Opinion

IN THE SUPREME COURT OF TEXAS

════════════

No. 10-0245

════════════

Patrick O. Ojo , On

Behalf of Himself and

All Others Similarly Situated,

Appellant

v .

Farmers Group, Inc., Fire Underwriters

Association,

Fire Insurance Exchange, Farmers Underwriters

Association,

and Farmers Insurance Exchange, Appellees

════════════════════════════════════════════════════

On Certified Question from the United

States

Court of Appeals for the Ninth

Circuit

════════════════════════════════════════════════════

Argued October 14,

2010

Justice Green delivered the

opinion of the Court, in which Chief

Justice Jefferson, Justice Wainwright , Justice Medina , Justice Johnson , Justice Guzman , and Justice Lehrmann joined, and in which

Justice Willett joined as to Parts

I, II, III.A–B, IV, and V.

Chief Justice Jefferson

filed a concurring opinion.

Justice Willett filed an opinion concurring in part.

Justice Hecht did not

participate in the decision.

The United States Court of Appeals for the Ninth Circuit certified to this Court

the following question:

Does Texas

law permit an insurance company to price insurance by using a credit-score

factor that has a racially disparate impact that, were it not for the

[McCarran-Ferguson Act] , 1 would violate the federal Fair Housing

Act, 42 U.S.C. §§ 3601–19, absent a legally sufficient nondiscriminatory

reason, or would using such a credit-score factor violate Texas Insurance Code

sections 544.002(a), 559.051, 559.052, or some other provision of Texas law?

Ojo v.

Farmers Group, Inc. , 600 F.3d 1201 , 1204–05 (9th Cir. 2010) (en banc) (per

curiam ). Pursuant to Article 5, section

3-c of the Texas Constitution and Texas Rule of Appellate Procedure 58.1, we

answer that Texas law prohibits the use of race-based credit scoring, but

permits race-neutral credit scoring even if it has a racially disparate

impact.

I. Introduction

Patrick Ojo , an African-American resident of Texas,

carries a homeowner’s property-and-casualty insurance policy issued by Farmers

Group, Inc. Id. at 1202 . Although

Ojo has never made a claim on his homeowner’s policy,

Farmers raised Ojo’s insurance premium by nine

percent. Id. Ojo alleges that

Farmers increased the premium as a result of unfavorable credit information

acquired though its automated credit-scoring system. Id.

On behalf of himself and other racial minorities whose premiums increased as a

result of Farmers’ use of a credit-scoring system, Ojo

sued Farmers and its affiliates, subsidiaries, and reinsurers in federal

court. Id. Ojo alleges that the

defendants’ credit-scoring systems employ several “undisclosed factors” which

result in disparate impacts for minorities and violate the federal Fair Housing

Act (FHA), 42 U.S.C. §§ 3601–3619. Ojo ,

600 F.3d at 1202 . Ojo

does not assert that he or any other member of the putative plaintiff class has

suffered intentional discrimination at the hands of the defendants.

Id.

Citing Federal Rule of Civil Procedure 12(b )( 1) and

12(b)(6), the defendants moved to dismiss all of Ojo’s

claims. Id. Applying the McCarran-Ferguson Act’s (MFA)

reverse-preemption standard, 15 U.S.C. § 1012 (b), the district court

concluded that the Texas Insurance Code preempted Ojo’s FHA claims. Id. at

1203 . Accordingly, the district court declined to answer whether

Ojo’s disparate-impact discrimination claim

sufficiently complied with Federal Rule of Civil Procedure 12(b )( 6). Id. at

1202 . On appeal to the United States Court of Appeals for the Ninth

Circuit, a divided three-judge panel held that Texas law did not reverse-preempt

Ojo’s FHA claim, initially reversing the district

court. Ojo v. Farmers Group, Inc. , 565 F.3d 1175, 1178 (9th Cir.

2009). Subsequently, the Ninth Circuit ordered the case reheard en

banc. Ojo v. Farmers Group, Inc. , 586 F.3d 1108, 1108 (9th Cir.

2009). The Ninth Circuit’s rehearing en banc resulted in the

certified question now before us. See Ojo , 600 F.3d at 1204–05 .

II. Background

Ojo sued in federal court based on the FHA, under

which 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.” 42 U.S.C. § 3604 (b). Federal courts of appeals

have interpreted this FHA provision to prohibit not just intentional acts of

discrimination, but also race-neutral actions that have discriminatory effects

on racial minorities (disparate-impact discrimination). 2 Several courts of appeals have also

held that the FHA applies in the underwriting of homeowner’s property insurance,

given the FHA’s prohibition of discrimination “in the provision of services . .

