United States District Court, N.D. Illinois, Eastern Division
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For Property Casualty Insurers Association of America, Plaintiff: Randolph D. Moss, LEAD ATTORNEY, PRO HAC VICE, Wilmer Cutler Pickering Hale And Dorr Llp, Washington, DC; Rowe W. Snider, LEAD ATTORNEY, Ashlee Marie Knuckey, Locke Lord LLP, Chicago, IL; Seth P Waxman, LEAD ATTORNEY, PRO HAC VICE, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, DC; Brian M. Boynton, Lynn Eisenberg, Matthew J. Tokson, PRO HAC VICE, Wilmer Cutler Pickering Hale And Dorr Llp, Washington, DC.
For Shaun Donovan, in his official capacity as Secretary of Housing and Urban Development, Defendant: Kyle R. Freeny, LEAD ATTORNEY, U.S. Department of Justice, Civil Division, Washington, DC; Daniel Paul Mosteller, U.s. Dept. Of Justice, Civil Rights Division, Housing Sect, Washington, DC.
For United States Department of Housing and Urban Development, Defendant: Kyle R. Freeny, LEAD ATTORNEY, U.S. Department of Justice, Civil Division, Washington, DC; AUSA, United States Attorney's Office (NDIL), Chicago, IL; Daniel Paul Mosteller, U.s. Dept. Of Justice, Civil Rights Division, Housing Sect, Washington, DC.
For Chicago Lawyers' Committee for Civil Rights Under Law, Inc., Amicus: Elizabeth Shuman Moore, LEAD ATTORNEY, Chicago Lawyers' Committee for Civil Rights, Chicago, IL; Ruth Merewyn Greenwood, Chicago Lawyers' Committee For Civil Rights Under Law, Chicago, IL.
For State of Oklahoma ex rel John D. Doak, Amicus: Christopher D Wolek, Michael P. Womack, LEAD ATTORNEYS, Gibbs, Armstrong, Borochoff, Mullican & Hart, Tulsa, OK; Fred Evan Karlinsky, Maria Elena Abate, PRO HAC VICE, Colodny, Fass, Talenfeld, Karlinsky, Abate & Webb, Fort Lauderdale, FL; Kevin William Baldwin, Daley Mohan Groble PC, Chicago, IL; Michael M. Marick, Meckler Bulger Tilson Marick & Pearson LLP, Chicago, IL; Timothy H Wright, Meckler Bulger Tilson Marick & Pearson Llp, Chicago, IL.
For The American Financial Services Association, The Consumer Mortgage Coalition, The Independent Community Bankers of America, The Mortgage Bankers Association, Amici: Andrew C. Glass, LEAD ATTORNEY, K& L Gates LLP, Boston, MA; Nicholas William Marietti, Todd Edward Pentecost, K& L Gates LLP, Chicago, IL; Paul F. Hancock, PRO HAC VICE, Kirkpatrick & Lockhart Preston Gates Ellis LLP, Miami, FL; Roger Lewis Smerage, PRO HAC VICE, K& l Gates Llp, Boston, MA.
For Insurance Commissioners for States of Alabama, Louisiana, Mississippi and Nevada, Amicus: Maria Elena Abate, LEAD ATTORNEY, Fred Evan Karlinsky, Colodny, Fass, Talenfeld, Karlinsky, Abate & Webb, Fort Lauderdale, FL; Michael M. Marick, Meckler Bulger Tilson Marick & Pearson LLP, Chicago, IL; Timothy H Wright, Meckler Bulger Tilson Marick & Pearson Llp, Chicago, IL.
For State Of Illinois, Amicus: Stephen Matthew Soltanzadeh, LEAD ATTORNEY, Office of the Illinois Attorney General, Civil Appeals Division, Chicago, IL.
MEMORANDUM OPINION AND ORDER
AMY J. ST. EVE, United States District Judge.
