Prop. Cas. Insurers Ass'n of Am. v. Carson
| Decision Date | 20 June 2017 |
| Docket Number | No. 13-CV-8564,13-CV-8564 |
| Parties | PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA, Plaintiff, v. BENJAMIN S. CARSON, SR., in his official capacity as Secretary of Housing and Urban Development, and UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
AMY J. ST. EVE, District Court Judge:
Plaintiff Property Casualty Insurers Association of America ("PCI") moves pursuant to Federal Rule of Civil Procedure 15(a)(2) to file a First Amended Complaint. (R. 107.) Defendants the United States Department of Housing and Urban Development ("HUD") and Benjamin Carson, in his official capacity as Secretary of HUD (collectively, "Defendants"), oppose PCI's motion. For the following reasons, the Court grants in part and denies in part PCI's motion.
In 2013, HUD issued a final rule recognizing that liability under the Fair Housing Act ("FHA") may arise from a facially neutral practice that has discriminatory effects on certaingroups of people, regardless of whether discriminatory intent exists (the "Disparate Impact Rule" or the "Rule"). (R. 99 at 1.) The Disparate Impact Rule also established a three-step burden-shifting approach to deciding disparate-impact claims. (Id.) Under this approach, the plaintiff initially bears the burden of proving that a housing practice has a disparate impact on individuals with a protected characteristic or perpetuates segregation in the housing market. (Id. at 11-12, 17.) The burden then shifts to the defendant to prove that the challenged practice "has a necessary and manifest relationship to one or more of the defendant's . . . legitimate, nondiscriminatory interests." (Id. at 12, 17 (quoting Implementation of the Fair Housing Act's Discriminatory Effects Standard, 76 Fed. Reg. 70921, 70924 (Nov. 16, 2011)).) If the defendant satisfies this burden, the plaintiff may still establish liability by proving a less discriminatory method of serving the same interests. (Id. at 12, 17.)
In its proposed rule, HUD included "the provision and pricing of homeowner's insurance" as an example of a housing policy or practice that may have a disparate impact on protected groups. (Id. at 12 (quoting Implementation of the Fair Housing Act's Discriminatory Effects Standard, 76 Fed. Reg. at 70924).) PCI, among other associations representing the homeowners insurance industry, submitted comments to HUD. (Id. at 12-13.) The industry representatives (1) disputed whether the FHA allowed for disparate-impact liability in any context; (2) contended that application of the Disparate Impact Rule to homeowners insurance would violate the McCarran-Ferguson Act and the "filed rate" doctrine; (3) argued that imposing disparate-impact liability on homeowners insurance is incompatible with the nature of insurance, which relies on risk-based pricing; and (4) contended that the burden-shifting framework outlined in the proposed rule was inappropriate. (Id. at 13-14.) Based on these arguments, the insurance industry requested that HUD either exempt insurance underwriting and pricing fromthe Disparate Impact Rule or build safe harbors into the Rule for certain actuarial risk factors, like the age and condition of the property. (Id. at 14.) The industry's comments failed to persuade HUD, which did not make any changes to the Disparate Impact Rule in its final rule. (Id. at 15-17.) HUD found the Rule sufficiently flexible to alleviate the industry's concerns on a case-by-case basis. (Id. at 15.)
PCI filed suit in November 2013 seeking to invalidate the Disparate Impact Rule as it applies to the provision and pricing of homeowners insurance. (R. 1; R. 99 at 17.) As the Court described in its September 2014 opinion, PCI claimed the Disparate Impact Rule was invalid under the Administrative Procedure Act ("APA") for a variety of reasons:
First, PCI argues that application of the Disparate Impact Rule to the insurance industry would violate the McCarran-Ferguson Act. (See [R. 1] at Count I.) Second, PCI argues that HUD's issuance of the Disparate Impact Rule was arbitrary and capricious because HUD failed to adequately consider the Rule's conflict with the McCarran-Ferguson Act, the filed rate doctrine, and the nature of insurance. (Seeid. at Counts II-IV.) Finally, PCI challenges the three-step burden-shifting framework HUD adopted in the Disparate Impact Rule as arbitrary, capricious, and not in accordance with law. (See id. at Counts V-VI.)
(R. 99 at 17.) PCI moved for summary judgment and HUD filed a cross-motion seeking dismissal for lack of subject matter jurisdiction or, in the alternative, summary judgment in HUD's favor on all claims. (See R. 20; R. 30; R. 99 at 17-18.)
