Is the wait almost over? The insurance industry watches as the U.S. Supreme Court finally considers whether the Fair Housing Act allows claims for discriminatory impact.

• Author: Stuart, Sharon D.

This article originally appeared in the January 2015 Insurance and Reinsurance Committee newsletter.

AS the case of Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. (1) has wound its way through the district and appellate courts and on to the U.S. Supreme Court, the insurance industry has been closely watching. When the Supreme Court agreed to hear the case --which involves the viability of disparate impact claims under the U.S. Fair Housing Act of 1968 ("FHA")--industry advocates weighed in as amici curiae. The decision may be one of the most important rulings the Court makes this year, (2) but why are insurance companies so interested? It is because the provision and pricing of homeowners' insurance is a practice governed by the FHA. If plaintiffs can sue because a housing practice has a discriminatory effect, even if it is not intentionally discriminatory, insurers may be subject to those claims just as governmental entities, sellers, landlords and lenders are.

1. Background

   Section 804(a) of the FHA makes it unlawful "[t]o refuse to sell or rent ..., or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin." (3) Likewise, the FHA provides that " [i]t shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin." (4) The stated purpose of the Act was to unravel "patterns of racial segregation" in housing by outlawing all the "manifold and insidious ways in which discrimination works its terrible effects." (5)

   In 2008, the Inclusive Communities Project, Inc. ("ICP"), a nonprofit that works to place African American tenants in Dallas's predominantly white suburbs, sued the Texas Department of Housing and Community Affairs ("Texas"), claiming Texas disproportionately allocates tax credits to properties in minority populated areas. ICP brought both disparate treatment claims under the Equal Protection clause and 42 U.S.C. [section] 1982, and a disparate impact claim under the FHA. ICP also sought an injunction requiring Texas "to allocate Low Income Housing Tax Credits in the Dallas metropolitan area in a manner that creates as many Low Income Housing Tax Credit assisted units in nonminority census tracts as exist in minority census tracts" and to prohibit denying credits to units by taking the race and ethnicity of residents of the project area into account. (6)

   Following a bench trial, the U.S. District Court for the Northern District of Texas dismissed ICP's equal protection and Section 1982 claims, finding that it had failed to prove intentional discrimination. However, the district court ruled that ICP had established a prima facie case of disparate impact liability by showing that Texas had approved tax credits for non-elderly developments in minority neighborhoods in a disproportionate fashion and had engaged in disproportionate denial of tax credits for non-elderly housing in predominately white neighborhoods. (7) The district court found that Texas proved its actions furthered a legitimate government interest because they complied with state laws requiring award of low-income housing tax credits according to set criteria, including some that correlated with race. However, the court held that Texas failed to meet the burden of proving the absence of any alternative course of action that would enable the legitimate government interest to be served with less discriminatory impact. (8) The court entered judgment in ICP's favor on the disparate impact claim and imposed an injunction on Texas, which in turn appealed to the Fifth Circuit.

2. HUD's Regulation

   In 2013, while the case was on appeal, HUD issued a regulation interpreting the FHA to permit disparate impact liability and purporting to set standards for proving such claims under the FHA. (9) According to HUD, the FHA imposes liability for practices that actually or predictably result in a discriminatory effect on a group or create, increase, reinforce, or perpetuate segregated housing "because of race, color, religion, sex, handicap, familial status, or national origin." (10) The HUD regulation provides a three-part burden-shifting mechanism different from that imposed by the district court. Under the regulation, the plaintiff must prove that a challenged practice has a discriminatory effect. If the plaintiff meets this burden, the defendant must then prove that the practice is "necessary to achieve one or more substantial, legitimate, nondiscriminatory interests." (11) If the defendant meets its burden, the plaintiff bears the burden of proving that those substantial, legitimate, nondiscriminatory interests "could be served by another practice that has a less discriminatory effect." (12)

   In addition to establishing the burden-shifting procedure, HUD's rule makes clear that it retroactively applies to both public and private parties...