| INSURANCE DISCRIMINATION: DENYING THE AMERICAN DREAM Edward G. Kramer
Director, Fair Housing Law Clinic
Cleveland-Marshall College of Law
Cleveland State University For those in pursuit of the American dream of home ownership, homeowner's insurance is an absolute necessity. Adequate insurance coverage is often a prerequisite to obtaining financing. Insurance redlining, by denying or impeding coverage, makes mortgage money unavailable, rendering dwellings unavailable as effectively as the denial of financial assistance on other grounds. Memorandum to the Assistant Secretary for Equal Opportunity, U. S. Dept of Housing & Urban Development dated August 25, 1978 quoted in National Mutual Insurance Co., et al. v. Cisneros, 52 F.3d. 1351, 1354 (6th Cir. 1995)). In NAACP v. American Family Mut. Ins. Co., 978 F.2d 287(7th Cir. 1992), the Court held that redlining in the insurance business is a form of discrimination that violates the Fair Housing Act. Redlining is charging higher rates or declining to write insurance for people who live in particular areas (figuratively, sometimes literally, enclosed with red lines on a map). The practice of redlining can be a significant impediment to the upward mobility of minorities. It can also have a devastating impact on particular communities by discouraging the sort of reinvestment that can keep them vibrant.
Since most Americans have their personal wealth invested in their homes, an impediment to homeowners insurance coverage on the basis of race, ethnicity or color is a serious barrier to the American Dream of home ownership and financial security. Some members of the insurance industry have been quite savvy in devising methods of discriminating against minorities. Beyond what has traditionally been defined as redlining the National Fair Housing Alliance has categorized six different methods of discriminating.
1. Cost, when the cost per $1,000 of coverage or cost per square foot differed by at least 5 percent.
2. Type of Policy, when the minority tester was not offered access to a replacement cost policy, whereas the white paired tester was offered one or more replacement-cost policies.
3. Agent Responsiveness, when a tester's calls were not returned, when an agent referred the tester to another agent or company, or when an agent failed to call back to provide quote information.
4. Level of Service, when an agent failed to send a quote in writing to the minority tester as agreed during the telephone conversation while sending a quote to the white tester.
5. Differential Application of Company Policy, when the minority tester was informed of company policy or requirement (e.g., conducting an inspection before providing a quote), but the policy or requirement was not applied to the white tester; or when both testers were told of a company policy but the white tester was told the policy would not be applied or was given information on how to circumvent the policy.
6. Discouragement, when minorities were being asked to provide the name and telephone number of their mortgage lender in order to gather information about the property before the agent would provide a quote.
Insurance Redlining 112-113 (Gregory Squires eds., Urban Institute Press 1998).
A 1994 study of insurance availability in 33 cities by the National Association of Insurance Commissioners reported that participating insurers provided coverage for only 57.6 percent of structures in low income areas with a high minority population, whereas the same insurers covered 75.3 percent of the buildings located in low minority, low-income areas. The study took the zip code data filed by participating insurers and plotted it against census data on income and minorities. The findings show that low income inner city residents in areas with a high concentration of minorities are more likely to be insured in their state's FAIR Plan than people living in areas with low concentrations (18.2 percent compared with 2.9 percent). FAIR Plans are insurance programs run by the insurance industry to enable people who have had difficulty obtaining insurance through regular channels to insure their property. In addition, prices were higher and cancellation and non renewal rates were higher in minority than in white neighborhoods, even after controlling for a range of insurance, socio-economic and demographic variables.
A report by the National Association of Professional Insurance Agents entitled Doing Business with the New Insurance Consumer finds that A[t]he composition of the insurance industry does not reflect that of American society generally...[and] within the industry very little is understood about emerging minority populations in America. National Underwriter-Property & Casualty, (May 8,1995). Another example of potential form of discrimination is the research into the geographic location of agents offices. For example, in the St. Louis metropolitan area the Missouri Department of Insurance found significantly more agents in predominantly white communities, a disparity that persisted even after loss costs were taken into account. Jay Schultz, An Analysis of Agent Location and Homeowners Insurance Availability, Journal of Insurance Regulation (1995).
Insurance companies do discriminate legally everyday based on risk since a company's profitability is determined in large part by its ability to evaluate risk and charge a premium commensurate with the potential for loss. To help underwriters distinguish between what the company considers good and bad risks within the confines of its marketing strategy, insurers develop underwriting guidelines. These guidelines provide a framework for underwriting decisions by identifying what factors should be considered in accepting applications for coverage. This is meant to ensure that underwriters' selection decisions are uniform and consistent throughout the company. For example, an insurer that wants to limit its exposure to hurricane damage may decide to decline all applications for property insurance on buildings within a certain distance from the ocean.