. in connection” with the “sale or rental of a dwelling.” 42 U.S.C. § 3604 (b); see, e.g. , Nationwide Mut . Ins. Co. v.

Cisneros , 52 F.3d 1351, 1360 (6th Cir. 1995);

NAACP v. Am. Family Mut . Ins. Co. , 978 F.2d 287, 301 (7th

Cir. 1992). Ojo’s cause of

action asserts this type of disparate impact liability in Farmers’ pricing of

homeowner’s insurance based on credit scoring.

Ojo’s disparate impact claim, however, may be

“reverse-preempted” by Texas law under the MFA, which 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 relates to the

business of insurance.” 15 U.S.C.

§ 1012 (b). Under the MFA, state law reverse-preempts a federal

statute if: “(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.” Ojo , 600

F.3d at 1208–09 (citing Humana Inc. v. Forsyth , 525 U.S. 299, 307

(1999)). The Ninth Circuit, hearing this case en banc, held that

“it is undisputed that the FHA does not specifically relate to insurance,” thus

satisfying the first prong of MFA reverse-preemption. 3 Id. at 1203. It is

also undisputed that “the relevant provisions of Texas law . . . are enacted for

the purpose of insurance regulation,” thus satisfying the second prong.

Id. The certified question before us specifically deals with the

third prong, and asks whether allowing Ojo’s claim

under the FHA might invalidate, impair, or supersede Texas law. See id.

at 1204–05. In light of the fact that Texas

only prohibits the use of credit score factors or rates based on race, or

rates that differ because of race, we answer 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.

III. The Texas Insurance Code Does Not Provide for a Cause

of Action

Based on a

Racially Disparate Impac t

The Texas Insurance Code expressly prohibits “unfair discrimination” and

specifically states that “[a] person may not charge . . . an individual a rate

that is different from the rate charged to other individuals for the same

coverage because of the individual’s race, color, religion, or national

origin.” Tex. Ins. Code §

544.002(a )( 2). An exception to this provision

provides that “[a] person does not violate Section 544.002 if the refusal,

limitation, or charge is required or authorized by law or a regulatory

mandate.” Id. § 544.003(c). Farmers

points out that § 559.051 authorizes the use of race-neutral credit score

factors, and that this authorization is the exception to § 544.002 ,which is recognized in § 544.003. Section

559.051 permits an insurer to “use credit scoring, except for factors that

constitute unfair discrimination, to develop rates, rating classifications, or

underwriting criteria.” Id. § 559.051; see also id.

§ 559.052(a )( 1) (“An insurer may not use a

credit score that is computed using factors that constitute unfair

discrimination . . . .”). The factors that “constitute unfair

discrimination” are not defined in the Texas Insurance Code. However, the

Code does define an “unfairly discriminatory” rate as one that “is based

wholly or partly on the race , creed, color, ethnicity, or national origin of

the policyholder or an insured.” Id. § 560.002(c )( 3)(C) (emphasis added).

Under Texas Insurance Code § 559.201, the use of credit score factors defined by

§ 559.052(a )( 1) that constitute “unfair

discrimination” is deemed an “unfair practice in violation of Chapter

541.” Id. § 559.201 (making violations of Chapter

559 an unfair practice under Chapter 541). Unfair practices under

Chapter 541 are subject to private civil suits, including class actions.

Id. §§ 541.151 (Private Action for Damages Authorized), 541.251(a) (Class

Action Authorized); see Farmers Group, Inc. v. Lubin , 222 S.W.3d 417 , 421–22 (Tex. 2007).

No Texas courts have interpreted whether these Insurance Code provisions

prohibit only intentional discrimination or also discrimination based on

disparate impact. We derive from these provisions that insurance rates may

not be “based wholly or partly on” race, and that an individual may not be

charged a rate that is “different from the rate charged to other individuals for

the same coverage because of the individual’s race.”

Tex. Ins. Code §§ 544.002(a )( 1) (emphasis added), 560.002(c)(3)(C). Additionally,

while credit scoring is authorized, it may not be based on “factors that

constitute unfair discrimination.” Id. §§ 559.051, 559.052(a )( 1). We can only assume that a credit score factor constitutes unfair discrimination

if it is “based wholly or partly on” race, or if it is used to arrive at an

insurance rate that is “different from the rate charged to other individuals for

the same coverage because of the individual’s race.”

