Representatives of the property/casualty insurance industry are lashing out at a new federal rule that they say could change how homeowners insurance policies are written and may open insurers up to waves of litigation.
The rule issued by the U.S. Department of Housing and Urban Development expands the Fair Housing Act's Discriminatory Effects Standard and how it applies to actions that have discriminatory effects on minority groups. It would hold companies responsible for policies that result in statistically disproportionate effects on consumers based on color, religion, sex, familial status or national origin regardless of whether there is evidence of an intent to discriminate or that any individual was actually subjected to discriminatory treatment.
The rule will apply in situations where there was no intent to discriminate, and where all policyholders and applicants for insurance were subjected to the same underwriting and pricing criteria without regard to race, ethnicity, or any other prohibited characteristic, said Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies. Discrimination issues relating to insurance have traditionally been addressed by state regulators. Under federal law, the insurance industry is subject to state regulation.
"The final rule released by HUD is an unacceptable overreach by an agency that has no authority to regulate property/casualty insurance," Grande said in a statement. "If allowed to stand, this rule could undermine the entire process of insurance underwriting, effectively blinding insurers as they attempt to determine potential risks and appropriate pricing, and needlessly raising costs for all consumers."
HUD circulated a draft of the rule last year that was sharply criticized by P/C industry groups. Three industry trade groups said in filed comments pertaining to the rule that it could have a major effect on homeowners' insurers' bottom lines because "the very nature of insurance is to underwrite and set rates based on assigning risk levels to policyholders." The rule would hold insurers liable if they were found to have the "effect" of making unavailable or denying coverage to minorities at a higher percentage than non-minority consumers. It would also apply to rates that were disproportionately high for minorities.
Now that the rule has been issued, NAMIC said it intends to move forward with a legal challenge to its being implemented.
The Property Casualty Insurers Association of America also came out against the disparate impact rule, saying state regulations barring discrimination have worked well for years.
"Insurance regulation is the province of state law, not federal law," said Leon Buck, PCIs assistant vice president federal government relations, in an email. "States already prohibit discriminatory practices and have comprehensive enforcement, but the HUD rule puts in jeopardy the use of longstanding, sound, state-approved actuarial factors that are the foundation of responsible insurance underwriting."
That said, consumer advocates have countered FHA has always applied to insurance companies and a federal disparate-impact rule is necessary to ensure insurers' rate-setting practices are not discriminatory.
Birny Birnbaum, executive director of the Center for Economic Justice and a supporter of the rule, told Best's News Service in June that there is nothing new about HUD issuing a rule that affects insurance companies. Birnbaum said while the rule may force insurance companies to rethink their rate-setting practices, it is worth it to ensure minority insurance consumers aren't being treated unfairly.