More than ten years after the filing of the initial complaint challenging the 2013 disparate impact rule (Rule) adopted by the U.S. Department of Housing and Urban Development (HUD) under the Fair Housing Act (Act), the federal district court in Washington, DC granted HUD’s motion for summary judgment. The two plaintiffs that filed the lawsuit are the insurance industry trade associations, the American Insurance Association and the National Association of Mutual Insurance Companies (NAMIC), although ultimately the case was pursued only by NAMIC. Members of the plaintiff associations issue homeowners property insurance, which is covered by the prohibitions against discrimination under the Act. The judge in the case is Richard Leon, a Senior District Judge appointed by President George W. Bush. 

The Rule sets forth a burden shifting standard for disparate impact claims under the Act:•    

• The plaintiff in a lawsuit or charging party with an administrative complaint filed with HUD (plaintiff) has the burden of proving that a challenged practice caused or predictably will cause a discriminatory effect.
• If the plaintiff satisfies such burden of proof, the defendant in a lawsuit or responding party with an administrative complaint filed with HUD (defendant) has the burden of proving that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant.
• If the defendant satisfies such burden, the plaintiff may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.

HUD adopted the Rule at a time when it appeared that the Supreme Court would address for the first time whether disparate impact claims may be brought under the Act. Two cases addressing the issue that the Supreme Court agreed to hear ended up settling before oral arguments were held. A third case, Texas Department of Housing & Community Affairs v. Inclusive Communities Project,  Inc., ended up being the charm. In a 5-4 decision handed down in 2015, with former Justice Kennedy writing for the majority, the Court ruled that disparate impact claims may be brought under the Act. In so ruling, however, the Court indicated that appropriate safeguards were necessary to protect defendants from inappropriate claims of disparate impact. In this regard, the Court made several points:

• A claim based on statistical disparity fails without a showing of causation. That is, the plaintiff must show a causal link between an act or practice of the defendant and the statistical disparity.
• A robust causality requirement ensures that racial imbalance does not, without more, establish a prima facie case of disparate impact and, thus, protects defendants from being held liable for racial disparities they did not create.
• Governmental or private policies are not contrary to the disparate impact requirement unless they are “artificial, arbitrary, and unnecessary barriers.”
• Courts should avoid interpreting disparate impact liability to be so expansive as to inject racial considerations into every housing decision.
• These limitations are also necessary to protect defendants against abusive disparate impact claims.

While the Court acknowledged the existence of the Rule, it did not base its decision on the Rule.

In response to the Inclusive Communities decision, the plaintiffs in the lawsuit challenging the Rule amended their complaint. While the amended complaint acknowledged that disparate impact claims could be brought under the Act, the plaintiffs asserted that the Rule nonetheless was inconsistent with the Act and the Inclusive Communities decision. Oral arguments were scheduled for February 2017, but the case was stayed as the Trump Administration was now in place and new leadership at HUD and the Department of Justice needed to be nominated, confirmed and then brought up to speed on the case. Then the Trump Administration decided to revisit the Rule and issued an advance notice of proposed rulemaking in May 2018 requesting comment on whether the Rule was constituent with the Inclusive Communities decision. The case continued to be stayed.

In August 2019, HUD proposed to amend the Rule to provide for a new burden shifting framework and make other changes that HUD asserted would make the Rule consistent with the Inclusive Communities decision. In September 2020, HUD issued a final revised disparate impact rule. That final rule was quickly challenged in court by consumer groups, and in October 2020 a federal district court in Massachusetts stayed the effective date of the revised rule and enjoined the enforcement of the revised rule.

Enter the Biden Administration.  In a memorandum issued on January 26, 2021, President Biden ordered HUD to “as soon as practicable, take all steps necessary to examine the effects of” the 2020 rule. That lead to HUD proposing to reinstate the Rule, and ultimately doing so through a final rule issued in March 2023. After all of this activity, the lawsuit challenging the Rule, which was now reinstated, moved forward.

The court first addressed certain defenses raised by HUD that were unrelated to the merits of the case, namely whether NAMIC had standing and whether the case was ripe for review, and the court decided in favor of NAMIC. The court then turned to four substantive claims made by NAMIC, with the court rejecting all of the claims.

The first claim was that the Rule is not authorized by the Act to the extent that it imposes a disparate impact requirement on insurers’ underwriting and rating practices. The complaint asserted that the trade association members make race-blind underwriting and rating decisions for property insurance, and that under the Rule, in order to ensure that their policies and practices did not cause or perpetuate a disparate impact, the members would be compelled to collect data on protected characteristics such as race, consider that data, and make classification and rating decisions that take into account membership in protected groups. Addressing this claim, the court stated that it is hard to see how the Rule causes the “pervasive consideration of prohibited characteristics that NAMIC fears is inevitable.” The court added that nowhere does the Rule “require those engaging in housing practices to collect or use data on individual’s protected characteristics. Rather, as HUD points out, the initial burden is on the plaintiff to provide—through data or otherwise—that a housing practice actually or predictably results in a disparate impact.” (Citations omitted.)

The second claim was that the trade association members are heavily regulated under state laws that (1) substantially limit insurers’ discretion to make underwriting and ratemaking decisions, and (2) also dictate what criteria insurers may use to classify risks. As a result, the complaint then asserts that disparate impact claims against insurers based on underwriting and rating decisions cannot lie under the Act. The complaint also points to the federal McCarran-Ferguson Act as supporting this conclusion. The McCarran-Ferguson Act generally reserves the regulation of the insurance business to the states, and provides that a federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law involved “specifically relates to the business of insurance.” The complaint notes that the Act does not specifically indicate an intent to override the authority of states to regulate the business of insurance, and that imposing a disparate impact requirement on insurers’ underwriting and ratemaking decisions would in effect invalidate, impair or supersede state insurance laws.