In 2013, the United States Department of Housing and Urban Development (" HUD" ) issued a final rule formalizing its recognition tat liability under the Fair Housing Act (" FHA" ) may arise from a facially neutral practice that has discriminatory effects on certain groups of people, regardless of whether discriminatory intent exists (the " Disparate Impact Rule" ). See Implementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed.Reg. 11460 (Feb. 15, 2013) (to be codified at 24 C.F.R. pt. 100). In addition to recognizing the availability of discriminatory effects ( i.e., " disparate impact" ) liability under the FHA, the Disparate Impact Rule also establishes a three-step burden-shifting approach to deciding disparate impact claims. Plaintiff Property Casualty Insurers Association of America (" PCI" ) argues that HUD's refusal to build exclusions or safe harbors for homeowners insurance into the Disparate Impact Rule violates the McCarran-Ferguson Act and is arbitrary and capricious. PCI asks the Court to invalidate the Rule as it relates to homeowners insurance under the Administrative Procedure Act and to enjoin HUD from applying the Rule to the homeowners insurance industry.
Before the Court are PCI's motion for summary judgment (R. 20) and Defendants' motion to dismiss or for summary judgment (R. 30). For the following reasons, the Court grants in part and denies in part PCI's motion, and grants in part and denies in part Defendants' motion.
This Administrative Procedure Act case involves the intersection between two important federal policies, the policy of ensuring that regulation of the insurance industry rests primarily with the states and the policy of providing for fair housing throughout the United States, which are reflected in the McCarran-Ferguson Act, 59 Stat. 33 (1945) (codified as amended at 15 U.S.C. § § 1011, et seq.), and the Fair Housing Act (" FHA" ), Pub. L. No. 90-284, 82 Stat. 81 (1968) (codified as amended at 42 U.S.C. § § 3601-19), respectively. The Court, therefore, provides a brief overview of these two federal statutes before turning to HUD's Disparate Impact Rule.
I. The McCarran-Ferguson Act
Congress enacted the McCarran-Ferguson Act in response to the Supreme Court's decision in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), in which the Court held that insurance transactions were subject to federal regulation under the Commerce Clause. See United States Dep't of Treasury v. Fabe, 508 U.S. 491, 499, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993); SEC v. Nat'l Sec. Inc., 393 U.S. 453, 458, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). Prior to South-Eastern Underwriters, " it had been assumed . . . that [i]ssuing a policy of insurance is not a transaction of commerce" and, consequently,
" the States enjoyed a virtually exclusive domain over the insurance industry." Fabe, 508 U.S. at 499 (internal quotation marks and citations omitted). Congress reacted quickly to South-Eastern Underwriters, passing the McCarran-Ferguson Act within a year of the decision to allay fears that the decision threatened the states' power to tax and regulate the insurance industry. See id. at 499-500.
Congress expressed the purpose of the McCarran-Ferguson Act in Section 1 of the Act:
Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.
15 U.S.C. § 1011; see also Autry v. Northwest Premium Servs., Inc., 144 F.3d 1037, 1040 (7th Cir. 1998). To accomplish this purpose, Congress " transformed the legal landscape by overturning the normal rules of pre-emption" and " creating a clear-statement rule . . . that state laws enacted 'for the purpose of regulating the business of insurance' do not yield to conflicting federal statutes unless a federal statute specifically requires otherwise. Fabe, 508 U.S. at 507. Specifically, the McCarran-Ferguson Act provides that " [n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically related to the business of insurance[.]" 15 U.S.C. § 1012(b).
Over the years, courts have developed a three-part inquiry for determining whether the McCarran-Ferguson Act preempts application of a particular federal statute. First, courts inquire whether the federal statute at issue " specifically relate[s] to the business of insurance." Autry, 144 F.3d at 1040-41 (quoting Fabe, 508 U.S. at 501). Second, courts ask whether the state statute was enacted " for the purpose of regulating the business of insurance." Id. Finally, courts determine whether application of the federal statute will " invalidate, impair or supersede" the state law. Id. If the court answers all three inquiries in the affirmative, the federal statute must give way to state law. Id.
