Director of Investigations, FHEO
Department of Housing and Urban Develeopment
Sept. 12, 1997
(This is the full text from Sarah Pratt's Sept. 12, 1997, presentation at the John Marshall Law School's conference on mortgage discrimination and insurance redlining. Special thanks to people at John Marshall for supplying this to us.) I would like to thank the John Marshall Law School for extending to me the invitation to speak at this notable event. I have the highest regard for its program, and for its training activities, and I am grateful for the opportunity to address this audience today. I would also like to thank Galen Martin and Gregory Squires, who both got me thinking about insurance discrimination years ago, & whose writing and thinking about this subject has informed me through the years.
When we talk about the history of insurance redlining, we must start by recognizing the effect that racial segregation has had on our communities historically, because it is only with an understanding of that history that we can understand the ways in which we have seen redlining issues develop over the years. Racial segregation in residential areas was, and still is in many communities, a reality. Whether segregated housing persists de facto, de jure or by choice, racially segregated housing patterns weaken our communities when they result in limited or denied opportunities for rehabilitated housing, new construction of housing or the opportunity for loans to purchase or rehabilitate housing.
The importance of the availability of insurance on non-discriminatory bases to our communities should not be underestimated. In 1968, twenty eight years ago, the President's National Advisory Panel an Insurance in Riot Affected Areas said, "Insurance is essential to revitalize our cities .... without insurance, banks and other financial institutions will not--and cannot--make loans.... new housing cannot be repaired ... efforts to rebuild our nation's inner cities cannot move forward. Communities without insurance are communities without hope."
As a federal district court wrote in 1984, "it is elementary that without insurance, mortgage financing will be unavailable because a mortgage lender simply will not lend money on the property. Without mortgage financing, homes cannot be purchased. Thus, the availability of insurance and ability to purchase a home go hand in hand and vary, in direct proportion, to one another." McDiarmid v. Economy Fire and Casualty Co., 604 F. Supp. 105 (S.D. Ohio 1984).
Even when old patterns of racial segregation and race-based decision making have begun to break down, community infrastructure, and perhaps more importantly, community perceptions, may not have changed sufficiently to change old patterns of doing business. When subjective judgments, old stereotypes, or even the past practices of years are not consciously reassessed and changed where necessary old patterns of conduct may not change. The result may be insurance practices which violate the Fair Housing Act. At the same time, we all must recognize that not every practice, not every decision to deny insurance or offer it on different terms, constitutes a violation of the law.
The term insurance redlining, describes the practice or policy of refusing to write an insurance product or varying the terms of an insurance product because of the geographical location of the property and because of the racial or ethnic composition of the area.2 Insurance redlining is one manifestation of discrimination in the provision of housing related insurance. There are also more general forms of discrimination in housing-related insurance, including the unequal treatment in the provision or terms of insurance, based on race, color, religion, national origin, sex, handicap or familial status. Both forms violate the Fair Housing Act.
Like other forms of discrimination, the history of insurance redlining began in conscious, overt racial discrimination practiced openly and with significant community support in communities throughout the country. There was documented overt discrimination in practices relating to residential housing--from the appraisal manuals which established an articulated "policy" of preferences based on race, religion and national origin. to lending practices which only made loans available in certain parts of town or to certain borrowers, to the decision-making process in loans and insurance which allowed the insertion of discriminatory assessments into final decisions about either.
In the 1920s and 1930s racial and ethnic minorities were assumed to be bad risks for insurance. Report tome asked racial and ethnic origins and the racial composition of neighborhoods, A 1933 report indicated that basing risk decisions on whether a name sounded ethnic or not did not eliminate the groups believed to be risk hazards and concluded that screening based on risk should not be performed by the name, but by further investigation into racial or ethnic backgrounds. Another report described an investigator's work as follows: The proposed insured's name "was Ellis, a good old English name; however ... this was an Assyrian, and his company, under no consideration, wrote this race, so he promptly wired cancellation." There was no evidence of any assessment based on individual characteristics of the proposed insures; mere membership in a facial or ethnic group was sufficient for denial.3
Underwriting manuals frequently included maps with red lines drawn on them to indicate areas occupied by racial or ethnic minorities where policies should not be written, should not be sought or should only be written after some type of special review or with different terms.
