HUD Stance On Insurers’ Disparate Impact Liability May Shift

This article originally appeared in Law 360 on Friday, May 18, 2018, and is reprinted here with permission.

by Robert D. Helfand

Since 2013, the U.S. Department of Housing and Urban Development (HUD) has taken a hard line on insurers’ liability for causing unintended and unanticipated harm to the housing rights of vulnerable communities. On May 10, however, HUD announced that it will seek public comment about the continued validity of its own disparate impact rules.  The announcement suggests an opening for insurers to advance important arguments that have made little headway in recent years. 

The Rule on Disparate Impact

In 2013, HUD adopted a “Discriminatory Effects Rule,” 24 C.F.R. § 100.500, which held that defendants may be liable under the federal Fair Housing Act, 42 U.S.C §§ 3601 et seq. (FHA), for conduct with a “disparate impact”—i.e., conduct that is otherwise lawful, and which has no discriminatory intent, but which nevertheless has a disproportionately adverse effect on the housing rights of protected classes.  The Rule imposes liability for conduct that “caused or predictably will cause a discriminatory effect.” 

The Rule also established a burden-shifting procedure for disparate impact cases. Under HUD’s framework, defendants may be liable, even if they can prove their actions were “necessary to achieve … [their] substantial, legitimate, nondiscriminatory interests.”  Plaintiffs can overcome that proof, by showing that the defendants’ legitimate interests could also be served by a different practice with “a less discriminatory effect.” 

In 2015, in Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 135 S.Ct. 2507 (2015), the U.S. Supreme Court accepted HUD’s position, holding that evidence of disparate impact can establish a violation of the FHA.  Lower courts generally interpret the case as having also adopted HUD’s burden-shifting approach to disparate impact litigation. E.g., Mhany Management, Inc. v. City of Nassau, 819 F.3d 581, 618 (2d Cir. 2016). 

The Rule Applied to Insurers 

To the extent the Rule applies to the conduct of insurers, it has been challenged by the industry in two separate lawsuits. Property Casualty Insurers Assoc. of Am. v. Donovan, No. 1:13-cv-08654 (N.D. Ill.); American Ins. Assoc. v. U.S. Dep’t of Housing & Urban Dev., No. 13-00966 (D.D.C.).  In October 2016, after portions of the Rule had been remanded to HUD for further consideration, the Department strongly re-asserted its position that the Rule applies to all aspects of insurance operations.  81 Fed. Reg. 69012.  

HUD’s 2016 statement yielded no ground on the arguments the insurers had made. Insurers contended, among other things, that the Rule clashes with state insurance laws, in violation of the McCarran-Ferguson Act, 15 U.S.C. § 1012. For example: States require insurers to use only those rate classifications that are expected to affect the insurers’ costs.  If, as is likely, members of protected classes are not uniformly distributed among those cost-based classifications, then compliance with state insurance laws could disproportionately burden those groups.  

HUD did not dispute that analysis, but it nevertheless concluded that its Rule was consistent with state laws, because the Rule does not absolutely preclude compliance with them: 

[P]ractices that an insurer can prove are risk-based, and for which no less discriminatory alternative exists, will not give rise to discriminatory effects liability [under the Discriminatory Effects Rule]. 

HUD’s statement did not directly address the fact that consideration of “discriminatory effects” is not required under state insurance laws, and so that HUD’s Rule effectively imposes a new, mandatory element to the rating process that state laws govern. Without doing so expressly, HUD appeared to assert that the Discriminatory Effects Rule is consistent with McCarran-Ferguson, because it compliments state law, rather than conflicting with it. 

The industry also suggested that the Rule should include “safe harbors” for certain well-established insurance practices, such as the use of “long-recognized” risk factors in pricing. HUD concluded that any such exemptions would be “overbroad.”  In other words, HUD concluded that issues arising from the potential disparate impact of well-established insurance practices should be resolved on a case-by-case basis—and, often, through litigation. 

