The 8th U.S. Circuit Court of Appeals last month upheld a lower court finding that the plaintiffs’ claims were pre-empted by the McCarran-Ferguson Act, a federal law that leaves regulation of the insurance industry mainly with the states.
“In a nutshell, this decision empowers the state of Missouri to continue regulating how insurance companies set rates in Missouri,” said Denise Drake, an attorney with Spencer Fane Britt & Browne who represented Shelter General Insurance Co.
“The decision does not stop any person from raising a complaint of price discrimination based on race. To the contrary, this decision simply funnels complaints to the Missouri agency in the best position to evaluate and handle such complaints — the Missouri Department of Insurance.”
Originally filed in 1996 by East Side homeowners Cynthia Canaday and Marva Jean Saunders, the suits in question alleged that the insurers had violated federal fair housing and civil rights laws by using discriminatory underwriting standards to charge minority homeowners higher premium rates.
Such practices, known as redlining, involve the drawing of boundaries around certain geographical areas. Insurance officials insist that the industry does not engage in such practices.
The plaintiffs specifically charged that the insurers “used a multitiered rate structure based … on the racial composition of Kansas City ZIP code areas.” Their legal theory was that, while the insurers may not have engaged in intentional discrimination, their practices had a “disparate impact” on largely black neighborhoods.
Earlier in the litigation, U.S. District Judge Fernando Gaitan dismissed the homeowners’ claims after finding they had not alleged a direct injury. The homeowners then filed 10 new actions. Some of those were later dismissed; others were settled on confidential terms.
That left three cases against Shelter, Farmers Insurance Exchange and American Family Mutual Insurance Co. Gaitan threw out those actions in 2005 after determining that the homeowners had not proved they had been rejected for insurance for reasons related to the challenged underwriting standards.
On appeal, the 8th Circuit in 2006 upheld most of Gaitan’s findings, but sent the cases back to Gaitan after deciding the record was inadequate on the issue of whether the McCarran-Ferguson Act barred the plaintiffs’ discriminatory pricing claims. Gaitan found that it did, holding that the price discrimination claims would “impair” Missouri laws regulating insurance.
Gaitan ruled that if the homeowners were allowed to proceed with their fair-housing and civil rights claims, it would “clearly frustrate Missouri’s administrative regime to regulate the insurance industry.”
The homeowners appealed once again, and the 8th Circuit affirmed once again a few weeks ago.
In Missouri, the 8th Circuit held, “the Director of Insurance has been delegated the essentially legislative task of rate-making by reviewing insurer risk classifications and pricing differentials.”
Citing an earlier case, it went on to say that if a federal court were permitted to step in and determine what a nondiscriminatory rate would have been, a “more complete overlap with the state (agency’s) pricing decisions is impossible to conceive.”
Applauding the decision, Drake said that the state department of insurance is in the best position to determine, based on its own approved factors, whether rates set by an insurer might have an improper impact on a particular group of people.
“Obviously,” she said, “no one supports or in any way condones race discrimination, but risk discrimination is allowed, absolutely necessary even, as it is at the heart of the entire insurance business.”