Insurance group sues federal agency over new rule targeting discrimination in housing practices; says it could increase costs for everyone

CHICAGO - Asserting that the rule could drive up insurance rates needlessly and drive some insurers to insolvency, a property casualty trade association has brought a federal lawsuit challenging the legality of a new regulatory rule purportedly intended to eliminate discrimination in the issuance of home insurance policies.

Chicago-based Property Casualty Insurers Association of America (PCI) filed suit Nov. 27 in the U.S. District Court for the Northern District of Illinois against the U.S. Department of Housing and Urban Development (HUD), as well as its secretary, Shaun Donovan, over the agency’s new “Disparate Impact Rule.”

PCI’s suit was submitted by Rowe W. Snider of Locke Lord LLP in Chicago. He and his colleague, Ashlee M. Knuckey, are listed as of counsel in the suit, which shows that five attorneys at Wilmer, Cutler, Pickering, Hale and Dorr LLP in Washington D.C. are also representing the trade group.

PCI is an association that represents more than 1,000 member property and casualty insurers, who in 2012 wrote more than $190 billion in home insurance policies and accounted for almost one-third of all such policies written in every state in the U.S.

The complaint comes on the heels of HUD’s Feb. 15, 2013 decision to promulgate a new regulatory rule, issued under the federal Fair Housing Act, to address discrimination, whether intentional or not, in housing practices.

Among other practices, the new rule could also apply to the issuance of home insurance policies, compelling insurers to determine if their policies might be construed as discriminatory against federally-protected classes of people.

In its complaint, PCI argues that the new Disparate Impact Rule would essentially throw the business of underwriting and issuing home property and casualty insurance policies into chaos.

On top of other arguments, PCI asserts that the rule would undermine the actuarial determination of risk that forms the very basis by which insurers issue policies to and set rates for various homeowners.

In its complaint, PCI notes that such concerns were raised by itself and other insurance trade associations, including the National Association of Mutual Insurance Companies (NAMIC), during the comments period in the months leading up to HUD’s issuance of the final Disparate Impact Rule.

“To achieve a condition in which no statistical disparities exist in the average rate paid by different demographic groups, many if not most risk- based variables would have to be eliminated from the underwriting process,” NAMIC wrote in its comments to HUD. “In other words, to avoid creating a disparate impact, an insurer would have to charge everyone the same rate, regardless of risk.”

That, PCI contends, would have the effect of making insurance more expensive for everyone, and likely making it less available to all, even to prospective homeowners in the classes the rule was intended to help.

“If PCI members are forced to disregard actuarial risk data in favor of protected class data, they will be unable to price insurance as accurately and competitively as they currently do, resulting in lost business, decreased availability of insurance, and potential insolvency,” the trade group asserts in its complaint.

Further, PCI claims that the rule would come into conflict with existing federal law, which the association argues forbids the federal government and its agencies from interfering with state insurance regulation.

In some cases, PCI argues, the new federal rule would actually place insurers “in an impossible position of either complying with state law … or complying with the rule,” as some states actually require insurers to consider actuarial risk factors in setting rates and issuing policies.

PCI’s suit states that HUD, in response, argued that the federal law cited by PCI and other insurers applies only to federal courts, and not federal regulatory bodies.

Calling such a position a “novel contention that a federal agency need not consider whether an action it is taking is consistent with federal law,” PCI contends that HUD’s rule is arbitrary and capricious, and should be invalidated by the court.

In its 40-page, seven-count complaint, PCI asks the federal court to invalidate the rule and enjoin HUD from applying the rule to insurers issuing property and hazard policies.