Ojo v. Farmers Grp., Inc.

356 S.W.3d 421

54 Tex. Sup. Ct. J. 1068

Patrick O. OJO, on Behalf of Himself and All Others Similarly Situated, Appellant,

v.FARMERS GROUP, INC., Fire Underwriters Association, Fire Insurance Exchange, Farmers Underwriters Association, and Farmers Insurance Exchange, Appellees.

No. 10–0245.

Supreme Court of Texas.

Argued Oct. 14, 2010.Decided May 27, 2011.

James A. Francis, Philadelphia, PA, Andrew S. Friedman, Phoenix, AZ, Barrett Stephan Litt, Los Angeles, CA, John J. Stoia Jr., Sanford Svetcov, San Francisco, CA, John A. Yanchunis, Tampa, FL, and Jane M.N. Webre, Austin, for Appellant.

Harriet S. Posner, Los Angeles, CA, Charles W. Schwartz, Houston, Allison B. Holcombe and Carl Alan Roth, Los Angeles, CA, for Appellees.

Justice GREEN delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice WAINWRIGHT, Justice MEDINA, Justice JOHNSON, Justice GUZMAN, and Justice LEHRMANN joined, and in which Justice WILLETT joined as to Parts I, II, III.A–B, IV, and V.

The United States Court of Appeals for the Ninth Circuit certified to this Court the following question:

Does Texas law permit an insurance company to price insurance by using a credit-score factor that has a racially disparate impact that, were it not for the [McCarran–Ferguson Act],¹ would violate the federal Fair Housing Act, 42 U.S.C. §§ 3601–19, absent a legally sufficient nondiscriminatory reason, or would using such a credit-score factor violate Texas Insurance Code sections 544.002(a), 559.051, 559.052, or some other provision of Texas law?

Ojo v. Farmers Group, Inc., 600 F.3d 1201, 1204–05 (9th Cir.2010) (en banc) (per curiam). Pursuant to Article 5, section 3–c of the Texas Constitution and Texas Rule of Appellate Procedure 58.1, we answer that Texas law prohibits the use of race-based credit scoring, but permits race-neutral credit scoring even if it has a racially disparate impact.

I. Introduction

Patrick Ojo, an African–American resident of Texas, carries a homeowner's property-and-casualty insurance policy issued by Farmers Group, Inc. Id. at 1202. Although Ojo has never made a claim on his homeowner's policy, Farmers raised Ojo's insurance premium by nine percent. Id. Ojo alleges that Farmers increased the premium as a result of unfavorable credit information acquired though its automated credit-scoring system. Id.

On behalf of himself and other racial minorities whose premiums increased as a result of Farmers' use of a credit-scoring system, Ojo sued Farmers and its affiliates, subsidiaries, and reinsurers in federal court. Id. Ojo alleges that the defendants' credit-scoring systems employ several “undisclosed factors” which result in disparate impacts for minorities and violate the federal Fair Housing Act (FHA), 42 U.S.C. §§ 3601–3619. Ojo, 600 F.3d at 1202. Ojo does not assert that he or any other member of the putative plaintiff class has suffered intentional discrimination at the hands of the defendants. Id.

Citing Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6), the defendants moved to dismiss all of Ojo's claims. Id. Applying the McCarran–Ferguson Act's (MFA) reverse-preemption standard, 15 U.S.C. § 1012(b), the district court concluded that the Texas Insurance Code preempted Ojo's FHA claims. Id. at 1203. Accordingly, the district court declined to answer whether Ojo's disparate-impact discrimination claim sufficiently complied with Federal Rule of Civil Procedure 12(b)(6). Id. at 1202. On appeal to the United States Court of Appeals for the Ninth Circuit, a divided three-judge panel held that Texas law did not reverse-preempt Ojo's FHA claim, initially reversing the district court. Ojo v. Farmers Group, Inc., 565 F.3d 1175, 1178 (9th Cir.2009). Subsequently, the Ninth Circuit ordered the case reheard en banc. Ojo v. Farmers Group, Inc., 586 F.3d 1108, 1108 (9th Cir.2009). The Ninth Circuit's rehearing en banc resulted in the certified question now before us. See Ojo, 600 F.3d at 1204–05.

