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A nationwide class action brought by six minority policyholders challenging insurers’ use of credit-scoring in the pricing of automobile and homeowners’ policies can continue intact under a Sept. 3 ruling by the 5th U.S. Circuit Court of Appeals. In a 2-1 decision, the 5th Circuit held in Dehoyos, et al. v. Allstate Corp., et al. that the McCarran-Ferguson Act (MFA) — which bars federal law from impinging on a state’s laws regulating the business of insurance — does not pre-empt the minority policyholders’ allegations that Allstate has violated federal civil rights and housing laws by engaging in a racially discriminatory pricing practice. The decision, which affirms a federal district judge’s ruling, marks the first time that a federal appeals court has dealt with whether the MFA precludes disparate impact claims under the Fair Housing Act since the U.S. Supreme Court set the standard for determining the supremacy of federal law over the states in 1999′s Humana Inc. v. Forsyth. Disparate impact claims involve procedures that are not intentionally discriminatory but result in discrimination. Houston insurance lawyer Chris Martin says Dehoyos is significant and could have a major impact on insurance companies. “If this opinion is allowed to stand, then arguably any risk discrimination that a creative plaintiffs lawyer can argue violates some federal discrimination statute. Then the insurance company is subject to the blackmail of a nationwide class action lawsuit dealing with what otherwise 50 state departments of insurance have previously blessed,” says Martin, a partner in Martin, Disiere, Jefferson & Wisdom and a University of Houston Law Center adjunct professor who teaches insurance law. The minority plaintiffs, whose home states are Texas and Florida, filed suit in November 2001 alleging that Allstate’s use of credit-scoring violates federal civil rights laws, 42 U.S.C. ��1981 and 1982, and the housing law, 42 U.S.C. �3601. In their brief to the 5th Circuit, the plaintiffs allege that Allstate employs “a nationwide scheme” of intentional racial discrimination against minorities, charging them higher premiums for property and casualty insurance than whites have to pay. The plaintiffs allege in their brief that Allstate uses credit scores — a factor they contend has no reasonable relationship to risk of loss — to justify placing minority applicants in more expensive policies than those in which whites are placed. “The object of the plaintiffs is to stop the discriminatory sales of these policies,” says Sanford Svetcov, a partner in San Francisco’s Milberg Weiss Bershad Hynes and Lerach and lead counsel on appeal for the minority policyholders. “Allstate vehemently denies that it has discriminated against any of its policyholders,” says Tony Rosenstein, a partner in the Houston office of Baker Botts and co-lead attorney for Allstate. “The decisions about the use of variables to price insurance are supposed to be determined, we believe, by state insurance commissioners and state legislators,” Rosenstein says. Rosenstein says that the use of credit-scoring is intensely regulated under a bill passed by the Legislature in its regular session this year. S.B. 14, which amends Chapter 21, Subchapter E, of the Insurance Code, specifies when a credit rating can be used, when it can’t be used and the kind of notification that must be given policyholders before their credit scores are considered in deciding their premiums, Rosenstein says. PRICING PRACTICES In its brief to the 5th Circuit, Allstate argued that the Dehoyos plaintiffs’ challenge of Allstate’s pricing practices “threatens to turn the regulation of insurance on its head” in violation of the MFA, 15 U.S.C. �1012. Allstate appealed to the 5th Circuit after U.S. District Judge Fred Biery of the Southern District in San Antonio denied its motion to dismiss the plaintiffs’ claims. At the end of his memorandum opinion, Biery noted that the issue involved “controlling questions of law as to which there are substantial grounds for difference of opinion.” Biery also said in the order that he would “look favorably” on an interlocutory appeal. According to the 5th Circuit’s opinion, the U.S. Supreme Court outlined the framework in which MFA pre-emption questions are to be addressed in Humana, which reviewed whether the application of the Racketeer Influenced Corrupt Organization Act (RICO) in an insurance context was pre-empted by the MFA. In Humana, the Supreme Court said that RICO could be applied in harmony with state law. The high court also identified the MFA threshold requirements: The federal law must not be specifically directed at insurance regulation; there must be a particular state law or policy enacted to regulate insurance; and application of the federal law to the controversy in question must invalidate, impair or supercede the state law. Judge Fortunato Benavides, writing for the majority in Dehoyos, said that Allstate’s ability to invoke the MFA pre-emption fails because the insurer doesn’t point to any law with which the federal civil rights laws conflict or to any declared regulatory policy that the application of the statutes would frustrate. Because Allstate doesn’t identify a state law or policy that would be impaired by application of the federal statute, it can’t show impairment, Benavides said in the opinion in which Judge W. Eugene Davis joined. But Judge Edith Jones said in a concurring and dissenting opinion that, in her view, the MFA and Humana pre-empt disparate impact claims under the federal housing law. “ Humana does not require a direct conflict with state law in order to compel pre-emption. It is enough that the federal law may ‘interfere with a state’s administrative regime,’ ” Jones wrote, quoting Humana. Jones said in the opinion that, in Humana, the RICO claims were made against an alleged kickback plan between a health insurer and various hospitals and did not require a federal fact-finder to investigate the genesis of the insurer’s rates. She also said in the opinion that Nevada law authorized the policing of such activity through suits filed by private citizens in its state court. In Dehoyos, if the federal court declares that credit-scoring is impermissible, the court will have to determine what a fair and “nondiscriminatory” rate would have been for the plaintiffs in order to assess damages, and doing that would overlap with a state insurance regulator’s pricing decisions, Jones said in the opinion. “[I]t seems clear to me that federal courts are not competent to tread in the essential domain reserved to state regulators. In today’s case, credit-scoring is alleged to have a disparate impact. Tomorrow, some other facially neutral criterion, such as the age of one’s car or the number of one’s dependents, or the city of one’s residence, may fall under legal attack,” Jones wrote. Rosenstein says a motion for rehearing is being seriously considered based on Jones’ opinion. In a footnote to the majority opinion, Benavides said that Jones reiterates the insurers’ arguments “but offers no more convincing evidence that disparate impact suits will necessarily impact state insurance regulation.” Martin says that 50 different departments of insurance have pre-approved the rates that Allstate was charging. “If the [Dehoyos'] claim is allowed to go forward, then the federal district court will have the ability to supersede the prior determinations of all of those state departments of insurance,” he says. But Svetcov, the plaintiffs’ attorney, says the federal court could order an insurance company to stop the discriminatory impact of credit-scoring and then leave it up to the company how to do that. Notes Svetcov: “That wouldn’t get into an insurance company’s business.”

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