last revised: 10 May 2011
Date Written: April 8, 2011
The Fair Housing Act makes it unlawful to "discriminate against any person 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 the membership in a protected class. Even though the FHA does not mention insurance, courts have interpreted it as applying to insurance companies’ underwriting or rate making practices in connection with the provision of homeowners and similar coverage. Now enter the Civil Rights Act of 1964. Title VII of that Act bars discrimination against protected classes in employment. In Griggs v. Duke Power Co., the Supreme Court interpreted Title VII to proscribe "not only overt discrimination but also practices that are fair in form, but discriminatory in operation." The method of analysis that developed around the Griggs opinion is what my paper refers to as the "Title VII standard" for disparate impacts. Under this standard, once the plaintiff has made out a prima facie case (which, at least in theory, involves identifying a facially neutral practice and showing that the practice has caused a significant adverse and disproportionate impact on members of a protected class), the burden shifts to the defendant to demonstrate that the challenged practice is a "business necessity" and that there are no acceptable alternative policies that would create a less disparate impact.
The problem my paper addresses is created by some courts’ application of the Title VII standard to claims arising under statutes other than Title VII - namely, claims against homeowners insurance providers brought under the FHA. Superimposing this employment law theory onto a fair housing context makes sense, at least superficially, given the similarity of the two statutes’ language and the apparent universality of the Griggs doctrine. But it simply is not right for cases of "disparate insurance impacts." When it comes to FHA suits against insurers, central aspects of the Title VII standard for disparate impacts are legally infirm, as well as conceptually and practically unsuitable. For starters, the attempted application of this standard to FHA claims ignores Wards Cove Packing Co. v. Antonio (a Supreme Court case superseded by Congress for purposes of Title VII but not for purposes of the FHA), which modified the standard momentously in favor of defendants. Also, the flimsy pleading requirements of the current standard and its relatively low "significance of disparity" threshold create tremendous unfairness for defendants and allow disparate impact claims to reach too far beyond the FHA’s purposes. Courts and commentators have also been too deferential to HUD’s interpretation of the FHA (and even to the unofficial remarks of Janet Reno).
The Title VII standard’s "business necessity" and "less disparately-impacting alternative" requirements are incompatible with the workings of insurance, and fail to take risk transfer into account. For example, in challenging an employment practice, plaintiffs attack a means to an end; if the "means" creates disparate impacts without bearing any relationship to its "end" it is not a business necessity. In contrast, an insurer’s challenged practice (e.g., credit-based risk classification or higher rates for homes in bad neighborhoods) is itself the “end,” and so can never be defended as having a relation of necessity to itself. Since the offending practice is the insurer’s profits engine, the business necessity requirement effectively creates a presumption against the validity of premiums revenue in excess of the insurer’s eventual losses. Thus cuts deeply against the grain of capitalism. There are also problems with the less disparately-impacting alternative requirement. For example, how much "less" disparate must the impact created by the supposed alternative be? Also, if the challenged practice is credit-based insurance scoring and minorities continue to have lower scores, it is impossible to fashion a less disparately-impacting pricing algorithm without asking the insurer to (1) engage in actual race-discrimination to fix the numbers or (2) use inferior risk assessment measures that force the insurer to mis-value its product and suffer "adverse selection."
It is true that the risk of racial and other unlawful forms of discrimination does not evaporate simply because insurers have no commercial incentive to discriminate unfairly. But the Title VII standard does not recognize that certain disparities are fair, and that it is not fair to put insurance companies through conceptually inapposite, impractical rigors to prove their fairness. It should therefore be replaced.
Keywords: Fair Housing Act, Insurance, Premiums, Race Discrimination, HUD, Disparate Impact, Title VII, Title III, Capitalism, Credit Score, Credit-Based Insurance Scoring, Underwriting, Redlining, Unintentional Discrimination, Racial Disparities, Minority Credit Score
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