Ojo v. Farmers Update: Texas Supreme Court Affirms Use of Credit Scoring to Price Homeowner Policies


For two years at our Sedgwick Insurance Regulatory and Litigation seminars, we have tracked the important issue of whether reverse preemption under the McCarran-Ferguson Act (MFA) applies to insurance pricing. We now update our audience on the latest development—the Texas Supreme Court's May 27 decision in Ojo v. Farmers Group, Inc. --- S.W.3d ----, 2011 WL 2112778 (Tex., May 27, 2011). The court held that Texas law permits racially neutral credit scoring in pricing homeowners insurance. This holding, in conjunction with the Ninth Circuit Court of Appeals' 2010 en banc opinion in Ojo, applies MFA "reverse preemption" to preclude federal Fair Housing Act (FHA) claims. Under this pair of Ojo decisions, the MFA continues to have vitality 70 years after its passage!

We have focused on Ojo because it presents critical issues of whether the MFA reverse-preempts federal disparate impact claims premised on racially neutral rating practices that are comprehensively regulated by state statutes. At the time of our February 2011 seminar, we were awaiting a decision on the following question, which the Ninth Circuit had certified to the Texas Supreme Court:

Does Texas law permit an insurance company to price insurance by using a credit-score factor that has a racially disparate impact that, were it not for the [MFA] would violate the federal Fair Housing Act, 42 U.S.C. §§ 3601-19, absent a legally sufficient

nondiscriminatory reason, or would using such a credit-score factor violate Texas Insurance Code sections 544.002(a), 559.051, 559.052, or some other provision of Texas law?

Ojo v. Farmers Group, Inc., 600 F.3d 1201, 1204-05 (9th Cir. 2010) (en banc) (per curiam). On May 27, 2011, the Texas Supreme Court answered that question, holding that "Texas law prohibits the use of race-based credit scoring, but permits race-neutral credit scoring even if it has a racially disparate impact." Ojo v. Farmers Group, Inc., Texas Supreme Court No. 10-0245.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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