See id. §§ 544.002(a )( 1),

560.002(c)(3)(C). Ojo alleges these provisions

not only prohibit intentional discrimination—the use of race-based

classifications to price insurance differently—but also prohibit disparate

impact discrimination—the use of race-neutral pricing schemes that effectuate

disparate results (in this case, racial minorities alleging they have suffered

higher premium rates as a direct consequence of race-neutral credit

scoring). However, nothing in the Insurance Code prohibits the use of

race-neutral credit scoring. In fact, the Code requires that the factors

used in credit scoring to price insurance be race-neutral, or not based

on race. See id. §§ 544.002(a )( 1), 560.002(c)(3)(C). The nature of Ojo’s disparate impact claim presupposes that these factors

are race neutral, which is exactly what the Code requires. Nevertheless,

to support his argument that the “based on” and “because of” race language in

the Texas Insurance Code implies the availability of a cause of action for

disparate impact discrimination, Ojo draws our

attention to the same language used in the FHA, an act which has been

interpreted to provide for disparate impact protection. See 42

U.S.C. § 3604 ; see, e.g. , City of Black Jack , 508 F.2d at

1184. Ojo also relies on the United States

Supreme Court’s interpretation of Title VII of the Civil Rights Act as providing

for a disparate impact cause of action, an act that also prohibits

discrimination “because of” race. See 42 U.S.C. § 2000e-2; Smith

v. City of Jackson , 544 U.S. 228, 240 (2005); Griggs v. Duke Power

Co. , 401 U.S. 424, 436 (1971). However, given the numerous other

considerations, addressed below, that have led federal courts to broadly

interpret the FHA and Title VII, we find this argument unavailing. We are

also guided by the fact that the use of the “because of” race and “based on”

race language in Texas case law and the Texas Labor Code has been more in

association with intentional discrimination claims than claims for disparate

impacts. We first address the use of this language within Texas statutes

and case law.

A. The

Language of the Insurance Code Is Inconsistent

with a Disparate Impact Theory

of Liability

The Texas Insurance Code prohibits “unfairly discriminatory” insurance rates as

those that charge differently “because of” or “based wholly or partly on”

race. See Tex. Ins. Code §§ 544.002(a )( 1), 560.002(c)(3). Texas courts considering this

language in the employment context have used the “because of” and “based . . .

on” race language in the disparate treatment context, but not in the area of

disparate impacts. In University of Texas v. Poindexter , 306 S.W.3d

798 (Tex. App.—Austin 2009, no pet.), the court of appeals held that “[d] isparate -treatment discrimination addresses employment

actions that treat an employee worse than others based on the employee’s

race, color, religion, sex, or national origin. In such

disparate-treatment cases, proof and finding of discriminatory motive is

required.” Id. at 804 n.1 (emphasis added); accord Massarsky v. Gen. Motors Corp. , 706 F.2d 111 ,

117 (3d Cir. 1983) (noting that a plaintiff could establish intentional

discrimination when his “employer applied an expressly race-based or

sex-based standard in its treatment of the plaintiff” (emphasis

added)). In Wal-Mart Stores, Inc. v. Davis , 979 S.W.2d 30

(Tex. App.—Austin 1998, pet. denied), the court of appeals described disparate

impact claims as ethose that “involve facially neutral

practices . . . that operate to exclude a disproportionate percentage of persons

in a protected group and cannot be justified by business necessity. . . .

Disparate treatment [exists where] the defendant . . . treats some people less

favorably than others because of their race, color, religion, sex, or

national origin.” Id. at 44 (emphasis added). The United

States Supreme Court has similarly distinguished between disparate treatment

discrimination and disparate impact discrimination, noting that the former is

discrimination against others “because of their race,” while the latter

encompasses “practices that are facially neutral . . . but that in fact fall

more harshly on one group than another.” Int’l Bhd. of Teamsters v.

United States , 431 U.S. 324 , 335–36 n.15 (1976); see also

Smith , 544 U.S. at 239 (plurality opinion).

Significantly, the phrase “because of race” is also used in the Texas Labor

Code, which makes an employer liable for taking action adverse to an employee

“because of race.” See Tex.

