Redlining Costs Wisconsin Insurance Co. $16 Million

In the first Justice Department action against an insurance company under the federal Fair Housing Act, American Family Mutual Insurance Company has agreed to pay over $16 million for allegedly providing Blacks with inferior policies than those offered to whites and in some cases for simply refusing to insure homes of African Americans.

"When property is not insured, homes cannot be rebuilt, neighborhoods deteriorate, and communities suffer," said Attorney General Janet Reno. She noted, "The agreement ensures that African Americans will be part of the American Family."Risk discriminat ion is permitted, race discrimination is not," added Reno.

Under the agreement between the Justice Department, American Family and a group of private plaintiffs, the company has agreed not to discriminate based on race and to pay over $14 million in damages to compensate the victims of the company's discriminato ry policies and an additional amount in attorneys fees. It also has agreed to advertise in media that targets African Americans and inspect homes in African American neighborhoods on an equal basis as in white neighborhoods.

The complaint, filed with the agreement in U.S. District Court in Milwaukee alleged that employees of American Family at one time:

  • gave explicit instruction to agents and underwriters to consider race in deciding whether, and on what terms, to offer homeowners insurance;
  • required agents and underwriters to consider race as a factor in deciding whether to inspect a home -- the results of which were used to deny coverage in some cases;
  • overlooked deficiencies in conditions of homes in white neighborhoods that were used to deny coverage in Black neighborhoods;
  • made disparaging and stereotypical references about African Americans as being poor insurance risks;
  • and criticized agents, including African American agents, who sought to do business in the African American community, and discouraged them from doing such business.

The case was filed in 1990 when eight Black Milwaukee homeowners backed by the NAACP and the American Civil Liberties Union sued the company in federal court. They charged discrimination because of their race and because they lived in largely black neig hborhoods. The Justice Department entered the case in 1995.

The Justice Department first started to investigate the company in 1988 after receiving numerous complaints about American Family's discriminatory behavior. The investigation in part revealed that African American homeowners disproportionately received inferior, more costly "repair cost" policies while white homeowners with similar risk assessments were provided the more favorable "replacement cost" policies.

The investigation also showed that Blacks were forced to submit to inspections more often than whites and that agents failed to return calls from Black customers and refused to keep appointments.

As a result of the alleged discriminatory practices, the company insured a significantly lower percentage of homes in the predominantly Black neighborhoods than in white neighborhoods. Even after accounting for various socioeconomic factors, the Justice Department's investigation revealed that the differences could not be explained by non-racial factors or any actuarial data.

The agreement also provides that the company will issue a non-discrimination statement, to continue to recruit qualified prospective customers from the state's insurance plan, conduct random testing, no longer exclude homes solely on the basis of the age or sales price of the home, and provide a new custom value policy that will make replacement cost-type coverage more widely available.

The settlement "will be reviewed, I assure you, by every insurance company in America," said Earl Shinhoster, acting executive director of the National Association for the Advancement of Colored People. The settlement resolves serious violation of th e Federal Fair Housing Act, noted William Lynch, lead attorney for the NAACP.

Evidence in the case includes handwritten orders, scrawled across the bottom of a computer printout, from a district manager to an agent: "Quit writing all those Blacks!" Another district manager wrote in a memo: "Most Blacks have financial problems, to some degree."

In addition to a total of $5 million for individual damage payments, American Family has agreed to spend $14.5 million for an array of programs similar to the community investment initiatives required of mortgage lenders. They include low-cost mortgage and repair loans and home improvement loans.

The remaining $1.5 million will cover private attorneys' fees for eight Milwaukee homeowners, the NAACP and the America Civil Liberties Union.

The settlement as reported in the March 30, Milwaukee Sentinel, calls for America Family to:

  • Provide $4 million to inner city residents so they may obtain home mortgages more easily. The mortgages will be at below-market interest rates "The goal is to improve the housing stock, increase the level of home ownership and provide more varied housing opportunities for residents," the settlement announcement says.
  • Provide $500,000 to city government agencies to provide counseling for first-time home buyers with low and moderate incomes. The announcement says the assistance should go to buyers of owner-occupied homes in need of repair and rehabilitation.
  • Provide $1.5 million for subsidized home-improvement loans in the inner city at below market rates. The announcement says the money could be used for such things as buying a new furnace or upgrading wiring.
  • "Such improvements make homes better risks for insurers and improve living conditions for residents," the announcement says.
  • Provide $1.5 million in financial assistance to people who attempt to obtain loans. The money would be used for such things as down payments or closing costs.
  • Provide $2 million to establish a pilot home repair program. The money would be used to assist in paying for unexpected repair or replacement costs such as a new roof.
  • "American Family suggested the program as a way to help first-time homeowners overcome financial calamities, so they would not default on their home loans," the announcement says. "It also is designed to help prevent neighborhood deterioration."
  • Place $5 million into an account to be used to compensate members of the "predominantly African-American community of Milwaukee" who meet criteria established by the Department of Justice and the plaintiffs.

Any unused funds from this part of the settlement will be invested in the community, the settlement announcement says. Most of the funding will be coordinated through the City Department of Development and the Wisconsin Housing and Economic Development Authority.

American Family also has agreed to increase its sales of homeowner's insurance policies in ZIP code areas with predominantly African-American populations. The announcement says that will be accomplished through "continued development of American Family' s urban marketing plan."

It also says the company will either hire or designate an additional four agents who will maintain agencies in the inner city. Agents and employees who sell and maintain policies in the inner city will receive additional training in urban marketing.

American Family is by far the biggest homeowner's insurance company in Wisconsin, capturing nearly one-fourth of the market statewide. Based in Madison, the company sells more than $2.6 billion annually in home, fire, marine and life insurance. It is t he dominant insurer in Wisconsin and operates in 12 other states.