Until recently, most insurers based one set of underwriting decisions on the age of a home and its market value. Admittedly, many older homes have features that are expensive to replace which can push the cost of rebuilding these structures higher than their current market value. However, a study commissioned by the Ohio Civil Rights Commission revealed that black households in Ohio were more than twice as likely as white households to live in a house that is valued at less than $ 50,000. Similarly, 40% of black households but only 29% of white households live in homes that were built prior to 1950. Therefore, underwriting practices that limit the availability of replacement cost insurance policies based on the age and/or value of a home have a significant discriminatory impact on racial minorities.
Under a disparate impact theory of proving a fair housing violation, a plaintiff must only show that a housing or related service, like homeowner insurance, falls more harshly on members of a protected group, usually by a statistical analysis. Griggs v. Duke Power Co., 401 U.S. 424 (1971). The burden of proof then shifts to the housing or related service provider to show a non discriminatory business necessity for the disputed policy. Id. at 431. If this burden is met, the burden bounces back to the plaintiff, who must show that either no such necessity exists or there remains a less discriminatory alternative means to meet the stated objectives of the policy.
Significant litigation has occurred over these two underwriting factors. As Patrick Musick, assistant vice president with the Alliance of American Insurers explained "The things that companies did were not necessarily designed to stay out of inner city neighborhoods or to not write minorities," Musick said. "There were a lot of factors like age of home, construction of home, and wiring and plumbing and so forth, that were not designed with urban areas or minorities in mind. They were designed for a house that's more modern and has updated wiring and plumbing, and is less likely to have losses than an older home." Barbara Bowers, Best's Review: Insurers See Potential of Urban Markets, (March 18, 1999) Under disparate impact theory such explanations are not a defense to a finding of a fair housing violation. As result of this litigation the insurance companies have dropped these underwriting criteria. However new criteria like credit scoring has been adopted which accomplish similar results in limiting the availability of homeowner insurance in the urban housing markets.
A number of federal courts have agreed that the federal and state Fair Housing Acts prohibiting insurance discrimination or redlining. Here are some of the most important cases in the field:
1. Dunn v. Midwestern Indemnity Mid-American Fire and Casualty Co., 472 F. Supp.1106 ( S.D. OH 1979)
Black homeowners in a predominately black neighborhood carried homeowners insurance from Midwestern through Borchers Insurance until Midwestern eliminated Borchers business profile. Midwestern notified the plaintiffs that their insurance would not be renewed for the above reason. The plaintiffs alleged the denial of homeowners insurance violated 42 USC 3604, 3605, 3617 of the Fair Housing Act. The court noted that although the sections of the Act did not forbid the use of redlining specifically, 3604(a) had been used to prohibit actions that have not been directly related to the sale or rental of housing. The court went on to note that insurance is often necessary, before obtaining a home. Thus, to deny insurance coverage on the basis of race, is to deny a protected a class the right to Fair Housing in contravention of the Act. The court denied the defendant's 12(b)(6) motion.
2. McDiarmid v. Economy Fire & Casualty Ins. Co., 604 F. Supp. 105 ( S.D. OH, W.D.1984)
Plaintiffs alleged that the insurance company engaged in a practice of redlining. This practice effectively denied him homeowners insurance based on his race. Court held that the McCarran-Ferguson Act did not prevent the application of state and federal civil rights to the business of insurance. The court reasoned the primary objective of the Act was to insure that state had the continued ability to regulate and tax the insurance business. A secondary purpose was to exempt insurance businesses from certain ant-trust laws. The court reasoned that to allow the Plaintiffs cause of action to go forward would not A...invalidate, impair or supercede the state statutes. Id.
3. Mackey v. Nationwide Ins. Co.,724 F. 2d 419 (4th Cir 1984).
Insurance a salesperson, filed suit against a former employer for use of redlining practices, which hurt his ability to sell housing. Court held that the McCarran-Ferguson Act barred the use of Sherman Act violations to redress redlining grievances. The 4th Circuit court reversed the lower courts decision that McCarran-Ferguson also barred the use of the Civil Rights Acts and the Fair Housing Act. The court reasoned that these Acts did not impair state law, when used. Therefore, it did not interfere with a state's right to regulate the insurance industry. However, the court ultimately dismissed all causes of action related to redlining, because the plaintiff lacked standing, or was outside the statute of limitations. Finally, the court declined to rule whether the McCarran-Ferguson Act would ever bar Fair Housing claims.