The Court began its analysis by addressing its jurisdiction. It concluded that PCI's claim that the Disparate Impact Rule violates the McCarran-Ferguson Act was not ripe for review but that PCI had standing to assert its remaining claims. (R. 99 at 32, 38.) The Court then turned to the merits of PCI's claim that the Disparate Impact Rule's application to homeowners insurancewas arbitrary and capricious because HUD did not give adequate consideration to various comments from the insurance industry.
First, PCI argued that HUD had failed to adequately consider the insurance industry's comments that application of the Disparate Impact Rule to homeowners insurance would violate the McCarran-Ferguson Act. (R. 99 at 39.) HUD had "determined that the question of whether McCarran-Ferguson preclusion applies should be left to a case-by-case basis determination based on the facts at issue and the relevant state laws." (Id. at 40.) The Court concluded that "[a]lthough HUD had discretion to decide whether to proceed by case-by-case adjudication or rule-making, it [failed] to provide a reasoned explanation for preferring case-by-case adjudication over rule-making." (Id. at 43.) The Court noted that HUD's explanation "that the McCarran-Ferguson Act does not preclude HUD from issuing regulations that may apply to insurance policies does not mean that HUD can simply disregard the likelihood that McCarran-Ferguson preclusion will apply in promulgating its regulations." (Id. at 42.) Additionally, the Court explained that HUD "made no attempt to evaluate how often McCarran-Ferguson preclusion would apply and whether it would bar entire categories of disparate impact claims against insurers." (Id.) The Court also noted that HUD had failed to acknowledge case law that "called into question the viability of many (if not most) disparate impact claims against insurers in light of the McCarran-Ferguson Act." (Id. at 43.) In the end, these shortcomings in HUD's analysis were arbitrary and capricious, and the Court therefore "remand[ed] this case to HUD for further explanation." (Id.)
Second, PCI argued that HUD had failed to adequately consider whether the Disparate Impact Rule violated the filed-rate doctrine, which "forbids courts from invalidating or modifying rates that have been filed with regulatory agencies." (Id. (quoting Schilke v.Wachovia Mortg., FSB, 820 F. Supp. 2d 825, 835 (N.D. Ill. 2011)).) The Court explained that HUD grouped the industry's concerns regarding the filed-rate doctrine with their concerns related to the McCarran-Ferguson Act but that HUD did not provide any response to the industry's comments about the filed-rate doctrine. (Id. at 44.) HUD's "failure to separately discuss the filed-rate doctrine," however, did not by itself render the Disparate Impact Rule's application to the provision of homeowners insurance arbitrary and capricious. (Id.) The Court reasoned that the purpose of the filed-rate doctrine was similar to that of the McCarran-Ferguson Act, and that "where the filed-rate doctrine applies, the McCarran-Ferguson Act almost certainly applies too." (Id.) Nevertheless, because HUD failed to adequately consider the industry's comments regarding the McCarran-Ferguson Act, it also failed to adequately consider the filed-rate doctrine. (Id. at 45.) Thus, the Court ruled that "on remand, HUD must explain its decision regarding the filed-rate doctrine or institute a new rule, as it must with respect to the industry's McCarran-Ferguson comments." (Id.)
Third, PCI argued that HUD had failed to adequately address the effect that the Disparate Impact Rule would have on the insurance industry due to the nature of insurance. (Id.) HUD had explained that the industry's concerns were misplaced because they incorrectly ignore the burden-shifting scheme and "presume that once a discriminatory effect is shown, the policy at issue is per se illegal." (Id. at 46 (quoting Final Rule, 78 Fed. Reg. at 11475).) The Court found HUD's response arbitrary and capricious because HUD "made no effort to evaluate the substance of the insurance industry's concerns, disregarding them merely because insurers would have an opportunity to raise their arguments as part of the burden-shifting framework." (Id.) The Court explained that the authority upon which HUD relied in fact supported PCI's argument that "HUD should include exemptions from the Disparate Impact Rule or create safe harbors inthe Rule for insurance practices that plaintiffs would have no chance of successfully challenging under the burden-shifting framework." (Id. at 47.) For these reasons, the Court determined that "HUD had an obligation to respond to the substance of [the industry's] concerns or, alternatively, provide a reasoned explanation why case-by-case determinations of the insurers' arguments are preferable to rule-making." (Id.) Accordingly, the Court "remand[ed] the[e] case to HUD for further explanation." (Id.)
Having resolved PCI's contentions regarding the adequacy of HUD's consideration of the industry's...
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