Application of the Fair Housing Act's Discriminatory Effects Standard to Insurance, 69012-69019 [2016-23858]

Download as PDF 69012 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules SMALL BUSINESS ADMINISTRATION 13 CFR Part 107 Small Business Investment Companies—Early Stage SBICs; Public Webinar U.S. Small Business Administration. ACTION: Proposed rule; notice of public webinar. AGENCY: The U.S. Small Business Administration (SBA) announces that it is holding a public webinar regarding its Early Stage Small Business Investment Companies proposed rule, which was published on September 19, 2016. The webinar will describe the changes proposed in the rulemaking and answer questions regarding the proposed rule. DATES: The webinar will be held on October 12, 2016, at 1 p.m. EST. Attendees must pre-register by October 10, 2016, at 11:59 p.m. EST. ADDRESSES: Parties interested in attending the webinar must pre-register by sending an email request to SBA’s Office of Investment and Innovation at applySBIC@sba.gov, as further described in section III of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Scott Schaefer, SBA Office of Investment and Innovation at (202) 205– 6514 or applySBIC@sba.gov. SUPPLEMENTARY INFORMATION: 19, 2016. In order to familiarize the public with the content of the Early Stage SBIC proposed rule, SBA will host a webinar on the proposed rule before the closing date. The webinar will be transcribed and become part of the administrative record for SBA’s consideration when the Agency deliberates on the final Early Stage SBIC regulations. II. Webinar Schedule mstockstill on DSK3G9T082PROD with PROPOSALS SUMMARY: I. Background Information The Early Stage SBIC program was launched in 2012 as a 5-year effort as part of President Obama’s Startup America Initiative. The intent of the Early Stage SBIC program was to license and provide SBA-guaranteed leverage to Early Stage SBICs that would focus on making investments in early stage small businesses. Although 62 investment funds applied to the program, few satisfied SBA’s licensing criteria. To date, SBA has only licensed five Early Stage SBICs. On September 19, 2016, SBA published a proposed rule regarding the Early Stage Small Business Investment Company (SBIC) program (81 FR 64075), which proposes to make the Early Stage SBIC program a permanent part of the SBIC program. In addition, the rule proposes changes to the Early Stage SBIC Program with respect to licensing, non-SBA borrowing, and leverage eligibility. The proposed Early Stage SBIC rule may be viewed at https:// www.regulations.gov/document?D=SBA2015-0002-0009. The comment period for the proposed rule closes on October VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 Webinar date and time October 12, 2016, 1 p.m. EST. Registration closing date October 10, 2016, 11:59 p.m. EST. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Part 100 [Docket No. FR–5508–N–03] Application of the Fair Housing Act’s Discriminatory Effects Standard to Insurance Office of the Assistant Secretary for Fair Housing and Equal Opportunity, HUD. ACTION: Reconsideration of public comments; implementation of the Fair Housing Act’s Discriminatory Effects Standard. AGENCY: HUD is issuing this document to supplement its responses to certain insurance industry comments to HUD’s proposed rule implementing the Fair Housing Act’s (‘‘Act’’) discriminatory effects standard. These commenters requested, inter alia, total or partial exemptions or safe harbors from liability under the Act’s discriminatory effects standard. After careful reconsideration of the insurance industry comments in accordance with the court’s decision in Property Casualty Insurers Association of America (PCIAA) v. Donovan, HUD has determined that categorical exemptions or safe harbors for insurance practices are unworkable and inconsistent with the broad fair housing objectives and obligations embodied in the Act. HUD continues to believe that the commenters’ concerns regarding application of the discriminatory effects standard to insurance practices can and should be addressed on a case-by-case basis. DATES: Supplemental Responses issued on October 5, 2016. FOR FURTHER INFORMATION CONTACT: Jeanine Worden, Associate General Counsel for Fair Housing, Office of General Counsel, U.S. Department of Housing and Urban Development, 451 7th Street SW., Washington, DC 20410– 0500; (202) 402–5188 (this is not a tollfree number). Persons with hearing or speech impairments may contact this number via TTY by calling the toll-free Federal Relay Service at 800–877–8399. SUPPLEMENTARY INFORMATION: SUMMARY: The session is expected to last no more than 1 hour. III. Registration If you are interested in attending the webinar, you must pre-register by the registration closing date. To pre-register, send an email to applySBIC@sba.gov. In the body of the email, please provide the following: Participant’s Name, Title, Organization Affiliation, Address, Telephone Number, and Email Address. You must submit your email by the applicable registration closing date listed in this notice. Due to technological limitations, attendance is limited to 120 participants per session. If demand exceeds capacity for the webinar, SBA will hold another one. SBA will announce any additional sessions through a Federal Register document and on its Web site, www.sba.gov/inv/earlystage. SBA will confirm the registration via email along with instructions for participating. SBA will post any presentation materials associated with the webinar on the day of the webinar by 10 a.m. EST at www.sba.gov/inv/ earlystage. If there are specific questions you would like SBA to address in the webinar, SBA must receive them no later than October 9, 2016. Since the Early Stage SBIC regulations are in the proposed rulemaking stage, SBA will not be able to answer questions that are outside of clarification of the proposed rule. Mark L. Walsh, Associate Administrator for Investment and Innovation. [FR Doc. 2016–24031 Filed 10–4–16; 8:45 am] BILLING CODE 8025–01–P PO 00000 Background Title VIII of the Civil Rights Act of 1968, as amended (‘‘Fair Housing Act’’ or ‘‘Act’’), prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin.1 On November 16, 1 42 Frm 00004 Fmt 4702 Sfmt 4702 E:\FR\FM\05OCP1.SGM U.S.C. 3601–3619. 05OCP1 mstockstill on DSK3G9T082PROD with PROPOSALS Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules 2011, HUD issued a proposed rule seeking to formalize, through noticeand-comment rulemaking, HUD’s longstanding interpretation of the Act as prohibiting practices with an unjustified discriminatory effect and to standardize the analytical framework for evaluating such cases.2 In response to the proposed rule, HUD received nearly one hundred comments from a range of interested parties, including from three insurance trade associations requesting exemptions or safe harbors. The National Association of Mutual Insurance Companies (‘‘NAMIC’’) and the American Insurance Association (‘‘AIA’’) requested an exemption from discriminatory effects liability for all insurance practices. NAMIC also requested, in the alternative, exemptions for insurance pricing, for Fair Access to Insurance Requirements (‘‘FAIR’’) plans, and/or safe harbors for recognized risk factors. The Property Casualty Insurers Association of America (‘‘PCIAA’’) requested an exemption for all insurance underwriting practices. On February 15, 2013, HUD published its final rule, entitled ‘‘Implementation of the Fair Housing Act’s Discriminatory Effects Standard’’ (‘‘Rule’’).3 In the Rule, HUD declined to grant the requested exemptions or safe harbors for any insurance practices, explaining that the commenters’ concerns could be addressed on a case-by-case basis. On November 27, 2013, PCIAA filed an action in the U.S. District Court for the Northern District of Illinois (‘‘the court’’) alleging that HUD’s Rule violated the McCarran-Ferguson Act 4 (‘‘McCarran-Ferguson’’) and the Administrative Procedure Act.5 On September 3, 2014, the court issued a decision in PCIAA v. Donovan.6 The court upheld the Rule’s burden-shifting framework for analyzing discriminatory effects claims as a reasonable interpretation of the Fair Housing Act.7 The court also held that a violation of McCarran-Ferguson can be adjudicated by a court only in the context of a concrete dispute challenging the application of the Rule to a particular insurance practice, and not in the abstract.8 Distinguishing between adjudication and agency rulemaking, the court concluded that HUD had not adequately explained why case-by-case adjudication was preferable 2 76 FR 70921 (Nov. 16, 2011). FR 11460 (Feb. 15, 2013). 4 15 U.S.C. 1011–1015. 5 5 U.S.C. 551–559. 6 Prop. Cas. Insurers Ass’n of Am. v. Donovan (PCIAA), 66 F. Supp. 3d 1018 (N.D. Ill. 2014). 7 Id. at 1051–53. 8 Id. at 1037–42. 3 78 VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 to using its rulemaking authority to provide exemptions or safe harbors related to homeowners insurance.9 The court remanded the matter to HUD for further proceedings consistent with its ruling.10 After careful reconsideration of the comments from insurance industry representatives and the court’s opinion, HUD continues to believe that case-bycase adjudication is preferable to creating the requested exemptions or safe harbors for insurance practices. The Fair Housing Act’s broad prohibitions on discrimination in housing are intended to eliminate segregated living patterns while moving the nation toward a more integrated society. When Congress enacted the Fair Housing Act in 1968 and amended it in 1988, it established exemptions for certain practices 11 but not for insurance. Rather, Congress stated that the Act is intended to provide for fair housing throughout the United States.12 The Supreme Court has recognized the Act’s broad remedial purpose.13 Among other things, the Act requires HUD to affirmatively further fair housing in all of its housing-related programs and activities,14 one of which is the administration and enforcement of the Act.15 McCarran-Ferguson, enacted in 1945, restricts only those applications of federal law that directly conflict with state insurance laws, frustrate a declared state policy, or interfere with a State’s 9 Id. at 1049. at 1054. 11 See, e.g., 42 U.S.C. 3605(c) (exempting appraisal practices from disparate impact liability), 3607(b)(1) (exempting reasonable governmental occupancy limits from disparate impact liability), 3607(b)(4) (exempting practices related to certain controlled substance convictions from disparate impact liability); see also Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507, 2520–21 (2015) (discussing these ‘‘exemptions from liability’’). 12 See 42 U.S.C. 3601. 13 See Havens Realty Corp. v. Coleman, 455 U.S. 363, 380 (1982) (recognizing Congress’s ‘‘broad remedial intent’’ in passing the Act); Trafficante v. Metro. Life Ins. Co., 409 U.S. 205, 209 (1972) (recognizing the ‘‘broad and inclusive’’ language of the Act); see also Inclusive Cmtys., 135 S. Ct. at 2521 (describing the ‘‘central purpose’’ of the Act as ‘‘to eradicate discriminatory practices within a sector of our Nation’s economy’’). 14 See 42 U.S.C. 3608(e)(5). 15 See, e.g., 42 U.S.C. 3608 (the Secretary’s administrative responsibilities under the Act), 3609 (education, conciliation, conferences, and reporting obligations to further the purposes of the Act), 3610 (investigative authority), 3611 (subpoena power), 3612 (administrative enforcement authority), 3614a (rulemaking authority), 3616 (authority to cooperate with state and local agencies in carrying out the Secretary’s responsibilities under the Act), 3616a (authority to fund of state and local agencies and private fair housing groups to eliminate discriminatory housing practices prohibited by the Act). 10 Id. PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 69013 administrative regime.16 For HUD to create the requested exemptions or safe harbors would allow to go uncorrected at least some discriminatory insurance practices that can be subject to disparate impact challenges consistent with McCarran-Ferguson and the filed rate doctrine. Thus, to create such exemptions or safe harbors would undermine the efficacy of the Act and run counter to the Act’s purpose and HUD’s statutory responsibilities. The concerns raised by the insurance industry commenters do not outweigh this loss of efficacy in the administration and enforcement of the Act. Rather, the case-by-case approach appropriately balances these concerns against HUD’s obligation to give maximum force to the Act by taking into account the diversity of potential discriminatory effects claims, as well as the variety of insurer business practices and differing insurance laws of the states, as they currently exist or may exist in the future. Moreover, in light of the variety of practices and relevant state laws, as well as the substantial range of possible discriminatory effects claims, it is practically impossible for HUD to define the scope of insurance practices covered by an exemption or safe harbor with enough precision to avoid case-by-case disputes over its application. Accordingly, HUD has determined that categorical exemptions or safe harbors for insurance practices are unworkable and inconsistent with HUD’s statutory mandate. The discriminatory effects standard imposes liability only for those insurance practices that actually or predictably result in a discriminatory effect and that lack a legally sufficient justification.17 It takes into account an insurer’s interest in the challenged practice and, for the reasons explained below, any conflict with a specific state insurance law can and should be addressed on a case-bycase basis in the context of that state law. HUD provides the following supplemental responses to the public comments submitted by the three insurance trade associations that sought exemptions or safe harbors. Revised Responses to Insurance Industry Comments Issue: Two commenters requested exemptions from the Rule for all 16 Humana Inc. v. Forsyth, 525 U.S. 299, 310 (1999) (‘‘When 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.’’). 17 See 24 CFR 100.500(b). E:\FR\FM\05OCP1.SGM 05OCP1 69014 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS insurance practices, and a third commenter requested an exemption for insurance underwriting practices. All three of these insurance industry commenters raised McCarran-Ferguson in support of their requests for an exemption. One of these three commenters urged HUD to delete the insurance example from the Rule, stating that McCarran-Ferguson dictates that ‘‘state insurance law trumps the application of any federal law to state regulated insurance, except under very narrow circumstances, which are not met here.’’ 18 Another questioned ‘‘whether non-racially motivated and sound actuarial underwriting principles recognized by state insurance regulators that permit accurate risk-based pricing for consumers can be prohibited by federal regulators who find them to have a ‘disparate impact.’ ’’ 19 The third commenter was concerned that ‘‘the disparate impact standards would impair state unfair discrimination standards,’’ which have ‘‘historically been a cost based concept’’ prohibiting ‘‘underwriting and rating distinctions ‘between individuals or risks of the same class and essentially the same hazard.’ ’’ 20 The commenter expressed concern that if the Rule is applied to homeowners insurance, ‘‘accurate risk assessment will be threatened, adverse selection will increase, and coverage availability will suffer.’’ 21 This commenter also sought, in the alternative, ‘‘safe harbors for longrecognized risk-related factors,’’ stating that ‘‘[f]ailure to provide safe harbor protection for the use of factors historically allowed by state insurance regulators would subject insurers to baseless litigation and threaten the sound actuarial standards underpinning the insurance market.’’ 