Prop. Cas. Insurers Ass'n of Am. v. Donovan, 13 C 8564

Decision Date03 September 2014
Docket NumberNo. 13 C 8564,13 C 8564
Citation66 F.Supp.3d 1018
PartiesProperty Casualty Insurers Association of America, Plaintiff, v. Shaun Donovan, in his official capacity as Secretary of Housing and Urban Development, and United States Department of Housing and Urban Development, Defendants.
CourtU.S. District Court — Northern District of Illinois

Randolph D. Moss, Brian M. Boynton, Seth P Waxman, Matthew J. Tokson, Lynn Eisenberg, Wilmer Cutler Pickering Hale And Dorr LLP, Washington, DC, Rowe W. Snider, Ashlee Marie Knuckey, Locke Lord LLP, Chicago, IL, for Plaintiff.

Kyle R. Freeny, Daniel Paul Mosteller, U.S. Department Of Justice, Washington, DC, for Defendants.


AMY J. ST. EVE, District Court Judge:

In 2013, the United States Department of Housing and Urban Development (HUD) issued a final rule formalizing its recognition that liability under the Fair Housing Act (“FHA”) may arise from a facially neutral practice that has discriminatory effects on certain groups of people, regardless of whether discriminatory intent exists (the “Disparate Impact Rule”). See Implementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed.Reg. 11460 (Feb. 15, 2013) (to be codified at 24 C.F.R. pt. 100). In addition to recognizing the availability of discriminatory effects (i.e., “disparate impact”) liability under the FHA, the Disparate Impact Rule also establishes a three-step burden-shifting approach to deciding disparate impact claims. Plaintiff Property Casualty Insurers Association of America (PCI) argues that HUD's refusal to build exclusions or safe harbors for homeowners insurance into the Disparate Impact Rule violates the McCarran–Ferguson Act and is arbitrary and capricious. PCI asks the Court to invalidate the Rule as it relates to homeowners insurance under the Administrative Procedure Act and to enjoin HUD from applying the Rule to the homeowners insurance industry.

Before the Court are PCI's motion for summary judgment (R. 20) and Defendants' motion to dismiss or for summary judgment (R. 30). For the following reasons, the Court grants in part and denies in part PCI's motion, and grants in part and denies in part Defendants' motion.


This Administrative Procedure Act case involves the intersection between two important federal policies, the policy of ensuring that regulation of the insurance industry rests primarily with the states and the policy of providing for fair housing throughout the United States, which are reflected in the McCarran–Ferguson Act, 59 Stat. 33 (1945) (codified as amended at 15 U.S.C. §§ 1011, et seq. ), and the Fair Housing Act (“FHA”), Pub.L. No. 90–284, 82 Stat. 81 (1968) (codified as amended at 42 U.S.C. §§ 3601 –19 ), respectively. The Court, therefore, provides a brief overview of these two federal statutes before turning to HUD's Disparate Impact Rule.

I. The McCarran–Ferguson Act

Congress enacted the McCarran–Ferguson Act in response to the Supreme Court's decision in United States v. South–Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), in which the Court held that insurance transactions were subject to federal regulation under the Commerce Clause. See United States Dep't of Treasury v. Fabe, 508 U.S. 491, 499, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993) ; SEC v. Nat'l Secs. Inc., 393 U.S. 453, 458, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). Prior to South–Eastern Underwriters, “it had been assumed ... that [i]ssuing a policy of insurance is not a transaction of commerce” and, consequently, “the States enjoyed a virtually exclusive domain over the insurance industry.” Fabe, 508 U.S. at 499, 113 S.Ct. 2202 (internal quotation marks and citations omitted). Congress reacted quickly to South–Eastern Underwriters , passing the McCarran–Ferguson Act within a year of the decision to allay fears that the decision threatened the states' power to tax and regulate the insurance industry. See id. at 499–500, 113 S.Ct. 2202.

Congress expressed the purpose of the McCarran–Ferguson Act in Section 1 of the Act:

Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

15 U.S.C. § 1101; see also Autry v. Northwest Premium Servs., Inc., 144 F.3d 1037, 1040 (7th Cir.1998). To accomplish this purpose, Congress “transformed the legal landscape by overturning the normal rules of pre-emption” and “creating a clear-statement rule ... that state laws enacted ‘for the purpose of regulating the business of insurance’ do not yield to conflicting federal statutes unless a federal statute specifically requires otherwise. Fabe, 508 U.S. at 507, 113 S.Ct. 2202. Specifically, the McCarran–Ferguson Act 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 ... unless such Act specifically related to the business of insurance[.] 15 U.S.C. § 1012(b).

