Ojo v. Farmers Group, Inc.

• Decision Date: 12 May 2009
• Docket Number: No. 06-55522.,06-55522.
• Citation: 565 F.3d 1175
• Parties: Patrick O. OJO, Attorney, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. FARMERS GROUP, INC.; Fire Underwriters Association; Fire Insurance Exchange; Farmers Underwriters Association Farmers Insurance Exchange, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

565 F.3d 1175

Patrick O. OJO, Attorney, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. FARMERS GROUP, INC.; Fire Underwriters Association; Fire Insurance Exchange; Farmers Underwriters Association Farmers Insurance Exchange, Defendants-Appellees.

No. 06-55522.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 6, 2007.

Filed May 12, 2009.

Sanford Svetcov, Lerach Coughlin Stoia Geller Rudman & Robbins LLP, San Francisco, CA, for the plaintiffs-appellants.

Harriet S. Posner, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, CA, for the defendants-appellees.

Appeal from the United States District Court for the Central District of California, John F. Walter, District Judge, Presiding. D.C. No. CV-05-05818-JFW.

Before: MYRON H. BRIGHT,^* Senior Circuit Judge, HARRY PREGERSON and CARLOS T. BEA, Circuit Judges.

Opinion by Judge Pregerson; Dissent by Judge Bea.

PREGERSON, Circuit Judge:

I. Introduction

Patrick L. Ojo ("Ojo"), on behalf of himself and all others similarly situated,¹ appeals the district court's dismissal under Fed.R.Civ.P. 12(b)(1) of a class action suit brought against Farmers Group, Inc., and its affiliates, subsidiaries, and reinsurers (collectively "Farmers"). The Complaint alleges, inter alia,² disparate impact race discrimination in violation of the federal Fair Housing Act ("FHA"), 42 U.S.C. §§ 3604 et seq.

Ojo, an African-American resident of Houston, Texas, alleges that Farmers used "a number of undisclosed factors" to compute credit scores and price homeowners' insurance policies. As a result, "Farmers charged minorities higher premiums for homeowners' property and casualty insurance than the premiums charged to similarly situated Caucasians." Farmers moved to dismiss the Complaint under 12(b)(1) for lack of subject matter jurisdiction and under 12(b)(6) for failure to state a claim.³ The district court⁴ granted Farmers' 12(b)(1) claim on the grounds that it was reverse-preempted by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et seq.

In dismissing Ojo's claim, the district court erred in two respects. First, the district court erroneously read Ojo's claim as challenging the practice of credit scoring per se. Second, the district court erroneously interpreted Texas state insurance law as permitting disparate impact race discrimination that results from credit scoring, thereby triggering McCarran-Ferguson reverse-preemption.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse.

II. Background

A. The Class Action Complaint

Patrick L. Ojo is an African-American resident of Houston, Texas, and the owner of a homeowner's property and casualty policy issued by Farmers Group, Inc.⁵ In January 2004, Farmers increased the premium on Ojo's homeowner's policy by nine percent, despite the fact that he had made no prior claims on the policy. Farmers allegedly advised Ojo that the increase was due to "unfavorable credit information" obtained through the company's automated credit scoring system (also referred to as Farmers' "automated risk assessment system").

According to Ojo, "[o]ver the years" Farmers has employed "geographical distinctions" and "various other artifices" to "identify and target minorities for the purpose of charging minorities higher premiums ... than the premiums charged to similarly situated Caucasians." Specifically, he contends that the credit scoring system is a formula that uses "a number of undisclosed factors" to produce a credit score for each applicant for homeowners' property and casualty coverage.⁶ The Complaint further alleges that "[m]inorities as a group have lower credit scores than whites," and that the "effect of Farmers' credit scoring system is that minorities are charged [disparately] higher prices" in violation of the federal FHA.⁷

Ojo also alleges that Farmers has "vigorously defended" its use of this credit scoring system as "actuarially sound," whilst keeping secret the formula, the actuarial basis for the formula, and the specific credit factors which impact a policyholder's score. The result is that "the price an individual pays for a policy is largely dependent on a secret credit score allegedly justified by secret actuarial information." As a result of Farmers' unlawful practices, Ojo and those similarly situated "have lost and face losing millions of dollars in premiums paid" as a result of "overcharges due to racial discrimination."