In Humana Inc. v. Forsyth, 525 U.S. 299, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999), the Supreme Court rejected the view that the McCarran-Ferguson Act created " any sort of field preemption" as well as the " polar opposite view . . . that Congress intended a green light for federal regulation whenever the federal law does not collide head on with state regulation." Id. at 309. The Court, instead, construed the Act as adopting a middle-ground, holding that " [w]hen federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application." Id. at 310. Accordingly, if a federal statute complements or duplicates a state's regulation of the insurance industry and does not interfere with a state's policies or administrative regime, McCarran-Ferguson preclusion does not apply. See id. at 313 (finding that the McCarran-Ferguson Act did not preclude the plaintiff's RICO claims because " RICO's private right of action and treble damages provision appears to complement Nevada's statutory and common-law claims for relief" ); NAACP v. American Family Mut. Ins.
Co., 978 F.2d 287, 295 (7th Cir. 1992) (" Duplication is not conflict." ); Ojo v. Farmers Grp., Inc., 600 F.3d 1205, 1209-10 (9th Cir. 2010) (recognizing that the McCarran-Ferguson Act would not reverse-preempt the FHA where the FHA " complement[s]--rather than displace[s] and impair[s]" state law).
II. The Fair Housing Actz
Congress enacted the FHA in 1968 " to provide, within constitutional limits, for fair housing throughout the United States." See 42 U.S.C. § 3601. The FHA makes it unlawful to, among other things, refuse to sell, rent, or " otherwise make unavailable or deny" housing to any person " because of race, color, religion, sex, familial status, . . . national origin[,]" or handicap. 42 U.S.C. § 3604(a), (f)(1). The FHA also makes it unlawful " [t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith" because of the person's race, color, religion, sex, familial status, national origin, or handicap. See id. § 3604(b), (f)(2). The FHA empowers HUD to enforce the Act and to issue regulations implementing the Act. See id. § § 2612, 3614a.
A. Disparate Impact Claims Under the FHA
HUD has long interpreted the FHA as prohibiting not only intentional discrimination on the basis of a person's protected characteristics, but also practices that have unwarranted discriminatory effects on minorities or other persons protected by the Act, regardless of whether there was an intent to discriminate. See 78 Fed.Reg. 11460-62 nn.12-27 (Feb. 15, 2013) (collecting examples). Put differently, HUD interprets the FHA as providing for both discriminatory intent and disparate impact liability. See id. All eleven circuit courts to have addressed this issue, including the Seventh Circuit, have agreed that the FHA provides for disparate impact liability at least in some cases. See, e.g., Metropolitan Hous. Dev. Corp. v. Village of Arlington Heights, 558 F.2d 1283, 1290 (7th Cir. 1977) (" We therefore hold that at least under some circumstances a violation of section 3604(a) can be established by showing a discriminatory effect without a showing of discriminatory intent." ). Neither the Supreme Court nor the Circuit Court for the District of Columbia, however, has weighed in on whether the FHA allows for disparate impact liability.
B. Liability of Insurers Under the FHA
HUD also has long interpreted the FHA as prohibiting discrimination in the provision of homeowners insurance. In 1989, HUD issued a regulation expressly stating that prohibited acts under the FHA include " [r]efusing to provide . . . property or hazard insurance for dwellings or providing such services or insurance differently because of race, color, religion, sex, handicap, familial status, or national origin." See Implementation of the Fair
Housing Amendments Act of 1988, 54 Fed.Reg. 3232, 3285 (codified at 24 C.F.R. § 100.70(d)(4)). Several circuit courts, deferring to HUD's interpretation, have similarly interpreted the FHA as prohibiting intentionally discriminatory practices related to the provision and pricing of homeowners insurance. See, e.g., NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, 301 (7th Cir. 1992), cert. denied, 508 U.S. 907, 113 S.Ct. 2335, 124 L.Ed.2d 247 (1993) (" Section 3604 applies to discriminatory denials of insurance, and discriminatory pricing, that effectively preclude ownership of housing because of the race of the applicant." ); Ojo v. Farmers Grp. Inc., 600 F.3d 1205, 1208 (9th Cir. 2010) ( en banc ) (deferring to HUD's interpretation of the FHA as prohibiting discrimination in the provision of homeowner's insurance); Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1359-60 (6th Cir. 1995) (same). But see Mackey v. Nationwide Ins. Cos., 724 F.2d 419, 423-25 (4th Cir. 1984), cert. denied 516 U.S. 1140, 116 S.Ct. 973, 133 L.Ed.2d 893 (1996) (concluding that claims against the hazard insurance industry do not fall within the scope of the FHA).
