When the 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.
The Supreme Court Proceedings
On Oct. 2, 2014, the U.S. Supreme Court granted certiorari as to a single issue in Inclusive Communities (“ICP”) – whether disparate impact claims are cognizable under the FHA. Contrary to the district courts’ conclusions in PCI (“the Property Casualty Insurers Association of America”) and AIA (“the American Insurance Association”), all federal circuit courts except the D.C. Circuit have either held or assumed that the FHA authorizes disparate impact claims. The U.S. Supreme Court has long been interested in this issue, having granted certiorari on two previous occasions to resolve whether the FHA provides for disparate impact liability.
The parties’ arguments before the Supreme Court are straightforward – Texas argues that the plain language of the FHA does not allow disparate impact claims; ICP argues that it does. Texas says that even if it did, state and local governmental agencies would improperly be forced to engage in “race-conscious decision-making to avoid legal liability;” ICP (and HUD, which entered the case to defend HUD’s new regulation) contend that the Act must be construed broadly to eradicate the continuing effects of discrimination. According to Texas, if the FHA allows discriminatory effects liability, then any federal law barring discrimination “because of race” can be expanded; ICP urges the Court to defer to HUD’s expert view of the law’s intent.
The insurance industry, through AIA, PCI and NAMIC (“the National Association of Mutual Insurance Companies”) filed amicus curiae briefs in support of Texas to alert the Court to evidence, specific to the insurance industry, that Congress did not intend the FHA to create disparate impact liability. The industry points to two overarching reasons in support of its position. First, the text of the FHA unambiguously prohibits only disparate treatment. The FHA lacks the clear effects-based language required in order for a statute to prohibit practices resulting in disparate impact; rather, it focuses on the improper motive of the defendant. Second, disparate impact liability would conflict with the McCarran-Ferguson Act and disrupt the business of homeowner’s insurance to such an extent that Congress could not have intended to create such liability. Amici argue that states require insurers to use actuarial practices based on factors “legitimately related to the risks associated with insured properties” and usually prohibit insurers from considering inappropriate factors like race when making classification and rating decisions. Discrimination on the basis of factors not legitimately related to risk would undermine the actuarial principles underlying the provision of insurance and violate state laws that prohibit differentiating between similar risks based on protected characteristics.
Thus, a disparate impact claim could be triggered by any risk factor that affects a protected class in a disproportionate way, even though eliminating otherwise appropriate risk factors because they have a disparate impact would violate sound insurance practices and result in unfairly discriminatory rates. Moreover, insurers would be exposed to tremendous uncertainty and litigation risk due to their inability to predict the potential disproportionate effect of fair discrimination across different geographic areas, time, and hundreds of actuarially appropriate risk factors. Amici argue that this outcome leaves insurers with impossible choices: (1) assigning insureds to alternative risk pools in contravention of sound actuarial principles; (2) ignoring risk characteristics that have a disparate impact and simply charging all insureds the same, likely forcing insurers out of business; or (3) raising prices for all insureds.
The High Court heard oral arguments on January 21, 2015. The more liberal justices questioned Texas’ plain text argument, noting that the goal of the FHA was to reverse decades of discrimination. Interestingly, Justice Scalia joined those justices to point out that the 1988 changes to the law, which created three exceptions to disparate impact liability, show Congress’ awareness that a disparate impact remedy was well established. However, Justice Scalia was equally tough on the respondent, noting that racial disparity is not the same as racial discrimination. The Court’s more conservative members pressed the U.S. Solicitor General, who argued on HUD’s behalf about how decision makers can know in advance whether a policy’s impact will be good or bad. Ultimately, Texas’ fallback argument – that local governments will be required to adopt racial quotas to protect against effects-based liability – could carry the day as it may be attractive to the more conservative justices.
The Supreme Court will rule by the end of its term on June 30, 2015. Until then, parties on both sides of this politically charged and emotional issue will wait, watch and plan for the future. Regardless of the outcome of Inclusive Communities, it is unlikely that the debate surrounding disparate impact will end there.