When the U.S. Supreme Court agreed to hear Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. – a case the insurance industry is watching closely that involves the viability of disparate impact claims under the U.S. Fair Housing Act of 1968 (“FHA”) – industry advocates weighed in as amici curiae. The decision may be one of the most important rulings the Court makes this year, and it has captured the insurance industry’s attention because the provision and pricing of homeowners’ insurance is a practice governed by the FHA.
In the first post of a two-part series, Sharon D. Stuart examines the origins of a case that is now being considered by the U.S. Supreme Court.
Section 804(a) of the FHA makes it unlawful to refuse to sell, rent or otherwise make a dwelling unavailable to a person because of his or her race, color, religion, sex, familial status, or national origin. Likewise, the FHA makes it unlawful for a person or entity engaged in residential real estate-related transactions to discriminate against those in a protected class.
In 2008, the Inclusive Communities Project, Inc. (“ICP”), a non-profit that places African American tenants in Dallas’s predominantly white suburbs, sued the Texas Department of Housing and Community Affairs (“Texas”), claiming Texas disproportionately allocates tax credits to properties in minority populated areas. ICP brought both disparate treatment claims under the Equal Protection clause and 42 U.S.C. § 1982, and a disparate impact claim under the FHA. ICP also sought an injunction requiring Texas to allocate Low Income Housing Tax Credits in a manner that creates as many low income units in non-minority census tracts as exist in minority census tracts and to prohibit denying credits based on the race and ethnicity of residents of the project area.
Following a bench trial, the U.S. District Court for the Northern District of Texas found that ICP failed to prove intentional discrimination, but ruled that ICP had established a prima facie case of disparate impact liability by showing that Texas had disproportionately approved tax credits for developments in minority neighborhoods and had disproportionately denied tax credits in predominantly white neighborhoods. The district court found that Texas proved its actions furthered a legitimate government interest because they complied with state laws requiring the award of low-income housing tax credits according to set criteria, including some that correlated with race. However, the court held that Texas failed to prove the absence of any alternative course of action that would enable the legitimate government interest to be served with less discriminatory impact. The court entered judgment in ICP’s favor on the disparate impact claim and imposed an injunction on Texas, which in turn appealed to the Fifth Circuit.
In 2013, while the case was on appeal, HUD issued a regulation interpreting the FHA to permit disparate impact liability and purporting to set standards for proving such claims under the FHA. According to HUD, the FHA imposes liability for practices that actually or predictably result in a discriminatory effect on a group or create, increase, reinforce, or perpetuate segregated housing due to race, color, religion, sex, handicap, familial status, or national origin. The HUD regulation provides a three-part burden-shifting mechanism different from that imposed by the district court. Under the regulation, the plaintiff must prove that a challenged practice has a discriminatory effect; if so, the defendant must prove that the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. The plaintiff then bears the burden of proving that that nondiscriminatory interest “could be served by a practice with a less discriminatory effect.”
HUD’s rule retroactively applies to both public and private parties and illustrates discriminatory housing practices found in the Fair Housing Regulations. The preamble of the proposed rule expressed HUD’s view that insurers may be liable for practices related to the provision and pricing of homeowner’s insurance under a disparate impact theory. Moreover, HUD’s response to industry comments made clear that it disagrees with insurers with regard to the burdens the FHA places on them.
The Insurance Industry Takes Action
HUD’s issuance of the rule spurred the homeowner’s insurance industry to take action. In 2013, non-profit trade organizations the American Insurance Association (“AIA”) and the National Association of Mutual Insurance Companies (NAMIC) filed suit in the U.S. District Court for the District of Columbia, claiming that the rule was invalid because HUD’s interpretation was contrary to the plain language of the FHA. Likewise, the Property Casualty Insurers Association of America (“PCI”) sued HUD in the Northern District of Illinois, contending that the rule was procedurally defective because HUD did not adequately consider the inconsistency between disparate impact liability versus the nature of insurance and the McCarran-Ferguson Act. In November of 2014, after the Supreme Court granted certiorari in Inclusive Communities, the district court in AIA vacated HUD’s rule, holding that the FHA unambiguously prohibits disparate treatment only, that the disparate impact rule is contrary to law, and that HUD exceeded its authority by issuing a rule imposing disparate impact liability. Similarly, the PCI court agreed that HUD failed to adequately consider the inconsistency between the rule and the nature of insurance and the McCarran-Ferguson Act, and in September 2014, the PCI court remanded to HUD for further consideration.
Meanwhile, the Fifth Circuit was considering Texas’ appeal of the Inclusive Communities decision. Although the Fifth Circuit had previously held that disparate impact liability is allowed under the FHA, it had not previously ruled on the burden-shifting test to be applied. In Inclusive Communities, the Fifth Circuit rejected the district court’s test, adopted the HUD regulations, and remanded to the district court to apply HUD’s framework.
Tomorrow: The case is presented to the U.S. Supreme Court