22 HUD Response: HUD does not agree that it is necessary or appropriate to create an exemption from discriminatory effects liability for all insurance practices or for all underwriting practices in order to accommodate the insurance industry’s concerns. McCarran-Ferguson does not require HUD to do so, and categorical exemptions would undermine the Act’s 18 American Insurance Association, Comment Letter on Proposed Rule on Implementation of the Fair Housing Act’s Discriminatory Effects Standard (Jan. 17, 2012). 19 Property Casualty Insurers Association of America, Comment Letter on Proposed Rule on Implementation of the Fair Housing Act’s Discriminatory Effects Standard (Jan. 17, 2012). 20 National Association of Mutual Insurance Companies, Comment Letter on Proposed Rule on Implementation of the Fair Housing Act’s Discriminatory Effects Standard (Jan. 17, 2012). 21 Id. 22 Id. VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 broad remedial purpose and contravene HUD’s own statutory obligation to affirmatively further fair housing. HUD also declines to create safe harbors from discriminatory effects liability for the use of particular risk factors. HUD disagrees with the commenter’s assertions about the consequences that would befall the insurance industry if HUD does not grant the requested safe harbors for ‘‘long-recognized risk-related factors’’ or ‘‘historically allowed’’ factors. Establishing safe harbors for specific risk-related criteria would be overbroad, arbitrary, and quickly outdated. The Act’s broad remedial purpose is ‘‘to provide . . . for fair housing throughout the United States.’’ 23 Thus, the Act plays a ‘‘continuing role in moving the Nation toward a more integrated society.’’ 24 Ensuring that members of all protected classes can access insurance free from discrimination is necessary to achieve the Act’s objective because obtaining a mortgage for housing typically requires obtaining insurance, too.25 Likewise, obtaining insurance may be a precondition to securing a home in the rental market.26 Insurance is also critical to maintaining housing because fire, storms, theft, and other perils frequently result in property damage or loss that would be too costly to repair or replace without insurance coverage. Yet the history of discrimination in the homeowners insurance industry is long and well documented,27 beginning with insurers overtly relying on race to deny insurance to minorities and evolving into more covert forms of discrimination.28 At times, agents were 23 42 U.S.C. 3601; see also cases cited supra note 13. 24 Inclusive Cmtys., 135 S. Ct. at 2526. v. Am. Family Mut. Ins. Co., 978 F.2d 287, 297 (7th Cir. 1992) (‘‘No insurance, no loan; no loan, no house; lack of insurance thus makes housing unavailable.’’). 26 See, e.g., Or. Rev. Stat. 90.222(1) (‘‘A landlord may require a tenant to obtain and maintain renter’s liability insurance in a written rental agreement.’’); Va. Code Ann. 55–248.7:2(B) (‘‘A landlord may require as a condition of tenancy that a tenant have renter’s insurance. . . .’’). 27 Although the discussion that follows focuses on race and national origin discrimination because of their historic prevalence, examples of discrimination in insurance against other protected classes exist as well. See e.g., Nevels v. W. World Ins. Co., 359 F. Supp. 2d 1110, 1120–21 (W.D. Wash. 2004) (disability). 28 See generally, Homeowners’ Insurance Discrimination: Hearings Before the S. Comm. on Banking, Housing and Urban Affairs, 103d Cong. (1994) [hereinafter 1994 Hearings]; Insurance Redlining Practices: Hearings before the Subcom. on Commerce, Consumer Protection & Competitiveness of the H. Comm. on Energy and Commerce, 103d Cong. (1993) [hereinafter Mar. 1993 Hearings]; Insurance Redlining: Fact or Fiction: Hearing before the Subcom. On Consumer 25 NAACP PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 given plainly discriminatory instructions, such as ‘‘‘get away from blacks’ and sell to ‘good, solid premiumpaying white people,’’’ or they simply were told, ‘‘We don’t write Blacks or Hispanics.’’ 29 Underwriting guidelines contained discriminatory statements, such as listing ‘‘population and racial changes’’ among ‘‘red flags for agents.’’ 30 Minorities were offered inferior products, such as coverage for repairs rather than replacement, or were subject to additional hurdles during the quote and underwriting process.31 Additionally, discrimination took the form of insurers redlining predominantly minority neighborhoods and disproportionately placing agents and offices in predominately white neighborhoods.32 Minorities also were denied access to insurance through property-location and property-age restrictions, even when data had demonstrated that such restrictions are not justified by risk of loss.33 This history of discrimination led to Credit and Insurance of the H. Comm. on Banking, Finance & Urban Affairs, 103d Cong. (1993) [hereinafter Feb. 1993 Hearing]; Insurance Redlining: Fact Not Fiction (Feb. 1979) [hereinafter Comm’n on Civil Rights] (report of the Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin Advisory Committees to the U.S. Commission on Civil Rights); President’s National Advisory Panel on Insurance in Riot-Affected Areas, Meeting the Insurance Crisis of Our Cities (1968) [hereinafter Nat’l Advisory Panel]. 29 See 139 Cong. Rec. 22,459 (1993) (statement of Rep. Joseph P. Kennedy, II); see also, e.g., Nat’l Advisory Panel, supra note 28, at 116 (quoting an insurance broker as explaining, ‘‘No matter how good [a customer] is, they [the insurers] take that into consideration, the fact he is a Negro.’’). 30 Feb. 1993 Hearing, supra note 28 at 19, 27 (statement of Gregory Squires, Prof. U. Wis. Milwaukee). 31 1994 Hearings, supra note 28, at 15, 47–48 (statements of Deval Patrick, DOJ Ass’t Attorney Gen. for Civil Rights); id. at 18–19, 51 (statements of Roberta Achtenberg, HUD Ass’t Sec’y of Fair Hous. & Equal Opportunity). 32 Feb. 1993 Hearing, supra note 28, at 7 (statement of John Garamendi, Cal. Ins. Comm’r) (‘‘There may be some people that deny that redlining exists. They are not telling you the truth, or they just don’t know what they are talking about. It is real, it does exist, and it is a very serious socioeconomic problem.’’); Comm’n on Civil Rights, supra note 28, at 5 (listing ‘‘[p]lacing agents selectively in order to reduce the opportunity to secure business in certain areas’’ among the types of documented redlining practices). 33 See, e.g., Comm’n on Civil Rights, supra note 28, at 34–39 (‘‘The greater the minority concentration of an area and the older the housing, independent of fire and theft, the less voluntary insurance is currently being written.’’); 1994 Hearings, supra note 28, at 18 (statement of Roberta Achtenberg, HUD Ass’t Sec’y of Fair Hous. & Equal Opportunity) (noting the ‘‘disparate impact on minority communities’’ of property age and value requirements, and explaining that ‘‘47 percent of black households, but just 23 percent of white households, live in homes valued at less than $50,000’’ and that ‘‘40 percent of black households compared to 29 percent of white households live in homes build before 1950.’’). E:\FR\FM\05OCP1.SGM 05OCP1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS minorities being unjustifiably denied insurance policies or paying higher premiums.34 HUD’s long experience in administering the Act counsels that discriminatory effects liability does not threaten the fundamental nature of the insurance industry. HUD’s position that discriminatory effects liability applies to insurance dates back more than three decades,35 as does the industry’s concern that such liability makes it ‘‘near impossible for an insurer to successfully defend himself.’’ 36 HUD has maintained for decades that remedying discrimination in insurance, including discriminatory effects claims, requires examination of each allegedly discriminatory insurance practice on a case-by-case basis,37 and HUD sees no reason to deviate now from this longstanding approach. HUD recognizes that risk-based decision making is an important aspect of sound insurance practice, and nothing in the Rule prohibits insurers from making decisions that are in fact risk-based. Under the standard established by the Rule, 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.38 All the 34 See, e.g. 139 Cong. Rec. 22,459 (1993) (statement of Rep. Joseph P. Kennedy, II) (‘‘[S]hocking anecdotal evidence was supported by 12 years of data submitted by Missouri State Insurance Commissioner Jay Angoff. . . . It shows that, in the cities of St. Louis and Kansas City, lowincome minorities had to pay more money for less coverage than their white counterparts, despite the fact that losses in minority areas were actually less than those in white areas. This evidence directly challenges industry assertions that minorities are too risky to insure.’’). 35 Fair Housing Amendments Act of 1979: Hearings before the Subcom. on Civil and Constitutional Rights of the H. Comm. on the Judiciary, 96th Cong. 79 (1979) (statement of Patricia Roberts Harris, Sec’y of HUD). 36 Fair Housing Act: Hearings before the Subcom. on Civil and Constitutional Rights of the H. Comm. on the Judiciary, 95th Cong. 20, 616 (1978) (statement of the Am. Ins. Ass’n.). 37 1994 Hearings, supra note 28, at 19 (statement of Roberta Achtenberg, HUD Ass’t Sec’y of Fair Hous. & Equal Opportunity) (discussing insurers’ property age and value requirements and stating that ‘‘when practices with such racial impacts are not legally or otherwise justified, a case-by-case, Fair Housing Act analysis is warranted’’); id at 50 (stating that ‘‘it is important to stress that the finding of a [Fair Housing Act] violation occurs on a case by case basis’’ for insurance practices that are ‘‘neutral on their face [but] have a disproportionate racial impact’’ and ‘‘cannot meet the established test of business necessity and . . . less discriminatory alternative’’). 38 24 CFR 100.500(b); see also Toledo Fair Hous. Ctr. v. Nationwide Mut. Ins. Co., 94 Ohio Misc. 2d 151, 157 (Ohio Ct. Com. Pl. 1997) (‘‘[T]he disparateimpact approach does not unduly undermine the business of selling insurance. Assuming . . . that the insurance industry is based on ‘fair’ risk discrimination, the disparate-impact approach will VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 Rule requires is that if an insurer’s practices are having a discriminatory effect on its insureds and ‘‘an adjustment . . . can still be made that will allow both [parties’] interests to be satisfied,’’ the insurer must make that change.39 Risk-based decision making is not unique to insurance, and discriminatory effects liability has proven workable in other contexts involving risk-based decisions, such as mortgage lending, without the need for exemptions or safe harbors.40 Moreover, some states provide for discriminatory effects liability against insurers under state laws, further undermining the industry’s claim that providing for such liability as a matter of federal law threatens the fundamental nature of the industry.41 Consistent with the Act’s broad scope and purpose, as well as HUD’s own obligation to affirmatively further fair housing, HUD declines to foreclose viable discrimination claims by creating an overbroad exemption. For the reasons detailed below, wholesale exemptions for all insurance practices or all insurance underwriting practices would necessarily be overbroad, allowing some practices with unjustified discriminatory effects to go uncorrected. Wholesale exemptions also would invariably sweep within their scope potential intentional discrimination in the insurance market as well because ‘‘disparate-impact liability under the [Fair Housing Act] also plays a role in uncovering discriminatory intent: It permits plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment.’’ 42 Some discriminatory effects claims against insurers will survive a McCarran-Ferguson defense depending on a host of case-specific variables, and therefore wholesale exemptions would be overbroad. McCarran-Ferguson not impede such fair discrimination if the insurer can show a business necessity.’’). 39 Ave. 6E Invs., LLC v. City of Yuma, 818 F.3d 493, 513 (9th Cir. 2016). 40 See, e.g., Policy Statement on Discrimination in Lending, 59 FR 18266 (Apr. 15, 1994); Interagency Fair Lending Examination Procedures (Aug. 2009); see also 1994 Hearings, supra note 28, at 20 (statement of Roberta Achtenberg, HUD Ass’t Sec’y of Fair Hous. & Equal Opportunity) (‘‘As in other areas of fair housing law enforcement, standards to determine [insurance] discrimination will . . . [include] disparate impact. . . . The investigative techniques we will utilize will include those that have grown from our fair housing investigative experience across the board . . . the kinds of tactics that we currently utilize . . . in lending discrimination investigations.’’). 41 See infra notes 61 thru 64 and accompanying text. 42 Inclusive Cmtys., 135 S. Ct. at 2522. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 69015 specifically 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 relates to the business of insurance.’’ 43 As interpreted by the Supreme Court in Humana v. Forsyth, McCarran-Ferguson applies only when a particular application of a federal law directly conflicts with a specific state insurance regulation, frustrates a declared state policy, or interferes with a State’s administrative regime.44 Accordingly, the mere fact that a state has the authority to regulate insurance or has adopted ratemaking regulations does not suffice on its own to create the kind of conflict, frustration of purpose, or interference that triggers McCarranFerguson.45 Rather, the inquiry required by Humana depends on the relevant state law and other case-specific variables.46 For example, in Dehoyos v. Allstate,47 the Fifth Circuit rejected a McCarranFerguson defense to a disparate impact claim where the insurer did not identify a specific state law that was impaired. In so ruling, the Fifth Circuit reasoned that the Seventh Circuit’s holding in Doe v. Mutual of Omaha 48 does not foreclose all discriminatory effects claims against insurers as barred by McCarran-Ferguson. Instead, the Fifth Circuit distinguished Doe, where McCarran-Ferguson was held to bar a claim of discrimination under the Americans with Disabilities Act 49 (‘‘ADA’’), by explaining that ‘‘[i]n Doe, there was an actual state insurance law which purportedly conflicted with the application of the [ADA] to the particular question at issue.’’ 50 Thus, 43 15 U.S.C. 1012(b). 525 U.S. at 310 (‘‘When 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 McCarranFerguson Act does not preclude its application.’’). 45 Dehoyos v. Allstate Corp., 345 F.3d 290, 295 (5th Cir. 2003) (disparate impact under the Act); Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1363 (6th Cir. 1995) (disparate treatment under the Act); Moore v. Liberty Nat’l Life Ins. Co., 267 F.3d 1209, 1221 (11th Cir. 2001) (disparate treatment in life insurance). 46 See PCIAA, 66 F. Supp. 3d at 1038 (‘‘McCarranFerguson challenges to housing discrimination claims [depend on] the particular, allegedly discriminatory practices at issue and the particular insurance regulations and administrative regime of the state in which those practices occurred.’’). 47 Dehoyos, 345 F.3d 290. 48 179 F.3d 557 (7th Cir. 1999). 49 42 U.S.C. 12101–12213. 50 Dehoyos, 345 F.3d at 298 n.6. Although in HUD’s view the Fifth Circuit persuasively distinguished the Seventh Circuit’s holding in Doe, 44 Humana, E:\FR\FM\05OCP1.SGM Continued 05OCP1 69016 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS where no state law is impaired, McCarran-Ferguson will not bar a discriminatory effects claim against an insurer. Past cases demonstrate also that discriminatory effects claims brought under the Fair Housing Act against insurers survive McCarran-Ferguson defenses even when an insurer points to a specific state law and alleges that it is impaired. Although the commenters provided examples of cases in which state laws were found to be impaired by a particular discriminatory effects challenge, other cases provide examples of state laws that were not. For instance, in Lumpkin v. Farmers Group, the court rejected a McCarran-Ferguson defense to a disparate impact challenge to credit scoring in insurance pricing, holding that disparate impact liability in that context did not impair the state’s law mandating that ‘‘insurance rates cannot be ‘unfairly discriminatory.’ ’’ 51 In so ruling, the court held it erroneous to read a state law prohibiting ‘‘unfairly discriminatory’’ rates ‘‘too broadly’’ and rejected the insurer’s argument that such state laws require that practices with an unjustified discriminatory effect must be permitted ‘‘as long as the rates are actuarially sound.’’52 The court then cited other provision of the state’s insurance code specifically dealing with credit scoring, concluding that they too were not impaired.53 McCarran-Ferguson requires a factintensive inquiry that will vary state by state and claim by claim. Thus, even those cases in which impairment was found support the case-by-case approach herein adopted by HUD because, in such cases, the finding of impairment was made only after considering the particularities of the challenged practices and the state law at hand. In Saunders v. Farmers Insurance Exchange, for example, prior to ruling that McCarran-Ferguson barred a discriminatory effects claim under the Act,54 the Eighth Circuit first remanded the case for further inquiry into several the case-by-case approach appropriately accommodates any variations among the circuits that may exist, now or in the future, as to how McCarran-Ferguson should be applied. This includes the Second Circuit’s skepticism over whether McCarran-Ferguson applies at all to ‘‘subsequently enacted civil rights legislation.’’ Viens v. Am. Empire Surplus Lines Ins. Co., 113 F. Supp. 3d 555, 572 (D. Conn. 2015) (quoting Spirt v. Teachers Ins. & Annuity Ass’n, 691 F.2d 1054, 1065 (2d Cir. 1982)). 51 Lumpkin v. Farmers Grp. (Lumpkin II), No. 05– 2868 Ma/V, 2007 U.S. Dist. LEXIS 98949, at *19 (W.D. Tenn. July 6, 2007). 52 Id. 53 Id. at *19–20. 54 Saunders v. Farmers Ins. Exch. (Saunders II), 537 F.3d 961 (8th Cir. 2008). VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 unknowns about the facts and Missouri law.55 The many ways in which one state’s insurance laws can differ from another’s, as well as the ways in which a single state’s insurance laws can change over time, mean that even an exemption for specific insurance practices would be overbroad and quickly outdated. For example, variations in state insurance laws have resulted in discriminatory effects challenges to similar insurance practices surviving a McCarran-Ferguson defense in regard to some state laws but not others.56 Past cases also demonstrate that the insurance laws of each state can change over time in significant ways,57 and state insurance regulators respond to new practices as they become common and their effects become clear.58 Given the variation in state insurance laws across more than fifty jurisdictions and over time, HUD declines to fashion a one-size-fits-all exemption that would inevitably insulate insurers engaged in otherwise unlawful discriminatory practices from Fair Housing Act liability. A one-size-fits-all exemption is also inappropriate in light of the fact that insurance practices are not governed solely by ‘‘hermetically sealed’’ state 55 Saunders v. Farmers Ins. Exch. (Saunders I), 440 F.3d 940 (8th Cir. 2006). These variables included whether Missouri insurance law provided a private right of action to challenge the conduct at issue, and whether determinations by the state insurance agency were subject to judicial review. The court explained that ‘‘the mere fact of overlapping complementary remedies under federal and state law does not constitute impairment for McCarran-Ferguson purposes.’’ Id. at 945. 56 For example, in cases challenging the discriminatory effect of insurers’ reliance on credit scores, the McCarran-Ferguson defense has failed in some states but succeeded in others. Compare Dehoyos, 345 F.3d 290 (McCarran-Ferguson defense fails) and Lumpkin II, 2007 U.S. Dist. LEXIS 98949 (same) with Saunders II, 537 F.3d 961 (McCarranFerguson defense succeeds) and McKenzie v. S. Farm Bureau Cas. Ins. Co., No. 3:06CV013–B–A, 2007 U.S. Dist. LEXIS 49133 (N.D. Miss. July 5, 2007) (same). See also PCIAA, 66 F. Supp. 3d at 1039 (‘‘Variations among state regulatory regimes . . . provide an additional variable that may complicate any hypothetical McCarran-Ferguson analysis.’’). 57 Compare Ojo v. Farmers Grp., Inc., 356 SW.3d 421 (Tex. 2011) (recognizing a McCarran-Ferguson defense to a credit scoring disparate impact claim based on the state legislature ‘‘expressly authoriz[ing] the use of credit scoring in setting insurance rates in 2003’’) with Dehoyos, 345 F.3d 290 (rejecting a McCarran-Ferguson defense to the same type of claim based on Texas law in effect before 2003). 58 See, e.g., Nat’l Ass’n of Ins. Comm’rs, Price Optimization White Paper (Nov. 19, 2015) https:// www.naic.org/documents/committees_c_catf_ related_price_optimization_white_paper.pdf [hereinafter NAIC White Paper] (discussing the responses of state regulators to the rising increase in use of price optimization practices by insurance providers). PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 insurance codes,59 but are also governed by a range of other state laws, including state fair housing laws. Many state fair housing laws track the Act’s applicability to insurance and provision of effects liability, indicating that those states do not consider disparate impact liability to conflict with the nature of insurance. Categorical exemptions or safe harbors of the types requested by the commenters would deprive all states of federal support in addressing discriminatory insurance practices— even those states that welcome or depend on such support. This outcome would be at odds with the purpose of McCarran-Ferguson to support the autonomy and sovereignty of each individual state in the field of insurance.60 Connecticut’s Discriminatory Housing Practices Act, for example, ‘‘provides similar (albeit broader) protection against housing discrimination as the [Fair Housing Act], which is strong indication that application of the federal antidiscrimination law will not impair Connecticut’s regulation of the insurance industry, but rather is complementary with Connecticut’s overall regulatory scheme.’’ 61 Similarly, a state court found that ‘‘the disparateimpact approach does not conflict with Ohio Insurance law’’ and thus allowed a disparate impact claim against an insurer to proceed under the state’s fair housing law.62 In another case where the court rejected a McCarran-Ferguson defense to a discriminatory effects claim against an insurer, the court explained that it was ‘‘not persuaded that California law would allow [the challenged] practice’’ and therefore ‘‘the Fair Housing Act complements California law in this regard.’’ 63 Furthermore, the allocation of authority to enforce a state’s protections against discrimination in insurance can impact whether McCarran-Ferguson is a viable defense to a discriminatory effects claim in a given state.64 The case-by-case approach thus affirms state autonomy 59 Humana, 525 U.S. at 312. 15 U.S.C. 1011 (explaining the purpose of McCarran-Ferguson as ‘‘the continued regulation . . . by the several States of the business of insurance is in the public interest’’). 61 Viens, 113 F. Supp. 3d at 573 n.20 (finding that McCarran-Ferguson does not bar an FHA disparate impact claim against an insurer related to a property located in Connecticut). 62 Toledo, 94 Ohio Misc. 2d at 157. 63 Jones v. Travelers Cas. Ins. Co. of Am., Tr. of Proceedings Before the Honorable Lucy H. Koh U.S. District Judge, No. C–13–02390 LHK (N.D. Cal. May 7, 2015), ECF No. 269–1. 64 Toledo, 94 Ohio Misc. 2d at 157 (recognizing discriminatory effects liability in homeowners insurance under state law in part because the Superintendent of Insurance lacks ‘‘primary jurisdiction’’ over such claims). 60 See E:\FR\FM\05OCP1.SGM 05OCP1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS and furthers the Act’s broad remedial goals by ensuring that HUD is not hindered in fulfilling its statutory charge to support and encourage state efforts to protect fair housing rights.65 The commenters’ concerns about the incompatibility between HUD’s Rule and the fundamental nature of insurance do not warrant the requested exemptions. Although the commenters assert that a broad exemption for all insurance practices or all underwriting decisions is necessary to preserve ‘‘sound actuarial underwriting’’ and the ‘‘risk-based insurance ‘unfair discrimination’ standard,’’ HUD declines to create a broad exemption of that sort because doing so would immunize a host of potentially discriminatory insurance practices that do not involve actuarial or risk-based calculations. Insurers regularly engage in practices, such as marketing and claims processing and payment, that do not involve risk-based decision making and to which the Act applies in equal force.66 In addition, a discriminatory effects claim also can challenge an insurer’s underwriting policies as ‘‘not purely risk-based’’ without infringing on the insurer’s ‘‘right to evaluate homeowners insurance risks fairly and objectively.’’ 67 Even practices such as ratemaking that are largely actuariallybased can incorporate an element of non-actuarially-based subjective judgment or discretion under state law. Indeed, many of the state statutes referenced by commenters mandating that rates be reasonable, not excessive, inadequate, or unfairly discriminatory permit insurers, via the very same section of the insurance code, to rely on ‘‘judgment factors’’ in ratemaking.68 The example of price optimization practices,69 which a minority of states have started regulating, illustrates how non-actuarial factors, such as price 65 See, e.g., 42 U.S.C. 3610(f); 24 CFR pt. 115 (HUD’s Fair Housing Assistance Program); 42 U.S.C. 3608(d); 80 FR 42272 (July 16, 2015) (HUD’s rule on Affirmatively Furthering Fair Housing). 66 See, e.g., Franklin v. Allstate Corp., No. C–06– 1909 MMC, 2007 U.S. Dist. LEXIS 51333 (N.D. Cal. July 3, 2007) (applying the Act to claims processing); Burrell v. State Farm & Cas. Co., 226 F. Supp. 2d 427 (S.D.N.Y. 2002) (same). 67 Nat’l Fair Hous. Alliance v. Prudential Ins. Co. of Am., 208 F. Supp. 2d 46, 60 (D.D.C. 2002). 68 See e.g., Ga. Code Ann. 33–9–4; Mont. Code Ann. 33–16–201; see also NAIC White Paper, supra note 58, at 1 ¶ 5 (‘‘Making adjustments to actuarially indicated rates is not a new concept; it has often been described as ‘judgment.’ ’’). 69 The term ‘‘price optimization’’ can refer to ‘‘the process of maximizing or minimizing a business metric using sophisticated tools and models to quantify business considerations,’’ such as ‘‘marketing goals, profitability and policyholder retention.’’ NAIC White Paper, supra note 58, at 4 ¶ 14(a). VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 elasticity of market demand,70 can impact insurance pricing in a manner similar to how such considerations affect pricing of products in nonactuarial industries.71 HUD likewise declines to craft a safe harbor for any risk-based factor or for the specific ‘‘long-recognized’’ factors suggested by one commenter because it would be arbitrary and overbroad. Creating a safe harbor for the use of any factor that an insurer could prove is in fact risk-based would be overbroad because it would foreclose claims where the plaintiff could prove the existence of a less discriminatory alternative, such as an alternative risk-based practice. Moreover, if HUD were to provide a safe harbor for the use of any factor that an insurer could prove is purely risk-based, entitlement to the safe harbor would inevitably necessitate a determination of whether the use of the factor is, in fact, risk-based. As stated above, if an insurance practice is provably riskbased, and no less discriminatory alternative exists, the insurer will have a legally sufficient justification under the Rule as is. The arguments and evidence that would be necessary to establish whether a practice qualifies for the requested exemption would effectively be the same as the arguments and evidence necessary for establishing a legally sufficient justification. Thus, an exemption for all provably risk-based factors would offer little added value for insurers not already provided by the Rule itself while foreclosing potentially meritorious claims in contravention of the Act’s broad remedial goals and HUD’s obligation to affirmatively further fair housing. Selecting a few factors for exemption, such as those suggested by the commenter, based on bare assertions about their actuarial relevance, without data and without a full survey of all factors utilized by the homeowners insurance industry, would also be arbitrary. Even if such data were available and a full survey performed, safe harbors for specific factors would still be overbroad because the actuarial relevance of a given factor can vary by context.72 Also, while use of a particular 70 The term ‘‘price elasticity of demand’’ refers to ‘‘the rate of response of quantity demanded due to a price change. Price elasticity is used to see how sensitive the demand for a good is to a price change.’’ Id. at 4 ¶ 14(f) (internal quotations omitted). 71 Id. at 9 ¶ 30 (‘‘Price optimization has been used for years in other industries, including retail and travel. However, the use of model-driven price optimization in the U.S. insurance industry is relatively new.’’). 72 For example, in some high-crime neighborhoods the higher-than-average risk of loss from theft could be offset by a lower-than-average PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 69017 risk factor may be generally correlated with probability of loss, the ways in which an insurer uses that factor may not be. Furthermore, the actuarial relevance of any given factor may change over time as societal behaviors evolve, new technologies develop, and analytical capabilities improve. In light of the long, documented history of discrimination in the homeowners’ insurance industry, including the use of ‘‘risk factors’’ by insurers and regulators that were subsequently banned as discriminatory, as well as the fact-specific nature of McCarran-Ferguson analysis and the non-actuarial or hybrid nature of many insurance practices, HUD considers it inappropriate to craft any exemptions or safe harbors for insurance practices. HUD’s longstanding case-by-case approach can adequately address any McCarran-Ferguson concerns and better serves the Act’s broad remedial purpose and HUD’s statutory obligation to affirmatively further fair housing, including by supporting fair housing efforts undertaken by states.73 Issue: One commenter requested that HUD ‘‘exempt insurance pricing from the discriminatory effects standards.’’ The commenter argued that pricing is not covered by the Act because the Act only covers insurance practices that ‘‘make[ ] homeowners insurance unavailable’’ and pricing does not do so. The commenter also asserted that pricing is ‘‘subject to the filed rate doctrine’’ and should therefore be exempted because the filed rate doctrine precludes ‘‘private claims for damages based on challenges to filed rates.’’ HUD Response: HUD disagrees with the commenter’s characterization of the Act as only covering insurance practices that make insurance unavailable, as well as with the commenter’s premise that pricing does not do so. HUD also declines to craft an exemption for insurance pricing based on the filed rate doctrine because HUD does not anticipate that the filed rate doctrine will bar discriminatory effects claims involving insurance pricing. In light of the broad remedial goals of the Act and HUD’s obligation to affirmatively further fair housing, HUD continues to prefer risk of other losses, such as those caused by weather. Therefore, the legitimacy of declining to issue insurance policies in all locations with high crime rates would depend on other features of those locations. 