As recently as 1962, a Manhattan based insurance company was alleged to have used maps in which large areas of various New York boroughs were shaded in with a red crayon.4
The Fair Housing Act was passed in April 1968 in the wake of the assassination of Dr. Martin Luther King. The Act prohibited a variety of forms of housing discrimination, including the general catch-all phrase, to "otherwise make unavailable or deny, a dwelling to any person" based on race, color, religion or national origin. The "make unavailable" language was broadly construed to apply to mortgage redlining, exclusionary and discriminatory zoning practices and discriminatory terms in appraisals. In the somewhat sketchy legislative history of the passage of the Act, Congress emphasized that the Act was designed to curb racially segregated housing patterns, including the elimination of racially discriminatory business practices which might prevent a person economically able to do so from purchasing a house regardless of his race.
In a 1978 memorandum, HUD's then General Counsel wrote to the then Assistant Secretary for Equal Opportunity that "adequate insurance coverage is often a prerequisite to obtaining financing. Insurance redlining, by denying or impeding coverage makes mortgage money unavailable, rendering dwellings unavailable" as effectively as the denial of financial insurance on other grounds .... " Proposed amendments to the Fair Housing Act that same year, which were defeated, and which would have made coverage of insurance discrimination explicit under the Act, were described as clarifying and strengthening the then current provisions of the Act.5 HUD's comments on the same bill confirmed that it was considered to be clarifying legislation only.
Also in 1978, a federal district court in Ohio held, for the first time, that the 1968 Fair Housing Act prohibited insurance redlining, and, more, that a state FAIR plan which was designed to provide insurance when insurance was not obtainable in the normal market, may assist in the creation of two insurance markets, the "normal market and the FAIR insureds, who were in many states typically people of color.6 As a footnote in history. this decision, which in terms of the case itself was preliminary only, is particularly a precursor of today's picture in looking at insurance discrimination. It not only held that the Fair Housing Act held a special role in prohibiting race- based insurance redlining, it also rejected a claim that federal legislation--the McCarran Act--precluded a federal role in prohibiting insurance redlining. The issue of whether and to what extent the now McCarran-Ferguson Act preempts the Fair Housing Act in dealing with claims of insurance discrimination has persisted.
As did courts considering other forms of housing discrimination, the court rejected procedural challenges to the Act's coverage and adopted a broad interpretation of the Act.
By 1884. there had been two more court decisions, a second in the southern district of Ohio (due to a strong combination of attorneys, private fair housing groups, and advocates, Ohio has been a particular for litigation and other challenges relating to mortgage lending and insurance discrimination) and the Fourth Circuit decision in the Mackey case. The Mackey Court held for the first, and only, time, that insurance redlining cases did not fall under the Act's coverage.7
To the extent that Mackey, and another failed effort to amend the Act to explicitly cover insurance in the mid-1980s, created confusion about the scope of the Act's coverage, subsequent events dissolved the confusion.
As we all know by now, the Act was amended in 1988. Once again, it did not explicitly include insurance discrimination. After the Act's amendment, however, HUD adopted regulations that stated that "refusing to provide ... property or hazard insurance for dwelling or providing such... insurance differently because of race..." violated the Act. 24 CPR 100.70(d)(4). The regulation's interpretation of the Act, consistent with years of similar interpretations, was the weighing factor when the Seventh Circuit Court of Appeals considered a case against American Family.