Lab. Code § 21.051. Under the

Labor Code, a plaintiff must show causation by demonstrating that race was a

motivating factor in the employer’s decision, the standard for proving

intentional discrimination, or disparate treatment. See id. §

21.125(a) (“Except as otherwise provided by this chapter, an unlawful employment

practice is established when the complainant demonstrates that race . . . was a

motivating factor for an employment practice, even if other factors also

motivated the practice . . . .”); cf. Quantum Chem. Corp.

v. Toennies , 47 S.W.3d 473, 480 (Tex. 2001)

(holding that in a claim for age discrimination, an employee must show that age

was a motivating factor in the employer’s decision to terminate the employee);

Herbert v. City of Forest Hill , 189 S.W.3d 369, 375 (Tex. App.—Fort Worth 2006, no pet.) ( holding that to prove causation in a race discrimination

case, a plaintiff “must establish that race was a motivating factor for [the]

employment practice” (internal quotation marks omitted)). In addition, the Texas Legislature expressly

provided for disparate impact protection in Texas Labor Code

§ 21.122(a )( 1), 4 where it

defined the burden of proof for disparate impact cases in the employment

context:

An unlawful employment practice based on disparate

impact is established under this chapter only if a complainant demonstrates that

a respondent uses a particular employment practice that causes a disparate

impact on the basis of race . . . and the respondent fails to demonstrate that

the challenged practice is job-related for the position in question and

consistent with business necessity . . . .

Id.

No such section appears in the Texas Insurance Code. The Texas

Legislature, well aware of how to create a cause of action for disparate impact

discrimination, chose not to do so in the field of insurance, specifically with

regards to the use of credit scoring. 5 Because the Legislature chose not

to include a section expressly providing for or defining a disparate impact

claim in the Texas Insurance Code, but did do so in the Texas Labor Code, we

conclude that the Legislature did not intend to provide for disparate impact

liability for the use of credit scoring in pricing insurance.

B. The Use

of “Because of” Race in the Federal FHA and Title VII

Did Not Alone

Prompt Federal Courts to Hold That These Acts

Create Causes of

Action Based on Racially Disparate Impacts

Ojo relies on federal case law interpreting the FHA

and Title VII to provide for disparate impact protection, arguing that the Texas

Insurance Code should also be interpreted to provide for disparate impact

protection because it uses the same “because of race” language as those federal

acts. See 42 U.S.C. § 2000e-2 (prohibiting discrimination by

employers of individuals “because of such individual’s race ”

) ; 42 U.S.C. § 3604 (b) (prohibiting discrimination in the provision of

services in connection with housing “because of race”); Tex. Ins. Code § 544.002(a) (defining unfair discrimination as

providing insurance coverage differently “because of the individual’s . . .

race”). Although Ojo has

pointed us to a wealth of federal authority holding that the FHA and Title VII

provide for disparate impact protection, the reasons supporting those holdings

extend far beyond the use of the phrase “because of race.” See, e.g. , Metro. Hous . Dev.

Corp. v. Vill . of Arlington Heights , 558

F.2d 1283, 1289 (7th Cir. 1977) (focusing on the policy goals of the FHA in

deciding on a broad interpretation of its provisions); see also Peter E.

Mahoney, The End(s) of Disparate Impact: Doctrinal Reconstruction, Fair

Housing and Lending Law, and the Antidiscrimination Principle , 47 Emory L.J. 409 , 425 (1998) (describing

the origins of the disparate impact standard under the FHA as partially

“borrowed” from the case law on Title VII, and also noting the standard’s

diverse and inconsistent application by federal courts). In determining

whether a statute provides for disparate impact protection, federal and state

courts have looked first to the language of the statute to assess whether “the

thrust of the Act [is] to the consequences of . . . practices, not simply the

motivation.” Griggs , 401 U.S. at 432 ; see also Tex. Parks &

Wildlife Dep’t. v. Dearing , 240 S.W.3d 330, 352 (Tex. App—Austin 2007, pet. denied ).

The United States Court of Appeals for the Seventh Circuit actually regarded the

phrase “because of race” as a potential obstacle to disparate impact protection

before considering the policy goals behind the FHA:

The major obstacle to concluding that action taken without discriminatory intent

can violate section 3604(a) is the phrase

“because of race” contained in the statutory provision. The narrow view of

the phrase is that a party cannot commit an act “because of race” unless he

intends to discriminate between races. . . . The broad view is that a party

commits an act “because of race” whenever the natural and foreseeable

consequence of that act is to discriminate between races, regardless of his

intent.

Vill . of Arlington Heights , 558 F.2d at 1288 ;

accord Resident Advisory Bd. v. Rizzo , 564 F.2d 126 , 146 (3d Cir.