As the Seventh Circuit explained in American Family, discrimination against minorities or other protected groups in the provision of homeowners insurance can make housing unavailable to those groups. American Family, 978 F.2d at 300. Put succinctly, " [l]enders require their borrowers to secure property insurance. No insurance, no loan; no loan, no house; lack of insurance thus makes housing unavailable." See id. at 297. Discrimination in the provision of homeowners insurance can also raise the cost of housing to minorities and other protected groups and frustrate their ability to live in integrated neighborhoods so that " [e]ven if they achieve their goal, they pay extra." See id. at 290. For these reasons, the Seventh Circuit recognized in American Family that the FHA allows for claims against homeowners insurers who intentionally discriminate against individuals based on protected characteristics.
C. Disparate Impact Liability of Insurers Under the FHA
Although almost all circuit courts have recognized that the FHA allows for disparate impact liability and several circuit courts have separately recognized that the FHA allows for claims against homeowners insurers, few courts have addressed whether the FHA allows for disparate impact claims--as opposed to disparate treatment claims--against homeowners insurers. In the same case in which the Seventh Circuit recognized that the FHA allows for claims against insurers who intentionally discriminate against individuals on the basis of a protected characteristic, the Seventh Circuit questioned whether the FHA would also allow for disparate impact liability against insurers. See id. The Seventh Circuit explained the issue as follows:
Insurance works best when the risks in the pool have similar characteristics. For example, term life insurance costs substantially more per dollar of death benefit for someone 65 years old than for one 25 years old, although the expected return per dollar of premium is the same to both groups because the older person, who pays more, also has a higher probability of dying during the term. Auto insurance is more expensive in a city than in the countryside, because congestion in cities means more collisions. Putting young and old, or city and country, into the same pool would lead to adverse selection: people knowing that the risks they face are less than the average of the pool would drop out. A single price for term life insurance would dissuade younger persons from
insuring, because the price would be too steep for the coverage offered; the remaining older persons would pay a price appropriate to their age, but younger persons would lose the benefits of insurance altogether. To curtail adverse selection, insurers seek to differentiate risk classes with many variables.
Risk discrimination is not race discrimination. Yet efforts to differentiate more fully among risks may produce classifications that could be generated by discrimination. . . . No insurer openly uses race as a ground of ratemaking, but is a higher rate per $1,000 of coverage for fire insurance in an inner city neighborhood attributable to risks of arson or to racial animus?
Id. at 290-91. Because of the difficulties that imposing disparate impact liability on insurers may create, the Seventh Circuit made clear in American Family that its interpretation of the FHA as applying to insurers extended only to disparate treatment liability, and it made no comment on whether the FHA also allows for disparate impact liability against insurers. See id. at 291 (" All we decide is whether the complaint states claims on which the plaintiff may prevail if they establish that the insurer has drawn lines according to race rather than actuarial calculations." ).
The Seventh Circuit's decision in Doe v. Mutual of Omaha, 179 F.3d 557 (7th Cir. 1999), also calls into question the viability of disparate impact claims against insurers, albeit in a different context and for different reasons than those at issue in American Family. In Mutual of Omaha, the Seventh Circuit considered whether an insurer violated the Americans with Disabilities Act by including lower lifetime benefits limits for AIDS and AIDS-related conditions than for other conditions. See id. at 558. The Seventh Circuit ultimately concluded that the insurer-defendant had not violated the Americans with Disabilities Act because the Act did not require the insurer to alter its policies to make them equally valuable to the disabled and nondisabled. See id. at 563. The court also held that even if its interpretation of the Americans with Disabilities Act was wrong, the plaintiff's claim against the insurer " must fail anyway, because it is barred by the McCarran-Ferguson Act." Id. According to the Seventh Circuit, interpreting the Americans with Disabilities Act as the plaintiff desired-- i.e., as regulating the content of insurance policies--would " interfere with a State's administrative regime" regulating insurance and, therefore, violate the McCarran-Ferguson Act. See id. at 563.