At the same time, the indicators suggested that insurance discrimination was becoming more subtle, less open, but that it existed in a variety of forms of unequal treatment. For example, in 1986, a private fair housing group in Milwaukee, Wisconsin, conducted tests of three large insurance companies. Using paired testers, posing as homeowners seeking homeowners insurance, a total of 60 tests were conducted. The difference between the testers was based on the racial composition of the neighborhood where they purported to reside. There were significant differences in treatment based on this factor: agents requested the names of callers from white areas 91.6% of the time, but in only 77.8% of the cases of callers from non-white areas. Callers from white areas were asked detailed information about their current policies in 91.7 % of the cases compared to 66.7% of the callers from non white areas. 44.4% of the callers from white neighborhoods were offered a minimum type of inspection: 15.8% of callers from nonwhite areas were offered that type of inspection. A more rigorous inspection was to be required of 55.6% of the callers from white neighborhoods but of 84.2% of the callers from non-white neighborhoods. The indications of refusing outright to write insurance were only minimally present; it was the terms required for pursuing insurance coverage which showed differences. While this testing project did not cover price or type of coverage, one analyst described it as revealing "an expressed preference on the part of these insurance agents to solicit business in white neighborhoods and a systemic tendency to place additional barriers in the way of homeowners in nonwhite communities..."8
By this point in the evolution of insurance discrimination issues, the formerly overt indicators of discrimination had disappeared, at least in this study, but there were differences in treatment. They were more subtle, but still indicated that race was a factor in the terms and conditions of insurance. The focus appeared to be not whether the policy would be available, at least preliminarily, but on what terms and with which information to whom. Nonetheless, in 1988 there was still information about some insurers which indicated that race was an overt consideration. A sales manager was quoted as saying to an employee of the American Family insurance company that "I think you write too many blacks ... You gotta get good, solid premium paying white people.'
This kind of statement, while the type that lawyers on one side of a case dream of and lawyers on the other side of a case have nightmares about, is undoubtedly a vestige of old patterns and old stereotypes about racial and ethnic minorities.
It is also still the type of statement which appears in occasional housing rental and sales cases. Mostly unspoken these days, discrimination is more likely to occur in more subtle ways, often unspoken, sometimes unrecognized even by the actor, by the acceptance of outdated subjective standards and assumptions. At the same time, not all instances of different treatment, particularly in the insurance arena, are unlawful discrimination, even when they adversely affect people of color. or others who claim unlawful discrimination. Consideration of risk in insurance is, and never has been, unlawful. Application of subjective judgment, rather than of objective standards, is, in another sense, risky business because it gives credence to a claim of discrimination and because it may lead to the unspoken application of discriminatory principles.
But this development in the insurance area, it must be emphasized, tracks developments in other areas where discrimination is claimed. Not all differences in treatment violate the law, not all subjective judgments exclude on a discriminatory basis, not all criteria which may operate to exclude or limit opportunities for a housing-related benefit violate the law, not all actions designed to prevent risk of lose violate the law. However, where underwriting criteria are not carefully examined, where subjective judgments are applied, where standards for offering policies or types of coverage are not uniform, the opportunity for discrimination is created, and may occur--just as it may in the landlord-tenant area, or any other area covered by the Act.
Continued process challenges to jurisdiction over insurance discrimination in the Act have continued. But in 1992, in a case brought on behalf of the NAACP in Milwaukee against American Family, the Court of Appeals in the Seventh Circuit held that the Act does prohibit insurance redlining and rejected a claim that the federal McCarron-Ferguson Act required that state law prevail over the Act, because the state law was inconsistent with the Act's language and interpretations.9
In 1995 the Sixth Circuit Court of Appeals did as well in a case involving Nationwide; a petition for rehearing was denied, and this past January the Supreme Court denied cert. in the Nationwide case." 10 The Sixth Circuit, following the American Family decision, rejected all of the arguments which had been successful in Mackey, finding that the Act's "make unavailable or deny* language and HUD's application to that language to insurance relating to housing was reasonable and that the McCarron-Ferguson Act did not require that state or local law preempt the Fair Housing Act, either-as applied to HUD's regulation, the remedies available under the Act or the potential, unestablished possibility that a disparate impact analysis would be applied in the case. It is clear that the courts will continue to find that claimed discrimination in the provision of housing-related insurance may violate the Fair Housing Act; it is equally clear that some insurers will continue to resist that decision.
