HUD Proposal Would Impose “Disparate Impact” Regulation on Property Insurance


Originally published in Washington Legal Foundation, Legal Backgrounder, Vol. 27 No. 11 on June 8, 2012.

The U.S Department of Housing and Urban Development (HUD) has proposed a Fair Housing Act rule that would increase the legal risk of housing providers, lenders, and providers of housing-related services. The proposal would impose liability for policies and practices that although benign in purpose, impact minority and nonminority persons or residential areas differently. It endorses a “disparate-impact” theory, which allows plaintiffs to bring Fair Housing Act claims without any evidence of discriminatory intent. HUD would create a difficult burden for companies to demonstrate the business necessity of the challenged policy or practice needed for them to avoid liability. Even if defendants meet their burden, HUD’s proposal allows the government and private plaintiffs to second guess business decisions; plaintiffs can suggest their own alternative business practices that are alleged to be “less discriminatory.”

HUD, with support from federal courts, has long interpreted the Fair Housing Act as applicable to the actions of property insurance providers, and these businesses are clearly within the reach of the new disparate-impact proposal. The proposed rule notes that “the provision and pricing of homeowner’s insurance” is an example “of a housing policy or practice that may have a disparate impact on a class of persons delineated by characteristics protected by the Act.” If the rule is finalized as proposed, and upheld by the courts, property insurance companies are likely to experience increased claims of unlawful discrimination under the Fair Housing Act. Successful challenges could alter risk-based business practices and lead to awards of compensatory and punitive monetary damages as well as civil penalties.

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