73 Cf. CROSSRDS v. MSP Crossroads Apts., LLC, No. 16–233 ADM/KMM, 2016 U.S. Dist. LEXIS 86965 at *32 n.6 (D. Minn. July 5, 2016) (declining to adopt a per se rule that a certain category of disparate impact claims could not be brought in part because ‘‘HUD has indicated a preference for case-by-case review of practices alleged to cause a disparate impact’’). E:\FR\FM\05OCP1.SGM 05OCP1 69018 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules case-by-case adjudication over the requested exemption. In addition to Section 804(a),74 which prohibits discrimination that ‘‘make[s] unavailable’’ a dwelling, there are several other provisions of the Act that can prohibit discriminatory insurance practices, including pricing.75 One of those is Section 805(a),76 which prohibits discrimination in the ‘‘terms or conditions’’ of ‘‘residential real estate-related transactions.’’ Another is Section 804(b),77 which prohibits discrimination in the ‘‘provision of services . . . in connection’’ with a dwelling. Indeed, HUD’s fair housing regulations since 1989 have specifically stated that the Act prohibits ‘‘[r]efusing to provide . . . property or hazard insurance for dwellings or providing such . . . insurance differently’’ because of a protected characteristic.78 Courts have applied the Act to insurance pricing,79 as well as to other practices such as marketing and claims processing,80 irrespective of whether the 74 42 U.S.C. 3604(a). on the circumstances, discriminatory insurance practices can violate 42 U.S.C. 3604(a), (b), (c), (f)(1), (f)(2), 3605, and 3617. See, e.g., Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d at 1360 (holding that section 3604 of the Act prohibits discriminatory insurance underwriting); Nevels, 359 F. Supp. 2d at 1120–21 (recognizing that sections 3604(f)(1), 3604(f)(2), 3605 and 3617 of the Act cover insurance practices); Nat’l Fair Hous. Alliance, 208 F. Supp. 2d at 55–58 (holding that sections 3604(a), 3604(b), and 3605 of the Act prohibit discriminatory insurance underwriting practices); Owens v. Nationwide Mut. Ins. Co., No. 3:03–CV–1184–H, 2005 U.S. Dist. LEXIS 15701, at *16–17 (N.D. Tex. Aug. 2, 2005) (holding that section 3604(b) of the Act prohibits discriminatory insurance practices); Francia v. Mount Vernon Fire Ins. Co., No. CV084032039S, 2012 Conn. Super. LEXIS 665 (Conn. Super. Ct. Mar. 6, 2012) (relying on section 3604(c) to interpret an analogous state law as prohibiting a discriminatory statement in an insurance quote). 76 42 U.S.C. 3605(a). 77 42 U.S.C. 3604(b). 78 24 CFR 100.70(d)(4) (emphasis added). As used in this regulation, the phrase ‘‘property or hazard insurance for dwellings’’ includes insurance purchased by an owner, renter, or anyone else seeking to insure a dwelling. See 42 U.S.C. 3602(b) (defining ‘‘dwelling’’ without reference to whether the residence is owner- or renter-occupied). 79 See, e.g., NAACP, 978 F.2d at 301 (‘‘Section 3604 of the Fair Housing Act applies to discriminatory denials of insurance, and discriminatory pricing, that effectively preclude ownership of housing because of the race of the applicant.’’) (emphasis added); Dehoyos, 345 F.3d at 293 (holding that a claim alleging discriminatory insurance pricing was not barred by McCarranFerguson). 80 See sources cited supra note 66; see also Owens, 2005 U.S. Dist. LEXIS 15701, at *17 (Insurance practices are covered by the Act ‘‘whether the insurance is sought in connection with the maintenance of a previously purchased home or with an application to purchase a home.’’); Lindsey v. Allstate Ins. Co., 34 F. Supp. 2d 636, 643 (W.D. Tenn. 1999) (‘‘It would seem odd to construe a statute purporting to promote fair housing as prohibiting discrimination in providing property mstockstill on DSK3G9T082PROD with PROPOSALS 75 Depending VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 discriminatory conduct occurred in conjunction with or subsequent to the acquisition of a dwelling. HUD is not aware of any case, and no commenter cited one, in which a court has applied the filed rate doctrine to defeat any sort of claim under the Act, although several courts have rejected such attempts.81 ‘‘The filed rate doctrine bars suits against regulated utilities grounded on the allegation that the rates charged by the utility are unreasonable.’’ 82 The doctrine primarily serves two purposes: First, preventing litigants from securing more favorable rates than their non-litigant competitors, and second, preserving for agencies rather than courts the role of ratemaking.83 The fit between the filed rate doctrine and discriminatory effects claims is attenuated, at best, because discriminatory effects claims ‘‘do not challenge the reasonableness of the insurance rates’’ but rather their discriminatory effects.84 To the extent there is any conflict between the directives of the federal Fair Housing Act and those of state ratemaking regulations, ‘‘the Supremacy Clause tips any legislative competition in favor of the federal antidiscrimination statutes.’’ 85 Unlike filed rate doctrine cases involving a conflict between federal ratemaking and a federal statute, applying the filed rate doctrine to prioritize state ratemaking over a federal statute ‘‘would seem to stand the Supremacy Clause on its head.’’ 86 Moreover, the filed rate doctrine ‘‘does not preclude injunctive relief or prohibit the Government from seeking civil or insurance to those seeking a home, but allowing that same discrimination so long as it takes place in the context of renewing those very same insurance policies.’’). 81 See Saunders I, 440 F.3d at 944–46 (‘‘The district court erred in invoking the judicially created filed rate doctrine to restrict Congress’s broad grant of standing to seek judicial redress for race discrimination.’’); Dehoyos, 345 F.3d at 297 n.5 (finding ‘‘unpersuasive’’ the argument that the filed rate doctrine barred a Fair Housing Act disparate impact claim); Lumpkin v. Farmers Grp., Inc. (Lumpkin I), No. 05–2868 Ma/V, 2007 U.S. Dist. LEXIS 98994, at *20–22 (W.D. Tenn. Apr. 26, 2007) (ruling that ‘‘the filed rate doctrine does not apply’’ to a Fair Housing Act disparate impact claim). 82 Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17, 18 (2d Cir. 1994). 83 Id. 84 Lumpkin I, 2007 U.S. Dist. LEXIS 98994, at *21; see also Dehoyos, 345 F.3d at 297 n.5 (‘‘[T]he application of anti-discrimination laws cannot be reasonably construed to supplant the specific insurance rate controls of [states].’’). 85 Saunders I, 440 F.3d at 944. 86 Perryman v. Litton Loan Servicing, LP, No. 14– cv–02261–JST, 2014 U.S. Dist. LEXIS 140479, at *20–22 (N.D. Cal. Oct. 1, 2014). PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 criminal redress,’’ 87 which are types of relief often obtained for violations of the Act.88 Because ‘‘the law on the filed rate doctrine is extremely creaky,’’ 89 abundant variations exist among the courts as to how the doctrine applies. Even where it does apply, a filed rate doctrine defense ‘‘must be examined specifically in the context of the laws and regulatory structures at issue.’’ 90 This would be a ‘‘fact-intensive issue’’ 91 that would include consideration of the particular state’s ratemaking structures.92 The case-by-case approach best accommodates these variations. For all the foregoing reasons, HUD does not agree that the filed rate doctrine, nor the commenter’s assertions about the Act’s scope, warrant an exemption for insurance pricing. Issue: One commenter sought an exemption from discriminatory effects liability for FAIR plans because ‘‘the operation of FAIR plans facilitates private conduct that otherwise would not have occurred.’’ HUD Response: FAIR plans were first enacted by many states in response to the federal Urban Property Protection and Reinsurance Act of 1968,93 which was passed by Congress to address the problem of inadequate property insurance availability in the nation’s urban areas due to insurance redlining. FAIR plans operate as insurance pools that sell property insurance to 87 In re Title Ins. Antitrust Cases, 702 F. Supp. 2d 840, 849 (N.D. Ohio 2010); see also Marcus v. AT&T Corp., 138 F.3d 46, 62 (2d Cir. 1998). 88 See 42 U.S.C. 3612(g)(3), 3613(c), 3614(d). 89 Town of Norwood v. New England Power Co., 202 F.3d 408, 420 (1st Cir. 2000). The filed rate doctrine has also been described as a ‘‘weak and forcefully criticized doctrine.’’ Cost Mgmt. Servs. v. Wash. Natural Gas Co., 99 F.3d 937, 946 (9th Cir. 1996). 90 Munoz v. PHH Corp., 659 F. Supp. 2d 1094, 1099 (E.D. Cal. 2009). 91 Saunders I, 440 F.3d at 945. 92 For example, the Seventh Circuit has questioned the applicability of the filed rate doctrine to any claims involving property insurance in Illinois because ‘‘[a]lthough [a property insurance provider] is required to file its insurance rates with the Illinois Department of Insurance, it is not at all clear that the Department has the authority to approve or disapprove propertyinsurance rates.’’ Cohen v. Am. Sec. Ins. Co., 735 F.3d 601, 607 (7th Cir. 2013). States vary considerably in the degree to which they regulate rate-setting, with six different types of rate regulatory systems in use across the country: Prior approval; file and use; use and file; flex rating; modified prior approval; and no file. See NAIC, 2 Compendium of State Laws on Insurance Topics, Health/Life/Property/Casualty II–PA–10–21 (2011). As the classifications indicate, these rate regulatory systems vary with respect to whether or when an insurance company is required to file its rates with a state insurance agency before those rates can be used. 93 Public Law 90–448, 82 Stat. 555 (1968). E:\FR\FM\05OCP1.SGM 05OCP1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS individuals who are unable to purchase insurance in the voluntary market. HUD declines to categorically exempt FAIR plans from discriminatory effects liability under the Act. To do so, without any consideration of the particular insurance practice or state requirements at issue, would be inconsistent with the broad remedial purpose of the Act and HUD’s obligation to affirmatively further fair housing. Like state regulation of voluntary market insurance practices, state laws governing the provision and pricing of FAIR plans vary across jurisdictions. Variations in state regulation of FAIR plans include the types of coverage provided by such plans,94 the amount of coverage allowed under such plans,95 and the conditions under which an individual or property will qualify for such plans.96 Additionally, even within a given state, FAIR plan regulations are subject to revision over time. Given such variation and changeability, exempting all FAIR plans from application of the discriminatory effects standard would be overbroad and would deprive individuals of the protections afforded by the Fair Housing Act. Indeed, one state court has held ‘‘the disparate impact approach does not interfere with the Ohio FAIR Plan.’’ 97 In light of this demonstrated compatibility, and because insurers retain some discretion in the operation of FAIR plans,98 HUD determines that case-bycase adjudication is preferable to the requested exemption of FAIR plans. 94 Compare, e.g., Conn. Agencies Regs. 38a–328– 3(c) (defining ‘‘basic insurance’’ for purposes of the Connecticut FAIR plan to include liability coverage for any dwelling of up to three families) with Mass. Gen. Laws ch. 175c, § 1 (defining ‘‘basic property insurance’’ for purposes of the Massachusetts FAIR plan to include liability coverage for only nonowner occupied dwellings of up to four families) and 98–08 Wash. Reg. 4 (April 15, 1998) (excluding liability coverage from the definition of ‘‘essential property insurance’’ for purposes of the Washington FAIR plan). 95 Compare, e.g., Mo. Rev. Stat. 379.825 (limiting maximum insurance coverage for a dwelling under the Missouri FAIR plan to $200,000) with 98–08 Wash. Reg. 5 (April 15, 1998) (limiting maximum insurance coverage for a dwelling under the Washington FAIR plan to $1.5 million). 96 Compare, e.g., Ohio Rev. Cod. Ann. 3929.44(D) (requiring applicant to certify that two insurance companies declined to provide coverage for purposes of FAIR plan eligibility) with 215 Ill. Comp. Stat. 5/524(1) (restricting FAIR plan eligibility to applicants who have been declined insurance coverage by three companies). 97 Toledo, 94 Ohio Misc. 2d at 157. 98 See, e.g., Cal. Ins. Code 10094 (leaving discretion to governing committee of participating insurers to establish ‘‘reasonable underwriting standards’’ for determining whether a property for which FAIR plan coverage is sought is insurable); 215 Ill. Comp. Stat. 5/524(1) (same); Ohio Rev. Code. Ann. 3929.43(C) (same). VerDate Sep<11>2014 18:25 Oct 04, 2016 Jkt 241001 Dated: September 23, 2016. Gustavo Velasquez, Assistant Secretary for Fair Housing and Equal Opportunity. [FR Doc. 2016–23858 Filed 10–4–16; 8:45 am] BILLING CODE 4210–67–P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA–R04–OAR–2016–0489; FRL–9953–63– Region 4] Air Plan Approval; Georgia: Volatile Organic Compounds Environmental Protection Agency (EPA). ACTION: Proposed rule. AGENCY: The Environmental Protection Agency (EPA) is proposing to approve portions of two revisions to the Georgia State Implementation Plan submitted by the Georgia Department of Environmental Protection on July 25, 2014, and November 1, 2015. These revisions modify the definition of ‘‘volatile organic compounds’’ (VOC). Specifically, these revisions add two compounds to the list of those excluded from the VOC definition on the basis that these compounds make a negligible contribution to tropospheric ozone formation. This action is being taken pursuant to the Clean Air Act. DATES: Written comments must be received on or before November 4, 2016. ADDRESSES: Submit your comments, identified by Docket ID No. EPA–R04– OAR–2016–0489 at https:// www.regulations.gov. Follow the online instructions for submitting comments. Once submitted, comments cannot be edited or removed from Regulations.gov. EPA may publish any comment received to its public docket. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. EPA will generally not consider comments or comment contents located outside of the primary submission (i.e., on the web, cloud, or other file sharing system). For additional submission methods, the full EPA public comment policy, information about CBI or multimedia submissions, and general guidance on making effective comments, please visit SUMMARY: PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 69019 https://www2.epa.gov/dockets/ commenting-epa-dockets. FOR FURTHER INFORMATION CONTACT: Sean Lakeman, Air Regulatory Management Section, Air Planning and Implementation Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street SW., Atlanta, Georgia 30303–8960. Mr. Lakeman can be reached by phone at (404) 562–9043 or via electronic mail at lakeman.sean@epa.gov. SUPPLEMENTARY INFORMATION: In the Final Rules Section of this Federal Register, EPA is approving the State’s implementation plan revision as a direct final rule without prior proposal because the Agency views this as a noncontroversial submittal and anticipates no adverse comments. A detailed rationale for the approval is set forth in the direct final rule. If no adverse comments are received in response to this rule, no further activity is contemplated. If EPA receives adverse comments, the direct final rule will be withdrawn and all public comments received will be addressed in a subsequent final rule based on this proposed rule. EPA will not institute a second comment period on this document. Any parties interested in commenting on this document should do so at this time. Dated: September 23, 2016. V. Anne Heard, Acting Regional Administrator, Region 4. [FR Doc. 2016–23971 Filed 10–4–16; 8:45 am] BILLING CODE 6560–50–P DEPARTMENT OF THE INTERIOR Bureau of Land Management 43 CFR Part 8360 [LLCO913000.L16300000.NU0000.16X] Notice of Proposed Supplementary Rules for Public Lands in Colorado Bureau of Land Management, Interior. ACTION: Proposed supplementary rules. AGENCY: The Bureau of Land Management (BLM) is proposing supplementary rules to protect natural resources and provide for public health and safety. The proposed supplementary rules would apply to all public lands and BLM facilities in Colorado. DATES: You should submit your comments by December 5, 2016. ADDRESSES: You may submit comments by the following methods: Mail or hand SUMMARY: E:\FR\FM\05OCP1.SGM 05OCP1