Reviewing the Rule 

Inclusive Communities was decided in 2015, and, since that time, it has been widely viewed as embracing both the substantive and procedural aspects of HUD’s Discriminatory Effects Rule.  Nevertheless, on May 10, 2018, HUD announced that it will formally seek public comment on whether that view is correct—“whether [the] 2013 Disparate Impact Regulation is consistent with the … ruling” in Inclusive Communities.  

HUD’s explanation for the decision was limited to the observation that, “[w]hile the Supreme Court referred to HUD’s Disparate Impact Regulation in its Inclusive Communities ruling, it did not directly rule upon it.”  That explanation does not rule out the possibility that the announcement reflects a change of attitude towards disparate impact litigation from the views of the previous Administration. 

What Might Happen 

Inclusive Communities did not involve an insurance company, and Justice Kennedy’s opinion in the case did not address insurers’ objections to the Discriminatory Effects Rule.  Nevertheless, HUD’s decision gives insurers an opening to make several important arguments. 

Justice Kennedy did emphasize that a defendant may be liable under the FHA only where the plaintiff firmly establishes a causal connection between the defendant’s conduct and the alleged impairment of housing rights. He said the FHA incorporates a “robust causality requirement”: 

[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy … causing that disparity. … A robust causality requirement ensures that ‘[r]acial imbalance … does not, without more, establish a prima facie case …’ and thus protects defendants from being held liable for racial disparities they did not create. … 

Where a defendant’s conduct was constrained by statute or regulation, the opinion suggested this “causality requirement” might not be satisfied; in that case, the law itself might be considered the cause of the plaintiff’s injury. Proof of causation might also fail where a complex housing problem has no single, pre-eminent cause:

It may … be difficult to establish causation [in a disparate impact case] because of the multiple factors that go into decisions [affecting the housing market]…. . And … if the [plaintiff] cannot show a causal connection between the [defendant’s] policy and a disparate impact—for instance, because [governing] law substantially limits the [defendant’s] discretion—that should result in dismissal … .

There can be no dispute that state laws “substantially limit” the discretion of insurers. In some jurisdictions, those laws have been interpreted to mean that insurers may not consider “non-risk-related factors"—such as discriminatory effect—in connection with activities such as pricing.  For example: 

To the extent price optimization involves gathering and analyzing data related to … characteristics … unrelated to risk of loss or expense, insurers may not use price optimization to rate policies … . (Delaware Department of Insurance, Bulletin No. 78.) 

[P]ractices that adjust premiums, whether included or not included in the insurer’s rating plan, are not allowed when the practice cannot be shown to be cost-based. (Connecticut Insurance Department, Bulletin PC-81.) 

Thus, insurers can now make the case that HUD’s Rule fails to incorporate the “causality requirement” of Inclusive Communities.  If state laws prohibit insurers from choosing among rating plans on the basis of “characteristics … unrelated to risk of loss,” then those laws might be considered the ultimate cause of an insurer’s alleged failure to choose the least discriminatory option among several possible plans.  

The argument for safe harbors can also be grounded in the Inclusive Communities opinion.  As, Justice Kennedy observed, “multiple factors … go into decisions” that affect housing—including decisions by government authorities. It would be unwarranted, therefore, to assume that state regulators failed to consider the possible social costs of insurance practices they have decided to approve over the course of many years, but which HUD’s Rule would potentially penalize.  Furthermore, the Rule exposes defendants to liability for the future impact of their decisions; it prohibits practices that “predictably will cause a discriminatory effect.”  By invalidating insurance practices on the basis of their predicted outcomes, juries could, in effect, assume responsibility over basic questions of regulatory policy. 


Whatever its motives, HUD has invited insurers to renew their assault, in a battle they have been fighting for more than four years, and in which the stakes involve fundamental aspects of insurance law. To say the least, it is a striking development.

Robert D. Helfand is a member with Pullman & Comley LLC in Hartford, Connecticut.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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