The U.S. Department of Housing and Urban Development (HUD) has announced it will continue to address disparate impact liability for discriminatory insurance practices on a case-by-case basis. HUD addressed concerns from the insurance industry in concluding that categorical exemptions for insurance practices from disparate impact liability are "unworkable and inconsistent with the broad fair housing objectives and obligations embodied in the Fair Housing Act."
HUD issued the statement in response to a 2014 federal court decision in Property Casualty Insurers Association of America v. Donovan, where the court required HUD to provide a reasoned explanation for its decision to refuse to enact a rule granting safe harbor exemptions to insurers from disparate impact liability. Instead, HUD chose to resolve cases through adjudication on a case-by-case basis. HUD's failure to provide a reasoned explanation for its decision to prefer adjudication over an exemption rule, the court held, constituted an arbitrary and capricious decision that violated the Administrative Procedures Act. The court criticized HUD for only providing a one-paragraph response to the concerns raised by the insurance industry regarding the application of disparate impact liability to insurance practices.
To satisfy the Donovan court's mandate, HUD now has issued this eight-page statement of responses to insurance industry concerns and comments on the matter. HUD provided two overarching reasons for why it would not create the safe harbor exemptions sought by the insurance industry. First, it claimed it would be "practically impossible" to define the scope of the exemptions with sufficient precision given the diversity of potential discriminatory effects claims. Second, HUD balanced that the exemptions sought would undermine the remedial purpose and effectiveness of the FHA in a way that outweighed any of the insurer concerns.
As background context, the U.S. Supreme Court recently recognized disparate impact liability as cognizable under the FHA. Disparate impact (also called "discriminatory effects") liability arises when facially neutral policies have an unintentional yet discriminatory effect on a protected class where the insurance company has no substantial, legitimate, nondiscriminatory interest for advancing the policy. For example, an insurer's policy of using certain risk factors in underwriting could lead to disparate impact liability if it causes a discriminatory effect on protected classes.
In response to comments that disparate impact liability could threaten the actuarial standards underpinning the insurance market, HUD reassured insurance providers that "practices that an insurer can prove are risk-based, and for which no less discriminatory alternative exists, will not give rise to discriminatory effects liability." HUD refers to the third step of the burden-shifting approach to disparate impact liability here by referencing that a policy will not violate the FHA if there is no less discriminatory alternative that the insurer could pursue in achieving its legitimate business interest. HUD did not provide specific examples of a less discriminatory alternative in the insurance context.
Although HUD's recent statement addresses the deficiencies in its stance raised by the Donovan court, other court battles ensue over the application of disparate impact standards to insurance. In American Insurance Association v. HUD, two homeowners insurance trade associations challenge the application of disparate impact standards to insurance on many of the same grounds that commenters raised in HUD's recent statement. Both HUD and the insurance associations moved for summary judgment and the motions are currently pending before the court. Regardless of the outcome, it is clear that the issue of the application of disparate impact liability under the FHA could soon again be before the Supreme Court for an opportunity for much needed clarity and resolution.
