The Texas Supreme Court held that, under the McCarran-Ferguson Act, the Texas Insurance Code (“the Code”) reverse-preempts disparate impact liability under the Fair Housing Act (FHA) based on credit scoring because the Code, which prohibits discrimination only “because of” or “based on” race, might be impaired by application of FHA. Ojo v. Farmers Group, Inc., No. 10–0245, 2011 WL 2112778 (Texas, May 27, 2011).
Patrick Ojo, an African-American, holds homeowner’s insurance from Farmers Group. His premium increased, allegedly because of his credit scores. Ojo filed a class-action lawsuit in federal court challenging Farmers Group’s usage of credit scores for insurance pricing. Ojo alleged that the use of credit scores has a disparate impact, thereby violating FHA. The defendants moved to dismiss the case, relying on the McCarran-Ferguson Act’s reverse-preemption clause: “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance…unless such Act specifically relates to the business of insurance.” 15 U.S.C. § 1012(b).
The Ninth Circuit, hearing the case en banc, used a three pronged test from Humana Inc. v. Forsyth to determine whether MFA reverse-preempts FHA: “(1) the federal law does not specifically relate to insurance; (2) the state law is enacted for the purpose of regulating insurance; and (3) the application of federal law to the case might invalidate, impair, or supersede the state law” (525 U.S. 299, 307, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999)). It concluded that the first two prongs were satisfied and certified the third prong to the Texas Supreme Court.
The Texas Supreme Court held that “application of the FHA to permit a cause of action for disparate impact resulting from the use of credit scoring in the field of insurance certainly might invalidate, impair, or supersede Texas law.” It inferred from the Code’s permitting credit scoring and in general prohibiting different rates “because of” and “based on race” that only disparate treatment liability is allowed. The Court further reasoned that, while prior laws explicitly provided disparate impact protection, the Code presently does not. The Court rejected Ojo’s argument that FHA’s “because of race” language supports disparate impact cases, noting that, unlike FHA, the Code “do[es] not include the type of broad prohibitory language that gives rise to disparate impact claims.” Also, the Court found disparate impact protection inconsistent with the Code’s legislative history.
The Court then considered Ojo’s argument that the Texas Fair Housing Act (TFHA), which mirrors FHA, extends the same protection for homeowner’s insurance as FHA. However, the Court highlighted that TFHA “does not affect a requirement of nondiscrimination in any other state or federal law.” TEX. PROP.CODE § 301.044(b). In addition, it noted that there exists “very little federal authority confirming the existence of disparate impact liability even under the FHA in the field of insurance.” It reaffirmed that “the relevant provisions of the Texas Insurance Code are more recent and specific regarding discriminatory liability in the field of insurance.”