Over the years, courts have developed a three-part inquiry for determining whether the McCarran–Ferguson Act preempts application of a particular federal statute. First, courts inquire whether the federal statute at issue “specifically relate[s] to the business of insurance.” Autry, 144 F.3d at 1040–41 (quoting Fabe, 508 U.S. at 501, 113 S.Ct. 2202 ). Second, courts ask whether the state statute was enacted “for the purpose of regulating the business of insurance.” Id. Finally, courts determine whether application of the federal statute will “invalidate, impair or supersede” the state law. Id. If the court answers all three inquiries in the affirmative, the federal statute must give way to state law. Id.

In Humana Inc. v. Forsyth, 525 U.S. 299, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999), the Supreme Court rejected the view that the McCarran–Ferguson Act created “any sort of field preemption” as well as the “polar opposite view ... that Congress intended a green light for federal regulation whenever the federal law does not collide head on with state regulation.” Id. at 309, 119 S.Ct. 710. The Court, instead, construed the Act as adopting a middle-ground, holding that [w]hen 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.” Id. at 310, 119 S.Ct. 710. Accordingly, if a federal statute complements or duplicates a state's regulation of the insurance industry and does not interfere with a state's policies or administrative regime, McCarran–Ferguson preclusion does not apply.See id. at 313, 119 S.Ct. 710 (finding that the McCarran–Ferguson Act did not preclude the plaintiff's RICO claims because RICO's private right of action and treble damages provision appears to complement Nevada's statutory and common-law claims for relief”);NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, 295 (7th Cir.1992) (“Duplication is not conflict.”); Ojo v. Farmers Grp., Inc., 600 F.3d 1205, 1209–10 (9th Cir.2010) (recognizing that the McCarran–Ferguson Act would not reverse-preempt the FHA where the FHA “complement[s]—rather than displace[s] and impair[s] state law).

II. The Fair Housing Act

Congress enacted the FHA in 1968 “to provide, within constitutional limits, for fair housing throughout the United States.” See 42 U.S.C. § 3601. The FHA makes it unlawful to, among other things, refuse to sell, rent, or “otherwise make unavailable or deny” housing to any person “because of race, color, religion, sex, familial status, ... national origin[,] or handicap. 42 U.S.C. § 3604(a), (f)(1). The FHA also makes it 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 the person's race, color, religion, sex, familial status, national origin, or handicap. See id. § 3604(b), (f)(2). The FHA empowers HUD to enforce the Act and to issue regulations implementing the Act. See id. §§ 2612, 3614a.

A. Disparate Impact Claims Under the FHA

HUD has long interpreted the FHA as prohibiting not only intentional discrimination on the basis of a person's protected characteristics, but also practices that have unwarranted discriminatory effects on minorities or other persons protected by the Act, regardless of whether there was an intent to discriminate. See 78 Fed.Reg. 11460–62 nn. 12–27 (Feb. 15, 2013) (collecting examples). Put differently, HUD interprets the FHA as providing for both discriminatory intent and disparate impact liability. See id. All eleven circuit courts to have addressed this issue, including the Seventh Circuit, have agreed that the FHA provides for disparate impact liability at least in some cases. See, e.g., Metropolitan Hous. Dev. Corp. v. Village of Arlington Heights, 558 F.2d 1283, 1290 (7th Cir.1977) (We therefore hold that at least under some circumstances a violation of section 3604(a) can be established by showing a discriminatory effect without a showing of discriminatory intent.”).1 Neither the Supreme Court nor the Circuit Court for the District of Columbia, however, has weighed in on whether the FHA allows for disparate impact liability.

B. Liability of Insurers Under the FHA

HUD also has long interpreted the FHA as prohibiting discrimination in the provision of homeowners insurance. In 1989, HUD issued a regulation expressly stating that prohibited acts under the FHA include [r]efusing to provide ... property or hazard insurance for dwellings or providing such services or insurance differently because of race, color, religion, sex, handicap, familial status, or national origin.” See Implementation of the ...

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