This is the second article of a three-part series about two recent decisions by federal courts in Connecticut and California: Viens v. America Empire Surplus Lines Ins. Co., No. 3:14cv952 (D. Conn. June 23, 2015), and Jones v. Travelers Cas. Ins. Co. of Am., No. CV 5:13-02390 (N.D. Cal. May 7 2015). The first article discussed the legal and procedural background of the two cases. This article will discuss the issues these cases raise about the intended scope of the federal Fair Housing Act and the state laws that are based on it. A final article will discuss the more fundamental issues these cases raise about the application of federal law to underwriting decisions, and it will suggest steps that prudent insurers should be taking.
Discriminatory Housing Practices
The Fair Housing Act, 42 U.S.C §§ 3601 et seq. (“FHA”), prohibits certain forms of discrimination on the basis of race, color, religion, sex, familial status, national origin or disability. The FHA prohibits the following actions (among others) as “discriminatory housing practices“:
- “[M]ak[ing] [a dwelling] unavailable” to a person because the person is a member of a protected class. (42 U.S.C. § 3604(a).)
- “[D]iscriminat[ing] … in the provision of services … in connection [with]” the “sale or rental of a dwelling.” (§ § 3604(b)
- “[D]iscriminat[ing] against any person in making available” a “real estate-related transaction[],” or “in the terms or conditions of such a transaction.” (§§ 3605(a))
- “[C]oerc[ion] … or interfere[nce] with any person … on account of his having aided or encouraged any other person in the exercise or enjoyment of, any right granted or protected by [the FHA].” (§ 3617.)
As discussed in part 1, there is general consensus that discrimination in the sale of property insurance can violate § 3604. See, e.g., 24 C.F.R. § 100.70(d)(4); N.A.A.C.P. v. American Family Mut. Ins. Co., 978 F.2d 287 (7th Cir. 1992) (“NAACP“); Fuller v. Teachers Ins. Co., No. 5:06-CV-00438-F (E.D.N.C., Sept. 19, 2007); National Fair Housing Alliance v. Prudential Ins. Co., 208 F.Supp.2d 46, 57 (D.D.C. 2002) (“NFHA“).
Some courts have also held that insurers may be liable under § 3605 or § 3617. E.g., NFHA at 58 (§ 3605); Nevels v. Western World Ins. Co., Inc., 359 F.Supp.2d 1110, 1122 (W.D. Wash. 2004) (“Nevels“) (§ 3617). But see NAACP at 297 (no claim under § 3605).
The New Disparate Impact Landscape
As a result of the Supreme Court’s June 2015 decision in Texas Dept. of Housing v. Inclusive Communities, No. 13–1371 (U.S. June 25, 2015), defendants can commit “discriminatory housing practices” without making any prohibited distinctions—by acting in a way that causes a “disproportionately adverse effect” on the housing rights of protected class members. These “disparate impact” claims must now proceed under the guidance of two recent, authoritative statements.
One is the “Discriminatory Effects Rule” issued by the U.S. Department of Housing and Urban Development (“HUD”) in 2013. Application of this regulation to insurance companies has been successfully challenged in recent litigation. Property Casualty Insurers Assoc. of Am. v. Donovan, No. 1:13-cv-08654 (N.D. Ill. Sept. 3, 2014) (“PCIA“), and American Ins. Assoc. v. U.S. Dep’t of Housing & Urban Dev., No. 13-00966 (D.D.C. Nov. 7, 2014) (“AIA“). (PCIA and AIA were discussed in part 1 of this series.) Nevertheless, the outlines of the rule were later cited with approval by the majority in Inclusive Communities.
Under the rule, the FHA prohibits certain conduct that “predictably will cause a discriminatory effect.” 24 CFR § 100.500(c)(1). Thus, as discussed in part 1, the rule effectively imposes a duty on defendants, not just to refrain from intentional acts of discrimination, but also to calculate the likely consequences that their non-discriminatory actions will have on the housing rights of protected classes.