The court acknowledged the existence of the state law restrictions on the underwriting and ratemaking determinations of insurers. However, the court believed that the state law restrictions, together with the robust causality requirement under the Inclusive Communities decision, are actually favorable for NAMIC’s members. The court states that if “an insurer is sued under a disparate-impact theory of liability, it can try to show that a state law prohibits (or requires) certain underwriting or rating decisions in a way that severs the casual connection between the insurer’s practices and the disparate impact. If successful, the insurer should be able to get the case dismissed. But that does not make the . . . Rule unlawful or, somehow, categorically inapplicable to insurers.”  (Citations omitted.)

The third claim was that the Rule conflicts with the Act because it allows a claim to be established solely on statistical disparities. As noted above, in the Inclusive Communities decision the Supreme Court made clear that a claim based on statistical disparity fails without a showing of causation. The court responded to this claim in part as follows:

“[C]ontrary to NAMIC’s position, proof of causation is exactly what the . . . Rule requires of plaintiffs at the prima facie stage. To be sure, the Supreme Court specifically called out statistical disparities as being insufficient alone to establish causation at the prima facie stage, and the . . . Rule does not. But the . . . Rule’s legal standard can still be, and is in fact, consistent with Inclusive Communities even if the Rule does not include the same depth of explanation as does the judicial opinion.”

The court concluded that the Rule simply does not allow a prima facie showing with nothing more than evidence of statistical disparities. 

This portion of the court’s decision is interesting. The court admits that the Rule does not expressly provide that statistical disparities alone are insufficient to establish causation at the prima facie stage, and that the Rule does not set forth the legal standard of causation at such stage with the same depth of explanation as the decision in Inclusive Communities. It is not hard to see that another court may find those variances to mean that the Rule is in fact inconsistent with the Inclusive Communities decision. When we previously reported on HUD’s reinstatement of the Rule, we noted various ways in which the Rule differed from the Inclusive Communities decision. For example, in the Inclusive Communities decision the Supreme Court stated that “[d]isparate-impact liability mandates the “removal of artificial, arbitrary, and unnecessary barriers,” not the displacement of valid governmental policies” and that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are “artificial, arbitrary, and unnecessary barriers.”” Nonetheless, when this was pointed out by parties commenting on the proposal to reinstate the Rule, HUD’s response was that it “declines to add an “artificial, arbitrary, and unnecessary” pleading standard or substantive element to the Rule.

The fourth and final claim is that the Rule is not consistent with the Act because, as the Supreme Court stated in the Inclusive Communities decision, the Act should not be used to “second-guess which of two reasonable approaches” an entity should follow, that the Act is not “an instrument to force . . . [defendants] to reorder their priorities,” and that disparate impact liability is properly used only to “remov[e] artificial, arbitrary, and unnecessary barriers.” (Citations omitted.) The complaint asserts that the Rule conflicts with these aspects of the decision because (1) it requires defendants to prove that the challenged practice or policy is necessary to achieve a substantial, legitimate, nondiscriminatory interest and (2) that even if the defendant makes that showing, the plaintiff may prevail by demonstrating that the defendant’s stated interest could be served by some other practice or policy that has a less discriminatory effect. The complaint also notes that in reinstating the Rule, HUD rejected a requirement that the plaintiff’s alternative be “equally effective” or “at least as effective” as the challenged policy in advancing the defendant’s proffered interest. 

The court responded to this claim in part as follows:

“To the extent that the . . . Rule’s “could be served” standard could allow for second-guessing of the type prohibited by Inclusive Communities, NAMIC’s challenge is not the vehicle to decide it. Recall, NAMIC is challenging the Rule in every application to insurers’ underwriting and rating decisions. It is therefore not enough to “point to a hypothetical case in which the [R]ule might lead to an arbitrary result.”  (Citations omitted.)

After addressing a specific hypothetical presented by NAMIC, the court then states as follows:

“In sum, the Court cannot conclude, based on a single hypothetical in which the . . . Rule might allow a plaintiff to second-guess an insurer’s priorities, that every underwriting and rating decision will be second-guessed in violation of the [Act]. This is, after all, summary judgment motion, not a law school classroom discussion!”

This aspect of the court’s opinion also is interesting. The court appears to admit that in given situations the Rule may in fact allow a plaintiff to engage in the type of second-guessing of a defendant’s decision-making in a manner that the Supreme Court sought to forestall in the Inclusive Communities decision. As a result, it is not hard to see that another court may find that this means the Rule is inconsistent with that decision.

While it took over 10 years for the issuance of this decision, the case is by no means at an end. NAMIC could elect to appeal the decision to the U.S. Courts of Appeals for the District of Columbia Circuit. Of particular intrigue is whether this case will make it to the Supreme Court. As noted above, the decision in the Inclusive Communities case was 5-4, and the makeup of the Supreme Court has changed significantly since the time of the decision. Should this case reach the Supreme Court, it is not likely that the Court would overrule the decision in Inclusive Communities that disparate impact claims may be brought under the Act. Nevertheless, if the case reaches the Supreme Court, it would provide an opportunity for the Court to establish with more granularity the specific bar that a plaintiff must clear to make a prima facie case of disparate impact under the Act. The earliest that the case could reach the Court is likely 2025, and we don’t know who will be in charge at HUD or the White House then. All we can say is, stay tuned.

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