B. The McCarran-Ferguson Act

The McCarran-Ferguson Act ("McCarran-Ferguson" or "Act") provides that "[t]he business of insurance ... shall be subject to the laws of the several States which relate to the regulation or taxation of such business." 15 U.S.C. § 1012(a). McCarran-Ferguson provides that "[n]o 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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance." Id. § 1012(b); see als Humana Inc. v. Forsyth, 525 U.S. 299, 306-07, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999). In sum, the Act "establishes a form of inverse preemption" which prevents a federal law of general applicability from inadvertently impairing state laws regulating the business of insurance. Id.; see also Merchants Home Delivery Serv. v. Frank B. Hall & Co., 50 F.3d 1486, 1488 (9th Cir.1995).

The Supreme Court has outlined the analytical framework for McCarran-Ferguson questions: "When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application." Humana, 525 U.S. at 310, 119 S.Ct. 710. Stated differently, three requirements must be met before a state insurance law preempts a federal statute: "(1) the federal law in question must not be specifically directed at insurance regulation; (2) there must exist a particular state law (or declared regulatory policy) enacted for the purposes of regulating insurance; and (3) application of federal law to the controversy in question must invalidate, impair or supersede that state law." Dehoyos v. Allstate Corp., 345 F.3d 290, 295 (5th Cir. 2003) (emphasis added).⁸

The Supreme Court has defined the terms "invalidate, impair, [and] supersede" as they are enumerated in McCarran-Ferguson. "Invalidate" is defined as "render[ing] ineffective, generally without providing a replacement rule or law." Humana, 525 U.S. at 307, 119 S.Ct. 710. "Supersede" is defined as "displac[ing] (and thus render[ing] ineffective) while providing a substitute rule." Id.

As for "impair," Humana concluded that Congress did not intend for state insurance laws to completely and automatically preempt any federal statute not specifically directed at insurance regulation. 525 U.S. at 308, 119 S.Ct. 710 ("We reject any suggestion that Congress intended to cede the field of insurance regulation to the States, saving only instances in which Congress expressly orders otherwise."). While states have "administrative regimes and mechanisms in place to regulate insurance [fraud], the question is not whether the state administrative regime has `occupied that field.' Instead, the question is whether the [state and federal] regulatory goals are in harmony." Dehoyos, 345 F.3d at 299 (quoting Humana, 525 U.S. 299, 119 S.Ct. 710, 142 L.Ed.2d 753).

Humana also held that when state law proscribes conduct similar to that proscribed by federal law, the fact that federal law provides different or stronger remedies does not bar application of federal law. Humana, 525 U.S. at 311-13, 119 S.Ct. 710 (emphasis added). In such circumstances, federal law complements, rather than impairs, frustrates or interferes with state law. Id. at 313, 119 S.Ct. 710.

C. The Federal Fair Housing Act

The federal Fair Housing Act states that it is unlawful "[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin." 42 U.S.C. § 3604(b) (emphasis added).

The Sixth and Seventh Circuits recognize that the FHA's ban on racial discrimination extends to the underwriting of homeowners' property insurance. Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1359 (6th Cir.1995) (concluding that no "Congressional intent [exists] to preclude the application of the Fair Housing Act to insurance underwriting practices"); N.A.A.C.P. v. Am. Family Mut. Ins. Co., 978 F.2d 287, 293 (7th Cir.1992) (The federal Fair Housing Act "applies to discriminatory denials of insurance, and discriminatory pricing, that effectively preclude ownership of housing because of the race of the applicant"); Nat'l Fair Housing Alliance, Inc. v. Prudential Ins. Co. of Am., 208 F.Supp.2d 46, 57 (D.D.C.2002) ("The application of the FHA to homeowners insurance is fully consistent with the statute's purpose in eliminating discrimination resulting in segregated housing and lack of equal housing opportunities," citing Trafficante v. Metropolitan Life Ins. Co., 409 U.S. 205, 211-12, 93 S.Ct. 364, 34 L.Ed.2d 415 (1972)).

While the federal FHA applies to cases involving discriminatory denials of homeowners' insurance to persons based on race, the Act is not specifically directed at insurance regulation. See Cisneros, 52 F.3d at 1360-61 ("[B]ecause the [FHA] does not mention insurance, it is covered by the McCarran-Ferguson Act and cannot be construed . . . to invalidate, impair or supersede any state law enacted to regulate the business of insurance"); Am. Family Mut. Ins. Co., 978 F.2d at 298 (recognizing that the Fair Housing Act "does not mention insurers").

D. Texas State Law

Like most states, Texas has a statutory scheme regulating...