As the Seventh Circuit explained, " [s]tate regulation of insurance is comprehensive and includes rate and conversion issues, . . . so if federal courts are now to determine whether caps on disabling conditions (by no means limited to AIDS) are actuarially sound and consistent with principles of state law they will be stepping on the toes of state insurance commissioners." Id. In finding that the McCarran-Ferguson Act barred the plaintiffs' claim, the Seventh Circuit drew a distinction between discriminatory intent claims and disparate impact claims against insurers:
It is one thing to say that an insurance company may not refuse to deal with disabled persons; the prohibition of such refusals can probably be administered with relatively little interference with state insurance regulation . . . . It is another thing to require federal courts to determine whether limitations on coverage are actuarially sound and
consistent with state law. Even if the formal criteria are the same under federal and state law, displacing their administration into federal court--requiring a federal court to decide whether an insurance policy is consistent with state law--obviously would interfere with the administration of the state law. The states are not indifferent to who enforces their laws.
Id. at 564 (emphasis in original).
In addition to the Seventh Circuit, the Eighth Circuit also has questioned the viability of disparate impact claims against insurers, noting that " at least with respect to insurers, the question [of whether the FHA provides for disparate impact liability] is not free from doubt." See Saunders v. Farmers Ins. Exch., 537 F.3d 961, 964 (8th Cir. 2008). Other courts, however, have recognized--either implicitly or explicitly--that the FHA allows for disparate impact claims against insurers. See Ojo, 600 F.3d at 1208-10; Nat'l Fair Hous. Alliance, Inc. v. Prudential Ins. Co. of Am., 208 F.Supp.2d 46, 60 (D.D.C. 2002) (rejecting the defendants' argument that disparate impact liability does not apply to the insurance industry because of the availability of the " business justification" defense and because the defendants pointed to nothing in the FHA that would justify carving out an exception for a particular type of organization).
The Ninth Circuit's decision in Ojo is particularly relevant to the present case. In Ojo, the plaintiff, an African-American resident of Texas, claimed that a homeowners insurance company and its affiliates based their rates on a number of credit-score factors that disparately impacted minorities in violation of the FHA. See Ojo, 600 F.3d at 1207. The Ninth Circuit, sitting en banc, held as a matter of first impression that the FHA prohibits racial discrimination in the denial and pricing of homeowners insurance. See id. at 1208. In doing so, the Ninth Circuit made no distinction between disparate treatment claims and disparate impact claims. Because the plaintiff based his claim entirely on the discriminatory effects of the defendants' policies and did not claim that the defendants intentionally discriminated against him, however, the Ninth Circuit implicitly held that disparate impact claims against insurers are cognizable under the FHA.
The Ninth Circuit then went on to address whether the McCarran-Ferguson Act nonetheless precluded the plaintiff's claim. The Ninth Circuit identified the issue as
whether application of the FHA to [the plaintiff's] case might invalidate, impair, or supersede the provisions of the Texas Insurance Code that authorize insurance companies to use credit scoring in setting insurance rates. If Texas law permits insurance companies to use credit scores even if the factors used to compute scores may have a racially disparate impact, then allowing [the plaintiff] to sue [d]efendants under the FHA for this practice would impair Texas law. On the other hand, if Texas law prohibits the use of credit-score factors that would violate the FHA on the basis of a disparate-impact theory, then the FHA would complement--rather than displace and impair--Texas law, and [the plaintiff's] FHA disparate-impact suit would not be reverse-preempted by the [McCarran-Ferguson Act].
See id. at 1209-10. Because the Ninth Circuit determined that this question of Texas law was unsettled, it certified the question to the Supreme Court of Texas. The Supreme Court of Texas, after performing an extensive review of the relevant provisions of the Texas Insurance Code, their legislative history, and similar provisions in other areas of Texas law, determined that Texas law permits race-neutral credit scoring even if it has a racially disparate impact. See Ojo v. Farmers Grp., Inc., 356 S.W.3d 421, 422-34 (Tex. 2011). Accordingly, the Texas Supreme
Court concluded that allowing a claim against Texas insurers for using completely race-neutral factors in credit scoring would frustrate ...