Claims-handling Discrimination May Trigger FHA Liability: Court

By Don R. Sampen, published, Chicago Daily Law Bulletin, October 17, 2023

The U.S. District Court for the Northern District of Illinois recently held that allegations of racial discrimination in State Farm’s handling of property damage claims stated a cause of action under one section of the Federal Housing Act, 42 U.S.C. § 3604(b).

The case is Huskey v. State Farm Fire & Casualty Co., 2023 U.S. Dist. Lexis 160629 (Sept. 11). The plaintiff homeowners were represented by, among others, Sanford Heisler Sharp LLP of New York. Riley Safer Holmes & Cancila LLP of Chicago represented State Farm.

The plaintiffs, Black owners of different homes insured by State Farm, incurred covered property damage to their homes in 2021 and 2022. After they reported the damage to State Farm, the plaintiffs alleged that the company took months to complete repairs, during which time additional damage occurred due to the lack of earlier repairs, and even then not all the damage was repaired.

As a result, the plaintiffs brought this class action. They claimed their experiences as Black homeowners, and those of other Black members of the plaintiff class, differed considerably from experiences of white homeowners insured by State Farm, whose homes for similar types of damages were repaired more efficiently and completely.

In support, they cited statistics showing that State Farm processed white policyholders’ claims faster than Black policyholders’ claims; it asked Black policyholders to submit more claims documentation than white policyholders; and white policyholders had fewer interactions with State Farm than Black policyholders prior to claim resolution.

These differences in treatment were alleged to have been brought about by algorithmic decision-making tools used by State Farm and resulted in disparate-impact race discrimination in violation of the Federal Housing Act. The plaintiffs sought various forms of relief, including an injunction and damages. In response, State Farm moved to dismiss.

Applicability of FHA

In an opinion by U.S. District Judge Virginia Kendall, the court granted the motion in part. She first addressed Section 3604(a) of the FHA, which makes it unlawful “to refuse to sell or rent after the making of a bona fide offer” to buy or rent, or to otherwise make a dwelling unavailable because of race.

Relying mainly on Bloch v. Frischholz, 587 F.3d 771 (7th Cir. 2009), Kendall found that post-acquisition discrimination claims generally are not available under Section 3604(a), nor is a claim for diminution in property value. The complaint therefore did not state a cause of action under that section.

She then took up Section 3604(b) of the FHA, which prohibits discrimination “against any person in terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race.”

This section, Kendall wrote, does address post-acquisition housing discrimination and, moreover, under NAACP v. American Family Mutual Insurance Co., 978 F.2d 287 (7th Cir. 1992), has been found to apply to discriminatory denials of insurance and discriminatory pricing.

She acknowledged that this section had not yet been applied to insurance claims processing, but she determined that Section 3604(b) at least did not foreclose the plaintiffs’ claim.

Kendall also analyzed Section 3605 of the FHA, which prohibits any “entity whose business includes engaging in residential real estate-related transactions” from discriminating on the basis of race. Under American Family, however, she found that insurers are not entities who are considered to engage in covered transactions under that section.

Stating a Claim

Having found the FHA potentially applicable under Section 3604(b), Kendall then analyzed whether the plaintiffs adequately alleged racial discrimination. She wrote that a disparate-impact claim arising from a statistical disparity requires three elements: a statistical disparity, a specific policy, and a causal connection. The section nonetheless requires that the plaintiff allege only enough facts to allow for a plausible inference of discrimination, and not every element required for summary judgment need be included.

The plaintiffs here met the requirements. They alleged three distinct significant disparities between Blacks and whites. They pointed to State Farm’s specific policy decision to use algorithmic decision-making tools to automate claims-processing. And they alleged a connection between that policy and the statistical racial disparities. According to Kendall, these were sufficient allegations to state a claim.

One further hurdle to stating a claim, however, still remained, namely, the McCarran-Ferguson Act. That act, among other things, states that acts of Congress are not to be construed as invalidating or affecting any state law enacted for the purpose of regulating the business of insurance, unless the congressional act “specifically relates to the business of insurance.” 15 U.S.C. Sec. 1012(b).

The FHA, moreover, said Kendall, does not so specifically relate. The question then became whether the FHA invalidated or affected any Illinois insurance laws. In arguing that it does, State Farm relied on 215 ILCS 5/154.6 and 5/154.7 of the Insurance Code, setting forth improper claims practices and giving the state insurance director the authority to penalize such practices.

Kendall observed, however, that the FHA appeared more to complement Illinois insurance law — citing, for example, 215 ILCS 5/424(3), banning discrimination by insurers — than to displace or conflict with Illinois law.

She thus found that the McCarran-Ferguson Act did not appear to nip the plaintiffs’ claims “in the bud.” Still, she acknowledged that things could change as the litigation proceeds. Particularly she observed that if State Farm’s liability under the FHA were shown to depend on actuarial claims-handling practices that interfered with Illinois regulatory policies, State Farm could raise its McCarran-Ferguson defense again.

The court therefore denied the motion to dismiss with respect to the plaintiffs’ claim under Section 3604(b) of the FHA, but otherwise granted the motion.

Key Points

• According to this court, insurers’ claims-handling practices that are not authorized by state regulatory policies and that have a racially disparate impact on minorities, may give rise to liability under Section 3604(b) of the FHA, which prohibits discrimination in the providing of services or facilities in connection with the sale of dwellings.
• Unless federal legislation “specifically relates to the business of insurance,” such legislation may not be construed as invalidating or affecting state law relating to such business.