But I'd like to issue a call to higher ground; to a ground that I believe that everyone in this room can agree to.
There is no place in today's society for discrimination based on any of the categories listed in the Fair Housing Act. There is no place for consideration of race or ethnicity, or of any other protected status, whether based on the composition of the neighborhood or the status of the applicant or the insured.
Old assumptions about where insurance can or should be written must be examined. Old assumptions about who is or is not a good risk must be examined with respect to objective, and not subjective, criteria. Practices must be examined to ensure that they are being objectively and consistently applied. insurers must be sure that their employees and agents are aware of the Fair Housing Act and of its application to their activities and conduct the kind of "smart management" techniques that they are already applying in the employment arena--set a non- discrimination policy at the highest levels, set objective and non-discriminatory standards which take into account all appropriate risk factors but which do not sweep overbroadly, ensure equal access to products and services wherever they are provided, make individualized decisions based on objective criteria and not based on assumptions, set up customer service systems which enable applicants or insureds who feel that they are treated unfairly to get a hearing. As management, recognize that not every employee or agent will perceive or act on a non- discriminatory basis unless they understand that it is the law, and the company's practice.
Consider the range of creative marketing and customer service changes that many in the lending arena have already undertaken. Show leadership in getting past the claims of discrimination, and the rather natural concerns about what it all means and what it could mean and move into the process of working to apply preventative strategies to educate and guide agents and employees. This is the route that many other industries have undertaken in their own courses of self-education and change after considering the anti-discrimination policies of this country and its laws. Realtors, newspaper publishers, lending institutions, property management companies--all have learned that good management means the kinds of leadership, direction and change that allow agents and employees to practice non- discrimination as a matter of practice, and, to be honest, to recognize the new markets and new business potential which can come from actively indicating to untapped markets the availability of services on a non-discriminatory basis.
As the history of insurance redlining, and other forms of insurance discrimination indicates, consistent with the history of situations where other forms of housing discrimination have been claimed, thoughtful consideration and institution of a systemic re-evaluation of processes and standards by the industry, is key to addressing issues of discrimination. Without such efforts, both administrative complaints and litigation will persist.
Denial of this challenge only ignores the potential for the kinds of changes which we have seen in the lending industry. And denial of this challenge dooms us to continued failures in re- building our communities to be strong, equal and welcoming to all people.
To quote the late Dr. Martin Luther King, "we are caught in an inescapable network of mutuality, tied in a single garment of destiny." Together, we must use all of our tools, our skills, and our history to build our communities.
1. The opinions expressed in this material are those of its author and not those of the Department of Housing and Urban Development.
2. See Squires and Venez., "Insurance Redlining and the Process of Discrimination,," The Review of Black Political Economy, Winter 1988.
3. Heimer, Carol. "The Racial and organizational origins of insurance Redlining," Journal of Intergroup Relations, Vol. X, No. 3, Autumn, 1982.
5. H.R. 3504, 95 Cong. let Sees. Sec. 804 (1977): Hearings before the Subcommittee on Civil and Constitutional Rights of the Committee on the Judiciary, House of Representatives, 95 Cong. 2d Session (1978), Testimony of co-sponsor, Rep. Don Edwards.
6. Dunn v. Midwestern Indemnity Mid-American Fire and Casualty Co., 472 F.Supp. 1106 (S.D. Ohio 1979).
7. Mackey v. Nationwide Insurance Co., 724 P.2d 419 (4th Cir.. 1984).
8. Squires and Velez, supra, pp. 65-70.
9. NAACP v. American Family Mutual Insurance Co., 978 F.2d 287 (7th Cir. 1992), cert. den. 113 S.Ct. 2335 (1993).
10. Nationwide Mutual Insurance Company v. Cisneros et al., 53 F.3rd 1351 (6th Cir. 1995).