That calculation must now take account of a second statement: Justice Kennedy’s majority opinion in Inclusive Communities. For a defendant to be liable under the FHA, the opinion emphasized that the causal connection between a defendant’s conduct and its alleged discriminatory effect must be firmly established; Justice Kennedy called this 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. …
The court’s discussion of this requirement suggests several ways in which defendants might challenge assertions about what effects their actions “predictably will cause.” One would be a showing that the defendant’s action merely contributes to a situation that can be traced to more than one cause. Another might show that the defendant’s choices are constrained by statute or regulation:
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 … .
HUD’s Discriminatory Effects Rule also provides that disparate impact will not result in liability, if the defendant’s conduct is “necessary to achieve … substantial, legitimate, nondiscriminatory interests” that could not “be served by another practice that has a less discriminatory effect.” 24 CFR §§ 100.500(c)(2) and (3). Thus, defendants must be prepared to show both that their action had a non-discriminatory rationale, and that the rationale has a solid basis in fact. The second showing is important, because (as discussed in part 1) HUD’s regulation effectively imposes an affirmative duty to select the least discriminatory alternative among all possible approaches to a business goal. To defend a disparate impact claim, therefore, companies must be prepared to offer evidence that the conduct they adopted is the most efficacious way to pursue the relevant nondiscriminatory objective.
It is not clear that the Supreme Court has gone quite so far. Quoting Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971), the majority opinion in Inclusive Communities stated that the FHA forbids housing “barriers” that are not only “unnecessary,” but also “artificial” and “arbitrary“—language that implies at least a residue of discriminatory intent. Moreover, the court admonished:
Courts should avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision.
Clearly, facially neutral policies that are mere pretexts for discrimination are prohibited. But the court’s language suggests that defendants acting in good faith might be shown some leeway on the issues of whether their policies are “necessary,” and whether they should have chosen a different option with a “less discriminatory effect.”
Disparate Impact Claims Based on the Intervening Acts of Others
As explained in part 1, the Viens and Jones cases assert a novel theory of FHA liability. The plaintiffs in Viens do not allege either that the insurer intended to discriminate against minority tenants, or that its underwriting guidelines make distinctions that are prohibited by the FHA; they contend, rather, that the insurer’s otherwise lawful act has a discriminatory effect on members of protected classes. (The plaintiffs in Jones asserted both disparate impact and disparate treatment.) But unlike previous disparate impact suits against insurers (such as Dehoyos v. Allstate, 345 F.3d 290 (5th Cir. 2003) (“Dehoyos“)), Viens and Jones involve claims that the alleged discriminatory effect will be felt by someone other than the insurer’s own customers—specifically, by tenants of insured landlords who receive housing assistance under the Section 8 program, and who will be displaced if the landlords choose to stop participating in that program. They allege, that is, that the insurers will produce a disparate impact through the intervening acts of their customers—acts the insurers will allegedly “cause.”
Causation Issues
Cases of this new variety will test the “robust causality requirement” that Inclusive Communities announced shortly after Viens and Jones were decided. As a general rule, “FHA plaintiffs’ injuries must be proximately caused by the defendant’s discriminatory acts.” Pacific Shores Properties, LLC v. City of Newport Beach, 730 F.3d 1142, 1168 n.32 (9th Cir. 2013). Proximate causation is usually absent where “an intervening act of a third party … actively operates to produce harm after the first person’s wrongful act has been committed.” E.g., Egervary v. Young, 366 F.3d 238, 246 (3d Cir. 2004). The exception is the rare case in which the intervening act was a “foreseeable” consequence of the first one. E.g., S.E.C. v. Apuzzo, 689 F.3d 204, 215 (2d Cir. 2012).
In Inclusive Communities, Justice Kennedy made a point of observing that “multiple factors” go into real estate decisions. His remark was made in a different context, but it still could...
