CHICAGO (CN) - An insurance trade group sued the Department of Housing and Urban Development, claiming its "disparate impact rule"- meant to protect minorities and the handicapped - makes it impossible for insurers to set prices based on objective assessment of risk.
The Property Casualty Insurers Association of America sued HUD and its Secretary Shaun Donovan in Federal Court.
It claims the HUD regulation violates the McCarran-Ferguson Act, of 1945, which gave the insurance industry broad exemptions from federal control, giving such regulatory powers to the states.
The trade group challenges a HUD regulation promulgated on Feb. 15, that "'formalize[d]' HUD's belief 'that liability under the Fair Housing Act may arise from a facially neutral practice that has a discriminatory effect' on a group of persons defined by race, color, religion, sex, handicap, familial status, or national origin -'regardless of whether there was an intent to discriminate.'"
The regulation at issue is 78 Fed. Reg. 11460, 11460 (Feb. 15, 2013).
Citing alleged violations of the Administrative Procedure Act, the trade group "challenges HUD's application of this regulation to the provision of homeowners insurance and property and hazard insurance, the underwriting and pricing of which has historically been regulated by the states."
The insurers claim HUD did not address whether applying disparate impact liability to insurance would interfere with state regulation of insurance, or whether the new rule is consistent with federal law.
"State laws permit and often require insurers to engage in risk-based underwriting and pricing - a practice that is fundamental to the business of insurance," the insurers say in their 40-page lawsuit. "As a matter of state law, property and casualty insurers are required to charge rates that are not excessive, inadequate, or unfairly discriminatory. A rate is not unfairly discriminatory, however, if it is based on actuarial data reflecting past losses that reveals differences in the risks posed by different insureds. Insurers are thus permitted as a matter of state law to use actuarially significant risk factors. Indeed, many states mandate that insurers use these actuarial risk factors."
Under the disparate impact rule, a plaintiff has the burden of proving that a challenged practice caused or will cause a discriminatory effect. If that burden is met, then the defendant has the burden of proving that the challenged practice is necessary to achieve a nondiscriminatory interest, and that no less-discriminatory alternative practice exists. The rule does not require that an alternative practice be equally effective at serving defendant's purpose, according to the complaint.
"Rather than allow insurance decisions to be guided by objective actuarial data regarding risk - as contemplated by state law - the disparate impact rule would require insurers to attempt to determine whether their underwriting and pricing decisions have a disparate impact on customers falling within a protected class. The rule would thus fundamentally change the business and regulation of insurance," the insurers claim.
The trade group seeks a court order declaring the disparate impact rule invalid as it applies to homeowners' insurance pricing.
It is represented by Seth Waxman with Wilmer Cutler Pickering Hale and Dorr in Washington D.C.
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