On March 17, 2023, the US Department of Housing and Urban Development reinstated a 2013 discriminatory effects rule regarding liability under the Fair Housing Act (42 U.S.C. 3601 et seq.). In doing so, HUD rescinded a 2020 rule regarding proving liability under the Act.

According to HUD, the Act “prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex (including sexual orientation and gender identity), disability, familial status, or national origin. This prohibition extends to practices with an unjustified discriminatory effect, regardless of whether there was an intent to discriminate.” Homeowners’ insurance companies are subject to the Act, which prohibits, among other things, charging higher rates, offering different terms or conditions, or refusing or denying coverage on the basis of a protected category.

The 2013 Rule, to be reinstated, involves the following burden-shifting analysis when HUD charges an insurance company with violating the Act: the claimant “is first required to prove as part of the prima facie showing that a challenged practice caused or predictably will cause a discriminatory effect;” then the company “must then prove that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the” company; if the company meets this burden, the claimant “may still prevail by proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.” HUD emphasized in its commentary on the reinstated Rule that this case-by-case approach would be consistent with the McCarran-Ferguson Act and with the text and legislative purpose of the Fair Housing Act.

As compared with the 2020 rule to be rescinded, HUD’s reinstated 2013 Rule makes it easier for claimants to prevail on FHA violation claims against property/casualty insurance companies. Unlike the 2020 rule, compliance with state insurance regulations (which has been used to show that underwriting standards are fair) is not a complete defense against FHA violation claims. In defending FHA claims, insurers must articulate and prove that the allegedly unlawful insurance practice is necessary to achieve at least one “substantial, legitimate and nondiscriminatory” interest of the insurer. Since a claimant may still prevail even if the insurer’s practice is necessary to achieve a substantial, legitimate, and nondiscriminatory interest, however, an insurer should also be ready to demonstrate that its interest(s) cannot be served by another practice with a less discriminatory effect. HUD emphasized in its commentary on the reinstated Rule that this case-by-case approach would be consistent with the McCarran-Ferguson Act and with the text and legislative purpose of the Fair Housing Act.

In 2014 the Property Casualty Insurance Association of America sued the HUD Secretary contending that the 2013 Rule violated the Act in not providing insurers a “safe harbor” if they merely showed that their challenged practices complied with state insurance regulations. The District Court for the Northern District of Illinois ruled, in part, for the Association, holding that HUD’s failure to adequately assess comments from the Association and from various individual insurers and other insurer groups concerning the application of the Act was arbitrary and capricious, and therefore enjoined enforcement of the regulation pending re-promulgation of the regulation following such an assessment. The text of the District Court’s decision can be accessed here.

It is uncertain if the Association will again challenge HUD’s reinstated 2013 Rule. To date, no homeowners’ insurance company has been cited by HUD for allegedly violating the Act. Clients should continue to monitor legal developments on this issue. When considering the implementation of an underwriting or rating practice which HUD may challenge, such as use of credit scores, the company should determine in consultation with expert counsel the extent to which state insurance regulations expressly or impliedly permit the practice. Clients should be prepared to argue that the practice is necessary to achieve at least one “substantial, legitimate and nondiscriminatory” interest and that the insurer’s interest(s) cannot be served by another practice with a less discriminatory effect.