4. Nationwide Mutual Ins. Co. v. Cisneros, 52 F. 3d 1351 (6th Cir. 1995).
Insurance companies brought suit against the United States Secretary of the Department of Housing and Urban Development for declaratory judgment and injunctive relief, challenging the government's ability to regulate the issuance and cancellation of homeowner's insurance policies through the Fair Housing Act. The court held that the plaintiffs failed to present any evidence that there was congressional intent to preclude the application of the Fair Housing Act to insurance underwriting practices. Id. The court reasoned that the connection of homeowners insurance with the ability to obtain a home was sufficient to support a claim under the Fair Housing Act. 5. N.A.A.C.P v. American Family Mutual Ins. Co.,978 F. 2d 287 (7th Cir.1992).
The plaintiffs alleged that the practice of redlining by insurance company violated the Fair Housing Act. Trial court ruled that the Fair Housing Act did not apply to the insurance business. Court held McCarran-Ferguson Act did not apply to civil rights legislation. The court reasoned that state insurance law did not conflict with the Fair Housing Act against the insurance industry
6. United Farm Bureau Mutual Ins. Co., Inc. v. Metro. Human Relations Comm. 24 F. 3d. 1008 ( 7th Cir.1994).
White homeowner filed suit against an insurance company who had cancelled his insurance. The homeowner alleged that the insurance company failed to renew his insurance, because he lived in a racially mixed neighborhood with a perceived high crime rate. The court held that the race of plaintiff brining a redlining complaint under Fair Housing Act was irrelevant. Moreover, the court held that there was no conflict between Indiana and Federal law. Therefore, the McCarran-Ferguson Act was inapplicable to the case.
7. Wai v. All State Ins. Co.75 F. Supp. 2d. (D.C.1999) Plaintiffs obtained their homeowners insurance from AllState. The policy provided for both casualty and liability coverage. The plaintiffs rented a house to Christians for Assisted Living for the Mentally Retarded Association (CALMARA) a group who specialized in providing housing for handicapped individuals. The plaintiff contacted her insurance company and wanted to change her policy coverage to rental rather than owner occupied . The agent agreed. However, upon learning that the plaintiff had rented the house to CALAMARA, the offer was withdrawn. The plaintiff sued under the Fair Housing Act 3604(f)(1). The court held that denying housing based on disability was contrary to 24 CFR 100.70(d)(4). Moreover, the court held that if the defendant were allowed to deny people insurance based on the fact that he rented to a person with a disability, persons with disabilities would effectively be denied housing opportunities. The court denied plaintiffs motion to dismiss.
8. National Fair Housing Alliance, Inc. v. Prudential Ins. Co. of America, 208 F. Supp. 2d 46 (D.C.2002)
Fair Housing organization brought suit against Prudential alleging Prudential engaged in redlining throughout the United States. Plaintiffs alleged that these practices had a disparate impact on minority homeowners. Moreover, these practices violated 42 U.S.C. '' 3604 and 3605. The court held that Prudential's redlining practices did violate 42 U.S.C. '' 3604 and 3605. The court reasoned that people are Aoften unable to purchase or to maintain financing for homes without homeowners insurance. Id. at 58. Therefore, it was reasonable to conclude that Congress meant for 42 U.S.C. '3605 to include homeowner's insurance.
As civil rights attorneys the need to protect equal rights to housing opportunities is a crucial responsibility. It is also an area that can lead to large verdicts as Nationwide Insurance Company learned when a jury awarded one fair housing organization a verdict of One Hundred Million dollars for violations of the fair housing laws in the Richmond, Virginia housing market. If you are interested in obtaining more information on insurance discrimination or other forms of fair housing violations a new litigation group has been formed. The Fair Housing Litigation Group is co- chaired by F. Willis Caruso and myself. Bill is a Clinical Professor at the John Marshall Law School and a Director of its Fair Housing Clinic. He has litigated over 1000 fair housing cases, including arguing two cases in the U.S. Supreme Court: Village of Arlington Heights v. Metropolitan Housing Development Corporation and Gladstone Realtors v. Village of Bellwood. You can reach us by email at kramere7@aol.com or 6caruso@jmls.edu. | 