II. Background

Ojo sued in federal court based on the FHA, under which it is unlawful “[t]o discriminate against any person in the 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.” 42 U.S.C. § 3604(b). Federal courts of appeals have interpreted this FHA provision to prohibit not just intentional acts of discrimination, but also race-neutral actions that have discriminatory effects on racial minorities (disparate-impact discrimination). ² Several courts of appeals have also held that the FHA applies in the underwriting of homeowner's property insurance, given the FHA's prohibition of discrimination “in the provision of services ... in connection” with the “sale or rental of a dwelling.” 42 U.S.C. § 3604(b); see, e.g., Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1360 (6th Cir.1995); NAACP v. Am. Family Mut. Ins. Co., 978 F.2d 287, 301 (7th Cir.1992). Ojo's cause of action asserts this type of disparate impact liability in Farmers' pricing of homeowner's insurance based on credit scoring.

Ojo's disparate impact claim, however, may be “reverse-preempted” by Texas law under the MFA, which provides that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, ... unless such Act specifically relates to the business of insurance.” 15 U.S.C. § 1012(b). Under the MFA, state law reverse-preempts a federal statute if: “(1) the federal law does not specifically relate to insurance; (2) the state law is enacted for the purpose of regulating insurance; and (3) the application of federal law to the case might invalidate, impair, or supersede the state law.” Ojo, 600 F.3d at 1208–09 (citing Humana Inc. v. Forsyth, 525 U.S. 299, 307, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999)). The Ninth Circuit, hearing this case en banc, held that “it is undisputed that the FHA does not specifically relate to insurance,” thus satisfying the first prong of MFA reverse-preemption.³ Id. at 1203. It is also undisputed that “the relevant provisions of Texas law ... are enacted for the purpose of insurance regulation,” thus satisfying the second prong. Id. The certified question before us specifically deals with the third prong, and asks whether allowing Ojo's claim under the FHA might invalidate, impair, or supersede Texas law. See id. at 1204–05. In light of the fact that Texas only prohibits the use of credit score factors or rates based on race, or rates that differ because of race, we answer that application of the FHA to permit a cause of action for disparate impact resulting from the use of credit scoring in the field of insurance certainly might invalidate, impair, or supersede Texas law.

III. The Texas Insurance Code Does Not Provide for a Cause of Action Based on a Racially Disparate Impact

The Texas Insurance Code expressly prohibits “unfair discrimination” and specifically states that “[a] person may not ... charge an individual a rate that is different from the rate charged to other individuals for the same coverage because of the individual's race, color, religion, or national origin.” Tex. Ins.Code § 544.002(a)(1). An exception to this provision provides that “[a] person does not violate Section 544.002 if the refusal, limitation, or charge is required or authorized by law or a regulatory mandate.” Id. § 544.003(c). Farmers points out that § 559.051 authorizes the use of race-neutral credit score factors, and that this authorization is the exception to § 544.002, which is recognized in § 544.003. Section 559.051 permits an insurer to “use credit scoring, except for factors that constitute unfair discrimination, to develop rates, rating classifications, or underwriting criteria.” Id. § 559.051; see also id. § 559.052(a)(1) ( “An insurer may not use a credit score that is computed using factors that constitute unfair discrimination....”). The factors that “constitute unfair discrimination” are not defined in the Texas Insurance Code. However, the Code does define an “unfairly discriminatory” rate as one that “is based wholly or partly on the race, creed, color, ethnicity, or national origin of the policyholder or an insured.” Id. § 560.002(c)(3)(C) (emphasis added).

Under Texas Insurance Code § 559.201, the use of credit score factors defined by § 559.052(a)(1) that constitute “unfair discrimination” is deemed an “unfair practice in violation of Chapter 541.” Id. § 559.201 (making violations of Chapter 559 an unfair practice under Chapter 541). Unfair practices under Chapter 541 are subject to private civil suits, including class actions. Id. §§ 541.151 (Private Action for Damages Authorized), 541.251(a) (Class Action Authorized); see Farmers Group, Inc. v. Lubin, 222 S.W.3d 417, 421–22 (Tex.2007).

No Texas courts have interpreted whether these Insurance Code provisions prohibit only intentional discrimination or also discrimination based on disparate impact. We derive from these provisions that insurance rates may not be “based wholly or partly on” race, and that an individual may not be charged a rate that is “different from the rate charged to other individuals for the same coverage because of the individual's race.” Tex. Ins.Code §§ 544.002(a)(1) (emphasis added), 560.002(c)(3)(C). Additionally, while credit scoring is authorized, it may not be based on “factors that constitute unfair discrimination.” Id. §§ 559.051, 559.052(a)(1). We can only assume that a credit score factor constitutes unfair discrimination if it is “based wholly or partly on” race, or if it is used to arrive at an insurance rate that is “different from the rate charged to other individuals for the same coverage because of the individual's race.” See id. §§ 544.002(a)(1), 560.002(c)(3)(C). Ojo alleges these provisions not only prohibit intentional discrimination—the use of race-based classifications to price insurance differently—but also...