Supreme Court Okays Allstate Credit Scoring Trial

At issue was a case brought by six non-white Allstate customers, DeHoyos v. Allstate, who filed suit against the company in U.S. District Court Western District of Texas in San Antonio.

The insurer appealed to the Fifth Circuit in Chicago, which ruled in a 2-1 decision that the federal anti-discrimination laws do not interfere with or frustrate the ability of states to regulate insurance rates.

Insurance companies urged the U.S. Supreme Court to review the Fifth Circuit's ruling, arguing that it ignores carefully developed state statutes.

In a brief filed with the Supreme Court, the Washington-based American Insurance Association said that based on more than a decade of loss experience, the insurance industry has found that a direct relationship exists between financial stability and risk.

"Recognizing the risk-predictive value of credit data, a large majority of the states have enacted legislation authorizing, in some cases with carefully designed limitations, the use of such data for underwriting and ratemaking purposes," AIA said.

However, AIA said, under the Fifth Circuit's ruling, an insurance company could, without any intent to discriminate on the basis of race, be held liable for racial discrimination because it used credit data for risk-assessment purposes.

A statistical correlation or disparate impact test cannot support an inference that a facially neutral, actuarially justified underwriting or pricing decision reflects any consideration of race, ethnicity or similar factor, AIA said.

Any number of actuarially sound risk-predictive factors, including dwelling characteristics or claims history, could conceivably correlate statistically with race in certain circumstances, AIA argued.

A disparate impact test, AIA said, is fundamentally ill-suited to analyzing claims of racial discrimination in the insurance context.

Forcing insurers to defend against charges of disparate impact would subject them to potentially frequent, unwarranted litigation, AIA said.

More importantly, AIA said, a judicial determination regarding the validity of an insurer's actuarial defense to disparate impact charges would necessarily entangle the courts in issues that are by law exclusively within the province of individual state regulators.

But in its decision, the Fifth Circuit said that applying anti-discrimination laws to insurance does not impair or frustrate state insurance law.

Indeed, the court said, no one has identified a state law or policy with which federal civil rights laws conflict.

No law, regulation or court decision, the court said, either requires or condones credit-scoring.

The view of the insurance industry, the court said, seems to be that if a state has a mechanism in place for performing an insurance-related function, such as rating, as the federal law enters the regulatory arena, then the federal law is "interfering" with the state's administrative function.

But the real question is not whether the federal law "interferes" with state regulation, but rather whether the regulatory goals are in harmony.

The insurance industry, the court said, does not point to an insurance pricing regulatory goal that is hampered by the application of civil rights laws to credit-scoring, except for the implied goal of allowing the states to pursue their pricing regulatory goals in isolation.

The Supreme Court, the Fifth Circuit said, has rejected this as a relevant state policy goal.