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Federal Judge Richard Leon issued an order on Monday to vacate the disparate impact rule as applicable to the 1968 Fair Housing Act. The ruling stated that the Department of Housing and Urban Development (HUD) exceeded its authority when it drafted a new rule on disparate impact.
In March 2013, HUD issued the rule seeking to establish a disparate impact standard that would be used to determine if and when discrimination applied in the pricing of homeowners insurance for a protected class. The legal theory of disparate impact arose from the Voting Rights Act of 1965. It relies on racial statistical disparities in certain business practices (such as mortgage lending) without having to show discriminatory intent.
The most common statutory standard used for regulating homeowners rates today is that rates shall not be excessive, inadequate or unfairly discriminatory. The business of insurance is not typically regulated by the federal government, but rather by the individual states via the McCarran-Ferguson Act of 1945. The new HUD rule would have potentially created significant changes in how carriers establish rates and the manner in which the individual states regulate rates for homeowners insurance.
The disparate impact rule would have allowed aggrieved groups to sue insurance companies for perceived disparities among protected groups, regardless of the lack of intent by the insurer to discriminate or the predictive validity of the indicated premium differences. That is, even though insurers are prohibited from considering race, religious affiliation or ethnicity in their underwriting and rating plans, they would nonetheless be required to prove either that their rating plans do not result in a disparate impact on protected groups or that the differentiation serves a substantial, legitimate business interest that cannot be achieved by some other method that does not result in disparate impact.
The National Association of Mutual Insurance Companies and the America Insurance Association brought the legal challenge on behalf of insurers arguing the HUD rule would seriously disrupt long-held practices for establishing rates for homeowners insurance and encroach on state insurance regulation. In short, the new rule would have called many traditional rating variables into question that had a clear relationship to expected homeowner losses, including territory and amount of insurance.
This is a positive development for the insurance industry, as consumers will continue to be protected by state insurance regulation, and the industry will still be allowed to use rating factors that predict loss while abiding by the prohibition to not use discriminatory factors like race, religious affiliation or ethnicity.
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