NU Online News Service, May 31, 3:28 p.m.EDT

Credit scoring using completely race-neutral factors ispermitted under Texas law even if it has an unintended impact onminorities, the state's Supreme Court ruled late last week.

On Friday, the court ruled in an 8-0 decision in the caseOjo v. Farmers Group et al (No. 10-0245) that the state'slaw "does not prohibit an insurer from using race-neutral factorsin credit-scoring to price insurance, even if doing so creates aracially disparate impact."

In the case, Patrick Ojo, an African-American resident of Texas,received a renewal on his homeowner's insurance with a 9 percentincrease despite the fact he never had a claim.

He sued the company, claiming that the increase was the result"of unfavorable credit information acquired through its automatedcredit-scoring system."

Ojo sued the company on behalf of himself and other minoritieswho experienced the same increases because of credit-scoring,claiming that several "undisclosed factors" resulted in "disparateimpacts for minorities and violate the federal Fair HousingAct."

The plaintiffs did not claim that the actions of the insurerwere intentional, according to court documents.

The case went to the U.S. Court of Appeals for the NinthCircuit, which went back to the Texas Supreme Court asking if thestate's law would violate the federal Fair Housing Act if it werenot for the McCarran-Ferguson Act, which puts the regulation ofinsurance in the hands of the state.

The court responded that the state's insurance code "is void ofany language" that creates "a cause of action for a raciallydisparate impact." It also noted that the state's legislature hasbeen very clear about creating "a cause of action" for disparateimpact, but declined to do so here.

Responding to the ruling, David Snyder, vice president andassociate general counsel of the American Insurance Association,says: "The vast majority of states (46) permit insurance scoringsubject to such regulation as is the case in Texas. Credit-basedinsurance scoring continues to play a major role in creating apositive and competitive personal lines market. Its use allowsinsurance companies to give more favorable rates to consumers whoare less likely to have costly losses."

Joe Woods, vice president for the Property Casualty InsurersAssociation of America, comments, "This decision will help addclarity regarding the use of insurance scores and theinappropriateness of disparate impact tests for property casualtyinsurance. For insurers, the issue has always been one of risk, notrace. Insurance scoring is an objective process."

Neil Alldredge, senior vice president, state and policy affairsfor the National Association of Mutual Insurance Companies said theassociation is pleased with the decision, noting that the decisionis consistent with studies from around the nation.

"Credit-based insurance scoring has been the most debated,legislated, regulated, and adjudicated tool in recent memory, andin virtually every jurisdiction it has been found to be a benefitto consumers," he says.

This story was updated at 5:26 p.m.