Agencies

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Proposed Rules]
[Pages 69012-69019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23858]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 100

[Docket No. FR-5508-N-03]

Application of the Fair Housing Act's Discriminatory Effects
Standard to Insurance

AGENCY: Office of the Assistant Secretary for Fair Housing and Equal
Opportunity, HUD.

ACTION: Reconsideration of public comments; implementation of the Fair
Housing Act's Discriminatory Effects Standard.

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SUMMARY: HUD is issuing this document to supplement its responses to
certain insurance industry comments to HUD's proposed rule implementing
the Fair Housing Act's (``Act'') discriminatory effects standard. These
commenters requested, inter alia, total or partial exemptions or safe
harbors from liability under the Act's discriminatory effects standard.
After careful reconsideration of the insurance industry comments in
accordance with the court's decision in Property Casualty Insurers
Association of America (PCIAA) v. Donovan, HUD has determined that
categorical exemptions or safe harbors for insurance practices are
unworkable and inconsistent with the broad fair housing objectives and
obligations embodied in the Act. HUD continues to believe that the
commenters' concerns regarding application of the discriminatory
effects standard to insurance practices can and should be addressed on
a case-by-case basis.

DATES: Supplemental Responses issued on October 5, 2016.

FOR FURTHER INFORMATION CONTACT: Jeanine Worden, Associate General
Counsel for Fair Housing, Office of General Counsel, U.S. Department of
Housing and Urban Development, 451 7th Street SW., Washington, DC
20410-0500; (202) 402-5188 (this is not a toll-free number). Persons
with hearing or speech impairments may contact this number via TTY by
calling the toll-free Federal Relay Service at 800-877-8399.

SUPPLEMENTARY INFORMATION:

Background

Title VIII of the Civil Rights Act of 1968, as amended (``Fair
Housing Act'' or ``Act''), prohibits discrimination in the sale,
rental, or financing of dwellings and in other housing-related
activities on the basis of race, color, religion, sex, disability,
familial status, or national origin.\1\ On November 16,

[[Page 69013]]

2011, HUD issued a proposed rule seeking to formalize, through notice-
and-comment rulemaking, HUD's longstanding interpretation of the Act as
prohibiting practices with an unjustified discriminatory effect and to
standardize the analytical framework for evaluating such cases.\2\ In
response to the proposed rule, HUD received nearly one hundred comments
from a range of interested parties, including from three insurance
trade associations requesting exemptions or safe harbors. The National
Association of Mutual Insurance Companies (``NAMIC'') and the American
Insurance Association (``AIA'') requested an exemption from
discriminatory effects liability for all insurance practices. NAMIC
also requested, in the alternative, exemptions for insurance pricing,
for Fair Access to Insurance Requirements (``FAIR'') plans, and/or safe
harbors for recognized risk factors. The Property Casualty Insurers
Association of America (``PCIAA'') requested an exemption for all
insurance underwriting practices.
---------------------------------------------------------------------------

\1\ 42 U.S.C. 3601-3619.
\2\ 76 FR 70921 (Nov. 16, 2011).
---------------------------------------------------------------------------

On February 15, 2013, HUD published its final rule, entitled
``Implementation of the Fair Housing Act's Discriminatory Effects
Standard'' (``Rule'').\3\ In the Rule, HUD declined to grant the
requested exemptions or safe harbors for any insurance practices,
explaining that the commenters' concerns could be addressed on a case-
by-case basis. On November 27, 2013, PCIAA filed an action in the U.S.
District Court for the Northern District of Illinois (``the court'')
alleging that HUD's Rule violated the McCarran-Ferguson Act \4\
(``McCarran-Ferguson'') and the Administrative Procedure Act.\5\
---------------------------------------------------------------------------

\3\ 78 FR 11460 (Feb. 15, 2013).
\4\ 15 U.S.C. 1011-1015.
\5\ 5 U.S.C. 551-559.
---------------------------------------------------------------------------

On September 3, 2014, the court issued a decision in PCIAA v.
Donovan.\6\ The court upheld the Rule's burden-shifting framework for
analyzing discriminatory effects claims as a reasonable interpretation
of the Fair Housing Act.\7\ The court also held that a violation of
McCarran-Ferguson can be adjudicated by a court only in the context of
a concrete dispute challenging the application of the Rule to a
particular insurance practice, and not in the abstract.\8\
Distinguishing between adjudication and agency rulemaking, the court
concluded that HUD had not adequately explained why case-by-case
adjudication was preferable to using its rulemaking authority to
provide exemptions or safe harbors related to homeowners insurance.\9\
The court remanded the matter to HUD for further proceedings consistent
with its ruling.\10\
---------------------------------------------------------------------------

\6\ Prop. Cas. Insurers Ass'n of Am. v. Donovan (PCIAA), 66 F.
Supp. 3d 1018 (N.D. Ill. 2014).
\7\ Id. at 1051-53.
\8\ Id. at 1037-42.
\9\ Id. at 1049.
\10\ Id. at 1054.
---------------------------------------------------------------------------

After careful reconsideration of the comments from insurance
industry representatives and the court's opinion, HUD continues to
believe that case-by-case adjudication is preferable to creating the
requested exemptions or safe harbors for insurance practices. The Fair
Housing Act's broad prohibitions on discrimination in housing are
intended to eliminate segregated living patterns while moving the
nation toward a more integrated society. When Congress enacted the Fair
Housing Act in 1968 and amended it in 1988, it established exemptions
for certain practices \11\ but not for insurance. Rather, Congress
stated that the Act is intended to provide for fair housing throughout
the United States.\12\ The Supreme Court has recognized the Act's broad
remedial purpose.\13\ Among other things, the Act requires HUD to
affirmatively further fair housing in all of its housing-related
programs and activities,\14\ one of which is the administration and
enforcement of the Act.\15\ McCarran-Ferguson, enacted in 1945,
restricts only those applications of federal law that directly conflict
with state insurance laws, frustrate a declared state policy, or
interfere with a State's administrative regime.\16\ For HUD to create
the requested exemptions or safe harbors would allow to go uncorrected
at least some discriminatory insurance practices that can be subject to
disparate impact challenges consistent with McCarran-Ferguson and the
filed rate doctrine. Thus, to create such exemptions or safe harbors
would undermine the efficacy of the Act and run counter to the Act's
purpose and HUD's statutory responsibilities. The concerns raised by
the insurance industry commenters do not outweigh this loss of efficacy
in the administration and enforcement of the Act. Rather, the case-by-
case approach appropriately balances these concerns against HUD's
obligation to give maximum force to the Act by taking into account the
diversity of potential discriminatory effects claims, as well as the
variety of insurer business practices and differing insurance laws of
the states, as they currently exist or may exist in the future.
Moreover, in light of the variety of practices and relevant state laws,
as well as the substantial range of possible discriminatory effects
claims, it is practically impossible for HUD to define the scope of
insurance practices covered by an exemption or safe harbor with enough
precision to avoid case-by-case disputes over its application.
---------------------------------------------------------------------------

\11\ See, e.g., 42 U.S.C. 3605(c) (exempting appraisal practices
from disparate impact liability), 3607(b)(1) (exempting reasonable
governmental occupancy limits from disparate impact liability),
3607(b)(4) (exempting practices related to certain controlled
substance convictions from disparate impact liability); see also
Tex. Dep't of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project,
Inc., 135 S. Ct. 2507, 2520-21 (2015) (discussing these ``exemptions
from liability'').
\12\ See 42 U.S.C. 3601.
\13\ See Havens Realty Corp. v. Coleman, 455 U.S. 363, 380
(1982) (recognizing Congress's ``broad remedial intent'' in passing
the Act); Trafficante v. Metro. Life Ins. Co., 409 U.S. 205, 209
(1972) (recognizing the ``broad and inclusive'' language of the
Act); see also Inclusive Cmtys., 135 S. Ct. at 2521 (describing the
``central purpose'' of the Act as ``to eradicate discriminatory
practices within a sector of our Nation's economy'').
\14\ See 42 U.S.C. 3608(e)(5).
\15\ See, e.g., 42 U.S.C. 3608 (the Secretary's administrative
responsibilities under the Act), 3609 (education, conciliation,
conferences, and reporting obligations to further the purposes of
the Act), 3610 (investigative authority), 3611 (subpoena power),
3612 (administrative enforcement authority), 3614a (rulemaking
authority), 3616 (authority to cooperate with state and local
agencies in carrying out the Secretary's responsibilities under the
Act), 3616a (authority to fund of state and local agencies and
private fair housing groups to eliminate discriminatory housing
practices prohibited by the Act).
\16\ Humana Inc. v. Forsyth, 525 U.S. 299, 310 (1999) (``When
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.'').
---------------------------------------------------------------------------

Accordingly, HUD has determined that categorical exemptions or safe
harbors for insurance practices are unworkable and inconsistent with
HUD's statutory mandate. The discriminatory effects standard imposes
liability only for those insurance practices that actually or
predictably result in a discriminatory effect and that lack a legally
sufficient justification.\17\ It takes into account an insurer's
interest in the challenged practice and, for the reasons explained
below, any conflict with a specific state insurance law can and should
be addressed on a case-by-case basis in the context of that state law.
HUD provides the following supplemental responses to the public
comments submitted by the three insurance trade associations that
sought exemptions or safe harbors.
---------------------------------------------------------------------------

\17\ See 24 CFR 100.500(b).
---------------------------------------------------------------------------

Revised Responses to Insurance Industry Comments

Issue: Two commenters requested exemptions from the Rule for all

[[Page 69014]]

insurance practices, and a third commenter requested an exemption for
insurance underwriting practices. All three of these insurance industry
commenters raised McCarran-Ferguson in support of their requests for an
exemption. One of these three commenters urged HUD to delete the
insurance example from the Rule, stating that McCarran-Ferguson
dictates that ``state insurance law trumps the application of any
federal law to state regulated insurance, except under very narrow
circumstances, which are not met here.'' \18\ Another questioned
``whether non-racially motivated and sound actuarial underwriting
principles recognized by state insurance regulators that permit
accurate risk-based pricing for consumers can be prohibited by federal
regulators who find them to have a `disparate impact.' '' \19\
---------------------------------------------------------------------------

\18\ American Insurance Association, Comment Letter on Proposed
Rule on Implementation of the Fair Housing Act's Discriminatory
Effects Standard (Jan. 17, 2012).
\19\ Property Casualty Insurers Association of America, Comment
Letter on Proposed Rule on Implementation of the Fair Housing Act's
Discriminatory Effects Standard (Jan. 17, 2012).
---------------------------------------------------------------------------

The third commenter was concerned that ``the disparate impact
standards would impair state unfair discrimination standards,'' which
have ``historically been a cost based concept'' prohibiting
``underwriting and rating distinctions `between individuals or risks of
the same class and essentially the same hazard.' '' \20\ The commenter
expressed concern that if the Rule is applied to homeowners insurance,
``accurate risk assessment will be threatened, adverse selection will
increase, and coverage availability will suffer.'' \21\ This commenter
also sought, in the alternative, ``safe harbors for long-recognized
risk-related factors,'' stating that ``[f]ailure to provide safe harbor
protection for the use of factors historically allowed by state
insurance regulators would subject insurers to baseless litigation and
threaten the sound actuarial standards underpinning the insurance
market.'' \22\
---------------------------------------------------------------------------

\20\ National Association of Mutual Insurance Companies, Comment
Letter on Proposed Rule on Implementation of the Fair Housing Act's
Discriminatory Effects Standard (Jan. 17, 2012).
\21\ Id.
\22\ Id.
---------------------------------------------------------------------------

HUD Response: HUD does not agree that it is necessary or
appropriate to create an exemption from discriminatory effects
liability for all insurance practices or for all underwriting practices
in order to accommodate the insurance industry's concerns. McCarran-
Ferguson does not require HUD to do so, and categorical exemptions
would undermine the Act's broad remedial purpose and contravene HUD's
own statutory obligation to affirmatively further fair housing. HUD
also declines to create safe harbors from discriminatory effects
liability for the use of particular risk factors. HUD disagrees with
the commenter's assertions about the consequences that would befall the
insurance industry if HUD does not grant the requested safe harbors for
``long-recognized risk-related factors'' or ``historically allowed''
factors. Establishing safe harbors for specific risk-related criteria
would be overbroad, arbitrary, and quickly outdated.
The Act's broad remedial purpose is ``to provide . . . for fair
housing throughout the United States.'' \23\ Thus, the Act plays a
``continuing role in moving the Nation toward a more integrated
society.'' \24\ Ensuring that members of all protected classes can
access insurance free from discrimination is necessary to achieve the
Act's objective because obtaining a mortgage for housing typically
requires obtaining insurance, too.\25\ Likewise, obtaining insurance
may be a precondition to securing a home in the rental market.\26\
Insurance is also critical to maintaining housing because fire, storms,
theft, and other perils frequently result in property damage or loss
that would be too costly to repair or replace without insurance
coverage.
---------------------------------------------------------------------------

