National Association of Mutual Insurance Companies v. United States Department of Housing and Urban Development
Date: Sept. 19, 2023
Issue: Whether the 2023 disparate impact rule from the U.S. Department of Housing and Urban Development (HUD), which recodifies its 2013 rule, conflicts with the Fair Housing Act (FHA) and the Supreme Court’s decision in Texas Department of Housing & Community Affairs v. Inclusive Communities Project Inc.
Case Summary: Judge Richard J. Leon of the U.S. District Court for the District of Columbia denied the National Association of Mutual Insurance Companies’ (NAIMC) motion for summary judgment, ruling HUD’s disparate impact rule conflicts with the FHA and Inclusive Communities interpreted at the Supreme Court.
In 2013, HUD published a rule formalizing a burden-shifting test for determining whether a given practice has an unjustified discriminatory effect (2013 rule). The plaintiff has the burden of proving a challenged practice caused or predictably will cause a discriminatory effect. If the plaintiff satisfies such burden of proof, the defendant has the burden of proving the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant. If the defendant satisfies such burden, the plaintiff may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.
After HUD published the 2013 rule, the American Insurance Association and the NAMIC sued HUD challenging the 2013 rule, arguing disparate impact claims are not cognizable under the FHA. In 2014, Judge Richard J. Leon ruled disparate impact claims are not permissible under the FHA. However, in 2015, the Supreme Court decided Texas Department of Housing & Community Affairs v. Inclusive Communities Project Inc. In a 5-4 decision, the Court ruled disparate impact claims may be brought under the FHA. However, the Court reiterated the limits of disparate impact. The Court noted a claim based on statistical disparity fails without a showing of causation. In other words, a plaintiff must show a causal link between an act or practice of the defendant and the statistical disparity. The Court declared a robust causality requirement ensures racial imbalance does not, without more, establish a prima facie case of disparate impact. The Court also explained lower courts should avoid interpreting disparate impact liability to be so expansive as to inject racial considerations into every housing decision.
In response to Inclusive Communities, the plaintiffs in the lawsuit challenging the 2013 rule amended their complaint. While the amended complaint acknowledged disparate impact claims are permitted under the FHA, the plaintiffs asserted the 2013 rule was inconsistent with the FHA and Inclusive Communities. In September 2020, HUD issued a final revised disparate impact rule amending the burden shifting framework (2020 rule). The 2020 rule, however, was challenged in court by consumer groups, and in October 2020, a federal district court in Massachusetts stayed the effective date of the revised rule and enjoined enforcement of the revised rule. Afterward, HUD (under the Biden administration) published a final rule recodifying the 2013 rule. In effect, NAMIC’s lawsuit challenging the 2013 rule could move forward (American Insurance Association dropped from the case).
The court first determined NAMIC had standing and the case was ripe for review. The court then evaluated NAMIC’s four arguments on the rule conflicting with the FHA, which the court rejected. First, NAMIC alleged the rule violates the FHA because it imposes a disparate impact requirement on insurers’ underwriting and rating practices. According to NAMIC, its members make race-blind underwriting and rating decisions for property insurance. But under the rule, its members must collect data on protected characteristics to ensure their policies do not cause or perpetuate a disparate impact. The court noted the rule does not require those engaging in housing practices to collect or use data on individual’s protected characteristics. Rather, the initial burden is on the plaintiff to supply data that a housing practice actually or predictably results in a disparate impact.
Second, NAMIC alleged state laws regulate its members, which substantially limit insurers’ discretion to make underwriting and ratemaking decisions, and dictate what criteria insurers may use to classify risks. For this reason, NAMIC asserted disparate impact claims against insurers based on underwriting and rating decisions cannot lie under the FHA. The court observed both state law restrictions and Inclusive Communities’ robust causality requirement favor NAMIC’s members. In the court’s view, “if an insurer is sued under a disparate-impact theory of liability, it can try to show that a state law prohibits (or requires) certain underwriting or rating decisions in a way that severs the casual connection between the insurer’s practices and the disparate impact.” The court added: “If successful, the insurer should be able to get the case dismissed,” but this does not make the rule “unlawful or, somehow, categorically inapplicable to insurers.”
Third, NAMIC alleged the rule allows a claim to be established solely on statistical disparities and thus conflicts with the FHA. But the court emphasized Inclusive Communities made clear a claim based on statistical disparity fails without a showing of causation. The court concluded the rule does not allow a prima facie showing with nothing more than evidence of statistical disparities.
Finally, NAMIC alleged the rule contravenes the FHA because defendants must prove the challenged practice or policy is necessary to achieve a substantial, legitimate, nondiscriminatory interest and even if defendant makes that showing, the plaintiff may prevail by demonstrated the defendant’s stated interest could be served by some practice that has a less discriminatory effect. NAMIC cited Inclusive Communities for the propositions the FHA should not be used to “second-guess which of two reasonable approaches” an entity should follow, the FHA is not “an instrument to force” defendants to “reorder their priorities,” and disparate impact liability is properly used only to “remove artificial, arbitrary, and unnecessary barriers.” As explained by the court, “to the extent the rule’s ‘could be served’ standard could allow for second-guessing of the type prohibited by Inclusive Communities, NAMIC’s challenge is not the vehicle to decide it.” The court noted NAMIC is challenging the rule in every application to insurers’ underwriting and rating decisions. As a result, the court concluded it is not enough to “point to a hypothetical case in which the rule might lead to an arbitrary result.”
Bottom Line: While it took over 10 years for this decision, the court concluded reinstatement of the 2013 disparate impact rule does not extend beyond the parameters laid out in the Inclusive Communities. NAMIC will likely appeal the decision to the D.C. Circuit.