\23\ 42 U.S.C. 3601; see also cases cited supra note 13.
\24\ Inclusive Cmtys., 135 S. Ct. at 2526.
\25\ NAACP v. Am. Family Mut. Ins. Co., 978 F.2d 287, 297 (7th
Cir. 1992) (``No insurance, no loan; no loan, no house; lack of
insurance thus makes housing unavailable.'').
\26\ See, e.g., Or. Rev. Stat. 90.222(1) (``A landlord may
require a tenant to obtain and maintain renter's liability insurance
in a written rental agreement.''); Va. Code Ann. 55-248.7:2(B) (``A
landlord may require as a condition of tenancy that a tenant have
renter's insurance. . . .'').
---------------------------------------------------------------------------

Yet the history of discrimination in the homeowners insurance
industry is long and well documented,\27\ beginning with insurers
overtly relying on race to deny insurance to minorities and evolving
into more covert forms of discrimination.\28\ At times, agents were
given plainly discriminatory instructions, such as ```get away from
blacks' and sell to `good, solid premium-paying white people,''' or
they simply were told, ``We don't write Blacks or Hispanics.'' \29\
Underwriting guidelines contained discriminatory statements, such as
listing ``population and racial changes'' among ``red flags for
agents.'' \30\ Minorities were offered inferior products, such as
coverage for repairs rather than replacement, or were subject to
additional hurdles during the quote and underwriting process.\31\
Additionally, discrimination took the form of insurers redlining
predominantly minority neighborhoods and disproportionately placing
agents and offices in predominately white neighborhoods.\32\ Minorities
also were denied access to insurance through property-location and
property-age restrictions, even when data had demonstrated that such
restrictions are not justified by risk of loss.\33\ This history of
discrimination led to

[[Page 69015]]

minorities being unjustifiably denied insurance policies or paying
higher premiums.\34\
---------------------------------------------------------------------------

\27\ Although the discussion that follows focuses on race and
national origin discrimination because of their historic prevalence,
examples of discrimination in insurance against other protected
classes exist as well. See e.g., Nevels v. W. World Ins. Co., 359 F.
Supp. 2d 1110, 1120-21 (W.D. Wash. 2004) (disability).
\28\ See generally, Homeowners' Insurance Discrimination:
Hearings Before the S. Comm. on Banking, Housing and Urban Affairs,
103d Cong. (1994) [hereinafter 1994 Hearings]; Insurance Redlining
Practices: Hearings before the Subcom. on Commerce, Consumer
Protection & Competitiveness of the H. Comm. on Energy and Commerce,
103d Cong. (1993) [hereinafter Mar. 1993 Hearings]; Insurance
Redlining: Fact or Fiction: Hearing before the Subcom. On Consumer
Credit and Insurance of the H. Comm. on Banking, Finance & Urban
Affairs, 103d Cong. (1993) [hereinafter Feb. 1993 Hearing];
Insurance Redlining: Fact Not Fiction (Feb. 1979) [hereinafter
Comm'n on Civil Rights] (report of the Illinois, Indiana, Michigan,
Minnesota, Ohio and Wisconsin Advisory Committees to the U.S.
Commission on Civil Rights); President's National Advisory Panel on
Insurance in Riot-Affected Areas, Meeting the Insurance Crisis of
Our Cities (1968) [hereinafter Nat'l Advisory Panel].
\29\ See 139 Cong. Rec. 22,459 (1993) (statement of Rep. Joseph
P. Kennedy, II); see also, e.g., Nat'l Advisory Panel, supra note
28, at 116 (quoting an insurance broker as explaining, ``No matter
how good [a customer] is, they [the insurers] take that into
consideration, the fact he is a Negro.'').
\30\ Feb. 1993 Hearing, supra note 28 at 19, 27 (statement of
Gregory Squires, Prof. U. Wis. Milwaukee).
\31\ 1994 Hearings, supra note 28, at 15, 47-48 (statements of
Deval Patrick, DOJ Ass't Attorney Gen. for Civil Rights); id. at 18-
19, 51 (statements of Roberta Achtenberg, HUD Ass't Sec'y of Fair
Hous. & Equal Opportunity).
\32\ Feb. 1993 Hearing, supra note 28, at 7 (statement of John
Garamendi, Cal. Ins. Comm'r) (``There may be some people that deny
that redlining exists. They are not telling you the truth, or they
just don't know what they are talking about. It is real, it does
exist, and it is a very serious socioeconomic problem.''); Comm'n on
Civil Rights, supra note 28, at 5 (listing ``[p]lacing agents
selectively in order to reduce the opportunity to secure business in
certain areas'' among the types of documented redlining practices).
\33\ See, e.g., Comm'n on Civil Rights, supra note 28, at 34-39
(``The greater the minority concentration of an area and the older
the housing, independent of fire and theft, the less voluntary
insurance is currently being written.''); 1994 Hearings, supra note
28, at 18 (statement of Roberta Achtenberg, HUD Ass't Sec'y of Fair
Hous. & Equal Opportunity) (noting the ``disparate impact on
minority communities'' of property age and value requirements, and
explaining that ``47 percent of black households, but just 23
percent of white households, live in homes valued at less than
$50,000'' and that ``40 percent of black households compared to 29
percent of white households live in homes build before 1950.'').
\34\ See, e.g. 139 Cong. Rec. 22,459 (1993) (statement of Rep.
Joseph P. Kennedy, II) (``[S]hocking anecdotal evidence was
supported by 12 years of data submitted by Missouri State Insurance
Commissioner Jay Angoff. . . . It shows that, in the cities of St.
Louis and Kansas City, low-income minorities had to pay more money
for less coverage than their white counterparts, despite the fact
that losses in minority areas were actually less than those in white
areas. This evidence directly challenges industry assertions that
minorities are too risky to insure.'').
---------------------------------------------------------------------------

HUD's long experience in administering the Act counsels that
discriminatory effects liability does not threaten the fundamental
nature of the insurance industry. HUD's position that discriminatory
effects liability applies to insurance dates back more than three
decades,\35\ as does the industry's concern that such liability makes
it ``near impossible for an insurer to successfully defend himself.''
\36\ HUD has maintained for decades that remedying discrimination in
insurance, including discriminatory effects claims, requires
examination of each allegedly discriminatory insurance practice on a
case-by-case basis,\37\ and HUD sees no reason to deviate now from this
longstanding approach.
---------------------------------------------------------------------------

\35\ Fair Housing Amendments Act of 1979: Hearings before the
Subcom. on Civil and Constitutional Rights of the H. Comm. on the
Judiciary, 96th Cong. 79 (1979) (statement of Patricia Roberts
Harris, Sec'y of HUD).
\36\ Fair Housing Act: Hearings before the Subcom. on Civil and
Constitutional Rights of the H. Comm. on the Judiciary, 95th Cong.
20, 616 (1978) (statement of the Am. Ins. Ass'n.).
\37\ 1994 Hearings, supra note 28, at 19 (statement of Roberta
Achtenberg, HUD Ass't Sec'y of Fair Hous. & Equal Opportunity)
(discussing insurers' property age and value requirements and
stating that ``when practices with such racial impacts are not
legally or otherwise justified, a case-by-case, Fair Housing Act
analysis is warranted''); id at 50 (stating that ``it is important
to stress that the finding of a [Fair Housing Act] violation occurs
on a case by case basis'' for insurance practices that are ``neutral
on their face [but] have a disproportionate racial impact'' and
``cannot meet the established test of business necessity and . . .
less discriminatory alternative'').
---------------------------------------------------------------------------

HUD recognizes that risk-based decision making is an important
aspect of sound insurance practice, and nothing in the Rule prohibits
insurers from making decisions that are in fact risk-based. Under the
standard established by the Rule, 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.\38\ All
the Rule requires is that if an insurer's practices are having a
discriminatory effect on its insureds and ``an adjustment . . . can
still be made that will allow both [parties'] interests to be
satisfied,'' the insurer must make that change.\39\ Risk-based decision
making is not unique to insurance, and discriminatory effects liability
has proven workable in other contexts involving risk-based decisions,
such as mortgage lending, without the need for exemptions or safe
harbors.\40\ Moreover, some states provide for discriminatory effects
liability against insurers under state laws, further undermining the
industry's claim that providing for such liability as a matter of
federal law threatens the fundamental nature of the industry.\41\
---------------------------------------------------------------------------

\38\ 24 CFR 100.500(b); see also Toledo Fair Hous. Ctr. v.
Nationwide Mut. Ins. Co., 94 Ohio Misc. 2d 151, 157 (Ohio Ct. Com.
Pl. 1997) (``[T]he disparate-impact approach does not unduly
undermine the business of selling insurance. Assuming . . . that the
insurance industry is based on `fair' risk discrimination, the
disparate-impact approach will not impede such fair discrimination
if the insurer can show a business necessity.'').
\39\ Ave. 6E Invs., LLC v. City of Yuma, 818 F.3d 493, 513 (9th
Cir. 2016).
\40\ See, e.g., Policy Statement on Discrimination in Lending,
59 FR 18266 (Apr. 15, 1994); Interagency Fair Lending Examination
Procedures (Aug. 2009); see also 1994 Hearings, supra note 28, at 20
(statement of Roberta Achtenberg, HUD Ass't Sec'y of Fair Hous. &
Equal Opportunity) (``As in other areas of fair housing law
enforcement, standards to determine [insurance] discrimination will
. . . [include] disparate impact. . . . The investigative techniques
we will utilize will include those that have grown from our fair
housing investigative experience across the board . . . the kinds of
tactics that we currently utilize . . . in lending discrimination
investigations.'').
\41\ See infra notes 61 thru 64 and accompanying text.
---------------------------------------------------------------------------

Consistent with the Act's broad scope and purpose, as well as HUD's
own obligation to affirmatively further fair housing, HUD declines to
foreclose viable discrimination claims by creating an overbroad
exemption. For the reasons detailed below, wholesale exemptions for all
insurance practices or all insurance underwriting practices would
necessarily be overbroad, allowing some practices with unjustified
discriminatory effects to go uncorrected. Wholesale exemptions also
would invariably sweep within their scope potential intentional
discrimination in the insurance market as well because ``disparate-
impact liability under the [Fair Housing Act] also plays a role in
uncovering discriminatory intent: It permits plaintiffs to counteract
unconscious prejudices and disguised animus that escape easy
classification as disparate treatment.'' \42\
---------------------------------------------------------------------------

\42\ Inclusive Cmtys., 135 S. Ct. at 2522.
---------------------------------------------------------------------------

Some discriminatory effects claims against insurers will survive a
McCarran-Ferguson defense depending on a host of case-specific
variables, and therefore wholesale exemptions would be overbroad.
McCarran-Ferguson specifically 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 relates to the business of
insurance.'' \43\ As interpreted by the Supreme Court in Humana v.
Forsyth, McCarran-Ferguson applies only when a particular application
of a federal law directly conflicts with a specific state insurance
regulation, frustrates a declared state policy, or interferes with a
State's administrative regime.\44\ Accordingly, the mere fact that a
state has the authority to regulate insurance or has adopted ratemaking
regulations does not suffice on its own to create the kind of conflict,
frustration of purpose, or interference that triggers McCarran-
Ferguson.\45\ Rather, the inquiry required by Humana depends on the
relevant state law and other case-specific variables.\46\
---------------------------------------------------------------------------

\43\ 15 U.S.C. 1012(b).
\44\ Humana, 525 U.S. at 310 (``When 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.'').
\45\ Dehoyos v. Allstate Corp., 345 F.3d 290, 295 (5th Cir.
2003) (disparate impact under the Act); Nationwide Mut. Ins. Co. v.
Cisneros, 52 F.3d 1351, 1363 (6th Cir. 1995) (disparate treatment
under the Act); Moore v. Liberty Nat'l Life Ins. Co., 267 F.3d 1209,
1221 (11th Cir. 2001) (disparate treatment in life insurance).
\46\ See PCIAA, 66 F. Supp. 3d at 1038 (``McCarran-Ferguson
challenges to housing discrimination claims [depend on] the
particular, allegedly discriminatory practices at issue and the
particular insurance regulations and administrative regime of the
state in which those practices occurred.'').
---------------------------------------------------------------------------

For example, in Dehoyos v. Allstate,\47\ the Fifth Circuit rejected
a McCarran-Ferguson defense to a disparate impact claim where the
insurer did not identify a specific state law that was impaired. In so
ruling, the Fifth Circuit reasoned that the Seventh Circuit's holding
in Doe v. Mutual of Omaha \48\ does not foreclose all discriminatory
effects claims against insurers as barred by McCarran-Ferguson.
Instead, the Fifth Circuit distinguished Doe, where McCarran-Ferguson
was held to bar a claim of discrimination under the Americans with
Disabilities Act \49\ (``ADA''), by explaining that ``[i]n Doe, there
was an actual state insurance law which purportedly conflicted with the
application of the [ADA] to the particular question at issue.'' \50\
Thus,

[[Page 69016]]

where no state law is impaired, McCarran-Ferguson will not bar a
discriminatory effects claim against an insurer.
---------------------------------------------------------------------------

\47\ Dehoyos, 345 F.3d 290.
\48\ 179 F.3d 557 (7th Cir. 1999).
\49\ 42 U.S.C. 12101-12213.
\50\ Dehoyos, 345 F.3d at 298 n.6. Although in HUD's view the
Fifth Circuit persuasively distinguished the Seventh Circuit's
holding in Doe, the case-by-case approach appropriately accommodates
any variations among the circuits that may exist, now or in the
future, as to how McCarran-Ferguson should be applied. This includes
the Second Circuit's skepticism over whether McCarran-Ferguson
applies at all to ``subsequently enacted civil rights legislation.''
Viens v. Am. Empire Surplus Lines Ins. Co., 113 F. Supp. 3d 555, 572
(D. Conn. 2015) (quoting Spirt v. Teachers Ins. & Annuity Ass'n, 691
F.2d 1054, 1065 (2d Cir. 1982)).
---------------------------------------------------------------------------

Past cases demonstrate also that discriminatory effects claims
brought under the Fair Housing Act against insurers survive McCarran-
Ferguson defenses even when an insurer points to a specific state law
and alleges that it is impaired. Although the commenters provided
examples of cases in which state laws were found to be impaired by a
particular discriminatory effects challenge, other cases provide
examples of state laws that were not. For instance, in Lumpkin v.
Farmers Group, the court rejected a McCarran-Ferguson defense to a
disparate impact challenge to credit scoring in insurance pricing,
holding that disparate impact liability in that context did not impair
the state's law mandating that ``insurance rates cannot be `unfairly
discriminatory.' '' \51\ In so ruling, the court held it erroneous to
read a state law prohibiting ``unfairly discriminatory'' rates ``too
broadly'' and rejected the insurer's argument that such state laws
require that practices with an unjustified discriminatory effect must
be permitted ``as long as the rates are actuarially sound.''\52\ The
court then cited other provision of the state's insurance code
specifically dealing with credit scoring, concluding that they too were
not impaired.\53\
---------------------------------------------------------------------------

\51\ Lumpkin v. Farmers Grp. (Lumpkin II), No. 05-2868 Ma/V,
2007 U.S. Dist. LEXIS 98949, at *19 (W.D. Tenn. July 6, 2007).
\52\ Id.
\53\ Id. at *19-20.
---------------------------------------------------------------------------

McCarran-Ferguson requires a fact-intensive inquiry that will vary
state by state and claim by claim. Thus, even those cases in which
impairment was found support the case-by-case approach herein adopted
by HUD because, in such cases, the finding of impairment was made only
after considering the particularities of the challenged practices and
the state law at hand. In Saunders v. Farmers Insurance Exchange, for
example, prior to ruling that McCarran-Ferguson barred a discriminatory
effects claim under the Act,\54\ the Eighth Circuit first remanded the
case for further inquiry into several unknowns about the facts and
Missouri law.\55\
---------------------------------------------------------------------------

\54\ Saunders v. Farmers Ins. Exch. (Saunders II), 537 F.3d 961
(8th Cir. 2008).
\55\ Saunders v. Farmers Ins. Exch. (Saunders I), 440 F.3d 940
(8th Cir. 2006). These variables included whether Missouri insurance
law provided a private right of action to challenge the conduct at
issue, and whether determinations by the state insurance agency were
subject to judicial review. The court explained that ``the mere fact
of overlapping complementary remedies under federal and state law
does not constitute impairment for McCarran-Ferguson purposes.'' Id.
at 945.
---------------------------------------------------------------------------

The many ways in which one state's insurance laws can differ from
another's, as well as the ways in which a single state's insurance laws
can change over time, mean that even an exemption for specific
insurance practices would be overbroad and quickly outdated. For
example, variations in state insurance laws have resulted in
discriminatory effects challenges to similar insurance practices
surviving a McCarran-Ferguson defense in regard to some state laws but
not others.\56\ Past cases also demonstrate that the insurance laws of
each state can change over time in significant ways,\57\ and state
insurance regulators respond to new practices as they become common and
their effects become clear.\58\ Given the variation in state insurance
laws across more than fifty jurisdictions and over time, HUD declines
to fashion a one-size-fits-all exemption that would inevitably insulate
insurers engaged in otherwise unlawful discriminatory practices from
Fair Housing Act liability.
---------------------------------------------------------------------------

\56\ For example, in cases challenging the discriminatory effect
of insurers' reliance on credit scores, the McCarran-Ferguson
defense has failed in some states but succeeded in others. Compare
Dehoyos, 345 F.3d 290 (McCarran-Ferguson defense fails) and Lumpkin
II, 2007 U.S. Dist. LEXIS 98949 (same) with Saunders II, 537 F.3d
961 (McCarran-Ferguson defense succeeds) and McKenzie v. S. Farm
Bureau Cas. Ins. Co., No. 3:06CV013-B-A, 2007 U.S. Dist. LEXIS 49133
(N.D. Miss. July 5, 2007) (same). See also PCIAA, 66 F. Supp. 3d at
1039 (``Variations among state regulatory regimes . . . provide an
additional variable that may complicate any hypothetical McCarran-
Ferguson analysis.'').
\57\ Compare Ojo v. Farmers Grp., Inc., 356 SW.3d 421 (Tex.
2011) (recognizing a McCarran-Ferguson defense to a credit scoring
disparate impact claim based on the state legislature ``expressly
authoriz[ing] the use of credit scoring in setting insurance rates
in 2003'') with Dehoyos, 345 F.3d 290 (rejecting a McCarran-Ferguson
defense to the same type of claim based on Texas law in effect
before 2003).
\58\ See, e.g., Nat'l Ass'n of Ins. Comm'rs, Price Optimization
White Paper (Nov. 19, 2015) https://www.naic.org/documents/committees_c_catf_related_price_optimization_white_paper.pdf
[hereinafter NAIC White Paper] (discussing the responses of state
regulators to the rising increase in use of price optimization
practices by insurance providers).
---------------------------------------------------------------------------

A one-size-fits-all exemption is also inappropriate in light of the
fact that insurance practices are not governed solely by ``hermetically
sealed'' state insurance codes,\59\ but are also governed by a range of
other state laws, including state fair housing laws. Many state fair
housing laws track the Act's applicability to insurance and provision
of effects liability, indicating that those states do not consider
disparate impact liability to conflict with the nature of insurance.
Categorical exemptions or safe harbors of the types requested by the
commenters would deprive all states of federal support in addressing
discriminatory insurance practices--even those states that welcome or
depend on such support. This outcome would be at odds with the purpose
of McCarran-Ferguson to support the autonomy and sovereignty of each
individual state in the field of insurance.\60\ Connecticut's
Discriminatory Housing Practices Act, for example, ``provides similar
(albeit broader) protection against housing discrimination as the [Fair
Housing Act], which is strong indication that application of the
federal antidiscrimination law will not impair Connecticut's regulation
of the insurance industry, but rather is complementary with
Connecticut's overall regulatory scheme.'' \61\ Similarly, a state
court found that ``the disparate-impact approach does not conflict with
Ohio Insurance law'' and thus allowed a disparate impact claim against
an insurer to proceed under the state's fair housing law.\62\ In
another case where the court rejected a McCarran-Ferguson defense to a
discriminatory effects claim against an insurer, the court explained
that it was ``not persuaded that California law would allow [the
challenged] practice'' and therefore ``the Fair Housing Act complements
California law in this regard.'' \63\ Furthermore, the allocation of
authority to enforce a state's protections against discrimination in
insurance can impact whether McCarran-Ferguson is a viable defense to a
discriminatory effects claim in a given state.\64\ The case-by-case
approach thus affirms state autonomy

[[Page 69017]]

and furthers the Act's broad remedial goals by ensuring that HUD is not
hindered in fulfilling its statutory charge to support and encourage
state efforts to protect fair housing rights.\65\
---------------------------------------------------------------------------

\59\ Humana, 525 U.S. at 312.
\60\ See 15 U.S.C. 1011 (explaining the purpose of McCarran-
Ferguson as ``the continued regulation . . . by the several States
of the business of insurance is in the public interest'').
\61\ Viens, 113 F. Supp. 3d at 573 n.20 (finding that McCarran-
Ferguson does not bar an FHA disparate impact claim against an
insurer related to a property located in Connecticut).
\62\ Toledo, 94 Ohio Misc. 2d at 157.
\63\ Jones v. Travelers Cas. Ins. Co. of Am., Tr. of Proceedings
Before the Honorable Lucy H. Koh U.S. District Judge, No. C-13-02390
LHK (N.D. Cal. May 7, 2015), ECF No. 269-1.
\64\ Toledo, 94 Ohio Misc. 2d at 157 (recognizing discriminatory
effects liability in homeowners insurance under state law in part
because the Superintendent of Insurance lacks ``primary
jurisdiction'' over such claims).
\65\ See, e.g., 42 U.S.C. 3610(f); 24 CFR pt. 115 (HUD's Fair
Housing Assistance Program); 42 U.S.C. 3608(d); 80 FR 42272 (July
16, 2015) (HUD's rule on Affirmatively Furthering Fair Housing).
---------------------------------------------------------------------------

The commenters' concerns about the incompatibility between HUD's
Rule and the fundamental nature of insurance do not warrant the
requested exemptions. Although the commenters assert that a broad
exemption for all insurance practices or all underwriting decisions is
necessary to preserve ``sound actuarial underwriting'' and the ``risk-
based insurance `unfair discrimination' standard,'' HUD declines to
create a broad exemption of that sort because doing so would immunize a
host of potentially discriminatory insurance practices that do not
involve actuarial or risk-based calculations. Insurers regularly engage
in practices, such as marketing and claims processing and payment, that
do not involve risk-based decision making and to which the Act applies
in equal force.\66\ In addition, a discriminatory effects claim also
can challenge an insurer's underwriting policies as ``not purely risk-
based'' without infringing on the insurer's ``right to evaluate
homeowners insurance risks fairly and objectively.'' \67\ Even
practices such as ratemaking that are largely actuarially-based can
incorporate an element of non-actuarially-based subjective judgment or
discretion under state law. Indeed, many of the state statutes
referenced by commenters mandating that rates be reasonable, not
excessive, inadequate, or unfairly discriminatory permit insurers, via
the very same section of the insurance code, to rely on ``judgment
factors'' in ratemaking.\68\ The example of price optimization
practices,\69\ which a minority of states have started regulating,
illustrates how non-actuarial factors, such as price elasticity of
market demand,\70\ can impact insurance pricing in a manner similar to
how such considerations affect pricing of products in non-actuarial
industries.\71\
---------------------------------------------------------------------------

\66\ See, e.g., Franklin v. Allstate Corp., No. C-06-1909 MMC,
2007 U.S. Dist. LEXIS 51333 (N.D. Cal. July 3, 2007) (applying the
Act to claims processing); Burrell v. State Farm & Cas. Co., 226 F.
Supp. 2d 427 (S.D.N.Y. 2002) (same).
\67\ Nat'l Fair Hous. Alliance v. Prudential Ins. Co. of Am.,
208 F. Supp. 2d 46, 60 (D.D.C. 2002).
\68\ See e.g., Ga. Code Ann. 33-9-4; Mont. Code Ann. 33-16-201;
see also NAIC White Paper, supra note 58, at 1 ] 5 (``Making
adjustments to actuarially indicated rates is not a new concept; it
has often been described as `judgment.' '').
\69\ The term ``price optimization'' can refer to ``the process
of maximizing or minimizing a business metric using sophisticated
tools and models to quantify business considerations,'' such as
``marketing goals, profitability and policyholder retention.'' NAIC
White Paper, supra note 58, at 4 ] 14(a).
\70\ The term ``price elasticity of demand'' refers to ``the
rate of response of quantity demanded due to a price change. Price
elasticity is used to see how sensitive the demand for a good is to
a price change.'' Id. at 4 ] 14(f) (internal quotations omitted).
\71\ Id. at 9 ] 30 (``Price optimization has been used for years
in other industries, including retail and travel. However, the use
of model-driven price optimization in the U.S. insurance industry is
relatively new.'').
---------------------------------------------------------------------------

HUD likewise declines to craft a safe harbor for any risk-based
factor or for the specific ``long-recognized'' factors suggested by one
commenter because it would be arbitrary and overbroad. Creating a safe
harbor for the use of any factor that an insurer could prove is in fact
risk-based would be overbroad because it would foreclose claims where
the plaintiff could prove the existence of a less discriminatory
alternative, such as an alternative risk-based practice. Moreover, if
HUD were to provide a safe harbor for the use of any factor that an
insurer could prove is purely risk-based, entitlement to the safe
harbor would inevitably necessitate a determination of whether the use
of the factor is, in fact, risk-based. As stated above, if an insurance
practice is provably risk-based, and no less discriminatory alternative
exists, the insurer will have a legally sufficient justification under
the Rule as is. The arguments and evidence that would be necessary to
establish whether a practice qualifies for the requested exemption
would effectively be the same as the arguments and evidence necessary
for establishing a legally sufficient justification. Thus, an exemption
for all provably risk-based factors would offer little added value for
insurers not already provided by the Rule itself while foreclosing
potentially meritorious claims in contravention of the Act's broad
remedial goals and HUD's obligation to affirmatively further fair
housing.
Selecting a few factors for exemption, such as those suggested by
the commenter, based on bare assertions about their actuarial
relevance, without data and without a full survey of all factors
utilized by the homeowners insurance industry, would also be arbitrary.
Even if such data were available and a full survey performed, safe
harbors for specific factors would still be overbroad because the
actuarial relevance of a given factor can vary by context.\72\ Also,
while use of a particular risk factor may be generally correlated with
probability of loss, the ways in which an insurer uses that factor may
not be. Furthermore, the actuarial relevance of any given factor may
change over time as societal behaviors evolve, new technologies
develop, and analytical capabilities improve.
---------------------------------------------------------------------------

\72\ For example, in some high-crime neighborhoods the higher-
than-average risk of loss from theft could be offset by a lower-
than-average risk of other losses, such as those caused by weather.
Therefore, the legitimacy of declining to issue insurance policies
in all locations with high crime rates would depend on other
features of those locations.
---------------------------------------------------------------------------

In light of the long, documented history of discrimination in the
homeowners' insurance industry, including the use of ``risk factors''
by insurers and regulators that were subsequently banned as
discriminatory, as well as the fact-specific nature of McCarran-
Ferguson analysis and the non-actuarial or hybrid nature of many
insurance practices, HUD considers it inappropriate to craft any
exemptions or safe harbors for insurance practices. HUD's longstanding
case-by-case approach can adequately address any McCarran-Ferguson
concerns and better serves the Act's broad remedial purpose and HUD's
statutory obligation to affirmatively further fair housing, including
by supporting fair housing efforts undertaken by states.\73\
---------------------------------------------------------------------------

\73\ Cf. CROSSRDS v. MSP Crossroads Apts., LLC, No. 16-233 ADM/
KMM, 2016 U.S. Dist. LEXIS 86965 at *32 n.6 (D. Minn. July 5, 2016)
(declining to adopt a per se rule that a certain category of
disparate impact claims could not be brought in part because ``HUD
has indicated a preference for case-by-case review of practices
alleged to cause a disparate impact'').
---------------------------------------------------------------------------

Issue: One commenter requested that HUD ``exempt insurance pricing
from the discriminatory effects standards.'' The commenter argued that
pricing is not covered by the Act because the Act only covers insurance
practices that ``make[ ] homeowners insurance unavailable'' and pricing
does not do so. The commenter also asserted that pricing is ``subject
to the filed rate doctrine'' and should therefore be exempted because
the filed rate doctrine precludes ``private claims for damages based on
challenges to filed rates.''
HUD Response: HUD disagrees with the commenter's characterization
of the Act as only covering insurance practices that make insurance
unavailable, as well as with the commenter's premise that pricing does
not do so. HUD also declines to craft an exemption for insurance
pricing based on the filed rate doctrine because HUD does not
anticipate that the filed rate doctrine will bar discriminatory effects
claims involving insurance pricing. In light of the broad remedial
goals of the Act and HUD's obligation to affirmatively further fair
housing, HUD continues to prefer

[[Page 69018]]

case-by-case adjudication over the requested exemption.
In addition to Section 804(a),\74\ which prohibits discrimination
that ``make[s] unavailable'' a dwelling, there are several other
provisions of the Act that can prohibit discriminatory insurance
practices, including pricing.\75\ One of those is Section 805(a),\76\
which prohibits discrimination in the ``terms or conditions'' of
``residential real estate-related transactions.'' Another is Section
804(b),\77\ which prohibits discrimination in the ``provision of
services . . . in connection'' with a dwelling. Indeed, HUD's fair
housing regulations since 1989 have specifically stated that the Act
prohibits ``[r]efusing to provide . . . property or hazard insurance
for dwellings or providing such . . . insurance differently'' because
of a protected characteristic.\78\ Courts have applied the Act to
insurance pricing,\79\ as well as to other practices such as marketing
and claims processing,\80\ irrespective of whether the discriminatory
conduct occurred in conjunction with or subsequent to the acquisition
of a dwelling.
---------------------------------------------------------------------------

\74\ 42 U.S.C. 3604(a).
\75\ Depending on the circumstances, discriminatory insurance
practices can violate 42 U.S.C. 3604(a), (b), (c), (f)(1), (f)(2),
3605, and 3617. See, e.g., Nationwide Mut. Ins. Co. v. Cisneros, 52
F.3d at 1360 (holding that section 3604 of the Act prohibits
discriminatory insurance underwriting); Nevels, 359 F. Supp. 2d at
1120-21 (recognizing that sections 3604(f)(1), 3604(f)(2), 3605 and
3617 of the Act cover insurance practices); Nat'l Fair Hous.
Alliance, 208 F. Supp. 2d at 55-58 (holding that sections 3604(a),
3604(b), and 3605 of the Act prohibit discriminatory insurance
underwriting practices); Owens v. Nationwide Mut. Ins. Co., No.
3:03-CV-1184-H, 2005 U.S. Dist. LEXIS 15701, at *16-17 (N.D. Tex.
Aug. 2, 2005) (holding that section 3604(b) of the Act prohibits
discriminatory insurance practices); Francia v. Mount Vernon Fire
Ins. Co., No. CV084032039S, 2012 Conn. Super. LEXIS 665 (Conn.
Super. Ct. Mar. 6, 2012) (relying on section 3604(c) to interpret an
analogous state law as prohibiting a discriminatory statement in an
insurance quote).
\76\ 42 U.S.C. 3605(a).
\77\ 42 U.S.C. 3604(b).
\78\ 24 CFR 100.70(d)(4) (emphasis added). As used in this
regulation, the phrase ``property or hazard insurance for
dwellings'' includes insurance purchased by an owner, renter, or
anyone else seeking to insure a dwelling. See 42 U.S.C. 3602(b)
(defining ``dwelling'' without reference to whether the residence is
owner- or renter-occupied).
\79\ See, e.g., NAACP, 978 F.2d at 301 (``Section 3604 of the
Fair Housing Act applies to discriminatory denials of insurance, and
discriminatory pricing, that effectively preclude ownership of
housing because of the race of the applicant.'') (emphasis added);
Dehoyos, 345 F.3d at 293 (holding that a claim alleging
discriminatory insurance pricing was not barred by McCarran-
Ferguson).
\80\ See sources cited supra note 66; see also Owens, 2005 U.S.
Dist. LEXIS 15701, at *17 (Insurance practices are covered by the
Act ``whether the insurance is sought in connection with the
maintenance of a previously purchased home or with an application to
purchase a home.''); Lindsey v. Allstate Ins. Co., 34 F. Supp. 2d
636, 643 (W.D. Tenn. 1999) (``It would seem odd to construe a
statute purporting to promote fair housing as prohibiting
discrimination in providing property insurance to those seeking a
home, but allowing that same discrimination so long as it takes
place in the context of renewing those very same insurance
policies.'').
---------------------------------------------------------------------------

HUD is not aware of any case, and no commenter cited one, in which
a court has applied the filed rate doctrine to defeat any sort of claim
under the Act, although several courts have rejected such attempts.\81\
``The filed rate doctrine bars suits against regulated utilities
grounded on the allegation that the rates charged by the utility are
unreasonable.'' \82\ The doctrine primarily serves two purposes: First,
preventing litigants from securing more favorable rates than their non-
litigant competitors, and second, preserving for agencies rather than
courts the role of ratemaking.\83\
---------------------------------------------------------------------------

\81\ See Saunders I, 440 F.3d at 944-46 (``The district court
erred in invoking the judicially created filed rate doctrine to
restrict Congress's broad grant of standing to seek judicial redress
for race discrimination.''); Dehoyos, 345 F.3d at 297 n.5 (finding
``unpersuasive'' the argument that the filed rate doctrine barred a
Fair Housing Act disparate impact claim); Lumpkin v. Farmers Grp.,
Inc. (Lumpkin I), No. 05-2868 Ma/V, 2007 U.S. Dist. LEXIS 98994, at
*20-22 (W.D. Tenn. Apr. 26, 2007) (ruling that ``the filed rate
doctrine does not apply'' to a Fair Housing Act disparate impact
claim).
\82\ Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17, 18 (2d Cir.
1994).
\83\ Id.
---------------------------------------------------------------------------

The fit between the filed rate doctrine and discriminatory effects
claims is attenuated, at best, because discriminatory effects claims
``do not challenge the reasonableness of the insurance rates'' but
rather their discriminatory effects.\84\ To the extent there is any
conflict between the directives of the federal Fair Housing Act and
those of state ratemaking regulations, ``the Supremacy Clause tips any
legislative competition in favor of the federal antidiscrimination
statutes.'' \85\ Unlike filed rate doctrine cases involving a conflict
between federal ratemaking and a federal statute, applying the filed
rate doctrine to prioritize state ratemaking over a federal statute
``would seem to stand the Supremacy Clause on its head.'' \86\
Moreover, the filed rate doctrine ``does not preclude injunctive relief
or prohibit the Government from seeking civil or criminal redress,''
\87\ which are types of relief often obtained for violations of the
Act.\88\
---------------------------------------------------------------------------

\84\ Lumpkin I, 2007 U.S. Dist. LEXIS 98994, at *21; see also
Dehoyos, 345 F.3d at 297 n.5 (``[T]he application of anti-
discrimination laws cannot be reasonably construed to supplant the
specific insurance rate controls of [states].'').
\85\ Saunders I, 440 F.3d at 944.
\86\ Perryman v. Litton Loan Servicing, LP, No. 14-cv-02261-JST,
2014 U.S. Dist. LEXIS 140479, at *20-22 (N.D. Cal. Oct. 1, 2014).
\87\ In re Title Ins. Antitrust Cases, 702 F. Supp. 2d 840, 849
(N.D. Ohio 2010); see also Marcus v. AT&T Corp., 138 F.3d 46, 62 (2d
Cir. 1998).
\88\ See 42 U.S.C. 3612(g)(3), 3613(c), 3614(d).
---------------------------------------------------------------------------

Because ``the law on the filed rate doctrine is extremely creaky,''
\89\ abundant variations exist among the courts as to how the doctrine
applies. Even where it does apply, a filed rate doctrine defense ``must
be examined specifically in the context of the laws and regulatory
structures at issue.'' \90\ This would be a ``fact-intensive issue''
\91\ that would include consideration of the particular state's
ratemaking structures.\92\ The case-by-case approach best accommodates
these variations.
---------------------------------------------------------------------------

\89\ Town of Norwood v. New England Power Co., 202 F.3d 408, 420
(1st Cir. 2000). The filed rate doctrine has also been described as
a ``weak and forcefully criticized doctrine.'' Cost Mgmt. Servs. v.
Wash. Natural Gas Co., 99 F.3d 937, 946 (9th Cir. 1996).
\90\ Munoz v. PHH Corp., 659 F. Supp. 2d 1094, 1099 (E.D. Cal.
2009).
\91\ Saunders I, 440 F.3d at 945.
\92\ For example, the Seventh Circuit has questioned the
applicability of the filed rate doctrine to any claims involving
property insurance in Illinois because ``[a]lthough [a property
insurance provider] is required to file its insurance rates with the
Illinois Department of Insurance, it is not at all clear that the
Department has the authority to approve or disapprove property-
insurance rates.'' Cohen v. Am. Sec. Ins. Co., 735 F.3d 601, 607
(7th Cir. 2013). States vary considerably in the degree to which
they regulate rate-setting, with six different types of rate
regulatory systems in use across the country: Prior approval; file
and use; use and file; flex rating; modified prior approval; and no
file. See NAIC, 2 Compendium of State Laws on Insurance Topics,
Health/Life/Property/Casualty II-PA-10-21 (2011). As the
classifications indicate, these rate regulatory systems vary with
respect to whether or when an insurance company is required to file
its rates with a state insurance agency before those rates can be
used.
---------------------------------------------------------------------------

For all the foregoing reasons, HUD does not agree that the filed
rate doctrine, nor the commenter's assertions about the Act's scope,
warrant an exemption for insurance pricing.
Issue: One commenter sought an exemption from discriminatory
effects liability for FAIR plans because ``the operation of FAIR plans
facilitates private conduct that otherwise would not have occurred.''
HUD Response: FAIR plans were first enacted by many states in
response to the federal Urban Property Protection and Reinsurance Act
of 1968,\93\ which was passed by Congress to address the problem of
inadequate property insurance availability in the nation's urban areas
due to insurance redlining. FAIR plans operate as insurance pools that
sell property insurance to

[[Page 69019]]

individuals who are unable to purchase insurance in the voluntary
market.
---------------------------------------------------------------------------

\93\ Public Law 90-448, 82 Stat. 555 (1968).
---------------------------------------------------------------------------

HUD declines to categorically exempt FAIR plans from discriminatory
effects liability under the Act. To do so, without any consideration of
the particular insurance practice or state requirements at issue, would
be inconsistent with the broad remedial purpose of the Act and HUD's
obligation to affirmatively further fair housing. Like state regulation
of voluntary market insurance practices, state laws governing the
provision and pricing of FAIR plans vary across jurisdictions.
Variations in state regulation of FAIR plans include the types of
coverage provided by such plans,\94\ the amount of coverage allowed
under such plans,\95\ and the conditions under which an individual or
property will qualify for such plans.\96\ Additionally, even within a
given state, FAIR plan regulations are subject to revision over time.
---------------------------------------------------------------------------

\94\ Compare, e.g., Conn. Agencies Regs. 38a-328-3(c) (defining
``basic insurance'' for purposes of the Connecticut FAIR plan to
include liability coverage for any dwelling of up to three families)
with Mass. Gen. Laws ch. 175c, Sec. 1 (defining ``basic property
insurance'' for purposes of the Massachusetts FAIR plan to include
liability coverage for only non-owner occupied dwellings of up to
four families) and 98-08 Wash. Reg. 4 (April 15, 1998) (excluding
liability coverage from the definition of ``essential property
insurance'' for purposes of the Washington FAIR plan).
\95\ Compare, e.g., Mo. Rev. Stat. 379.825 (limiting maximum
insurance coverage for a dwelling under the Missouri FAIR plan to
$200,000) with 98-08 Wash. Reg. 5 (April 15, 1998) (limiting maximum
insurance coverage for a dwelling under the Washington FAIR plan to
$1.5 million).
\96\ Compare, e.g., Ohio Rev. Cod. Ann. 3929.44(D) (requiring
applicant to certify that two insurance companies declined to
provide coverage for purposes of FAIR plan eligibility) with 215
Ill. Comp. Stat. 5/524(1) (restricting FAIR plan eligibility to
applicants who have been declined insurance coverage by three
companies).
---------------------------------------------------------------------------

Given such variation and changeability, exempting all FAIR plans
from application of the discriminatory effects standard would be
overbroad and would deprive individuals of the protections afforded by
the Fair Housing Act. Indeed, one state court has held ``the disparate
impact approach does not interfere with the Ohio FAIR Plan.'' \97\ In
light of this demonstrated compatibility, and because insurers retain
some discretion in the operation of FAIR plans,\98\ HUD determines that
case-by-case adjudication is preferable to the requested exemption of
FAIR plans.
---------------------------------------------------------------------------

\97\ Toledo, 94 Ohio Misc. 2d at 157.
\98\ See, e.g., Cal. Ins. Code 10094 (leaving discretion to
governing committee of participating insurers to establish
``reasonable underwriting standards'' for determining whether a
property for which FAIR plan coverage is sought is insurable); 215
Ill. Comp. Stat. 5/524(1) (same); Ohio Rev. Code. Ann. 3929.43(C)
(same).

Dated: September 23, 2016.
Gustavo Velasquez,
Assistant Secretary for Fair Housing and Equal Opportunity.
[FR Doc. 2016-23858 Filed 10-4-16; 8:45 am]
BILLING CODE 4210-67-P

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