1977) (“[W]e note that the ‘because of race’ language

might seem to suggest that a plaintiff must show some measure of discriminatory

intent.”). The Seventh Circuit declined to take a narrow view of the

“because of race” language because of the congressional mandate within the FHA

“to provide, within constitutional limitations, for fair housing throughout the

United States.” Vill . of Arlington

Heights , 558 F.2d at 1289 (quoting 42 U.S.C. § 3601 ). The

Seventh Circuit also relied on previous interpretations of the FHA, and its goal

to “promote ‘open, integrated residential housing patterns and to prevent the

increase of segregation, in ghettos, of racial groups whose lack of

opportunities the Act was designed to combat.’” Id.

(quoting Otero v. N.Y. City Hous .

Auth. , 484 F.2d 1122 , 1134

(2d Cir. 1973)). Other

federal circuit courts applying disparate impact protections under the FHA have

also relied upon this congressional mandate. 6 Numerous courts have also noted

that the need for disparate impact protection under the FHA arose from the lack

of disparate impact liability under the Fourteenth Amendment after the United

States Supreme Court’s decision in Washington v. Davis , 426 U.S. 229

(1976), and the difficulty of proving intentional discrimination. 7

In determining whether discriminatory impact liability exists within the FHA,

Title VII, and the Age Discrimination in Employment Act (ADEA), state and

federal courts have also focused on the breadth and reach of prohibitory

language, and have refused to find disparate impact liability when a statute

focuses only on the nature of an action, and not on its effects. See,

e.g. , Monson v. Rochester Athletic Club , 759 N.W.2d 60, 67 (Minn. Ct.

App. 2009) (holding that there was no disparate impact liability where “the

[state law] does not include such effects-based language”); see also

Smith , 544 U.S. at 235–36 (holding that the ADEA provides for disparate

impact liability because it not only prohibits employers’ actions that “limit,

segregate, or classify” persons, but rather, also prohibits actions that

“deprive any individual of employment opportunities or otherwise adversely

affect his status as an employee” (citing 29 U.S.C. § 623 (a)));

Dearing , 240 S.W.3d at 339 (quoting Smith , 544 U.S. at 235 ).

Both Title VII and the ADEA have been interpreted by the United States Supreme

Court to provide for disparate impact liability because they go so far as to

prohibit practices that “tend to deprive employees of opportunities.”

See Smith , 544 U.S. at 235–36 (ADEA); Griggs , 401 U.S. at

430–32 (Title VII); see also Huntington , 488 U.S. at 18 (declining to

determine whether the FHA provides for disparate impact protection, stating:

“Since appellants conceded the applicability of the disparate-impact test for

evaluating the zoning ordinance under Title VIII, we do not reach the question

whether that test is the appropriate one.”).

Sections 544.002(a) and 560.002(c )( 3) of the Texas

Insurance Code do not include the type of broad prohibitory language that gives

rise to disparate impact claims. Rather, both sections focus exclusively

on the manner in which insureds are classified; that

is, they prohibit classifications because of or based on

race. Neither statute broadens its application so as to prohibit

practices that may “otherwise adversely affect” or “tend to deprive” an insured

of an opportunity, or any other similarly expansive language, as was the case in

the federal acts at issue in Griggs and Smith . See

Smith , 544 U.S. at 235–36 (ADEA); Griggs , 401 U.S. at 430–32

(Title VII). Rather, the Texas Insurance Code authorizes actions that

classify individuals based on credit score in order to affect insurance pricing,

as long as such classifications are not based on race or because of race.

See Tex. Ins. Code §§

544.002(a), 559.051, 560.002(c )( 3). As long as

insurers use race-neutral factors in credit scoring to set insurance rates, they

do not run afoul of the Texas Insurance Code in the way an employer would run

afoul of Title VII for using race-neutral testing that adversely affects

employees of a certain race. See Griggs , 401 U.S. at 430 (“Under

[Title VII], practices, procedures or tests neutral on their face, and even

neutral in terms of intent, cannot be maintained if they operate to ‘freeze’ the

status quo of prior discriminatory employment practices.”). Because the

Texas Insurance Code expressly authorizes credit scoring, it cannot be subject

to the same breadth of interpretation applied to Title VII or the FHA simply

because it uses the phrases “because of” or “based . . . on” race. Ojo’s argument that federal interpretations of these acts

should control our interpretation of the Texas Insurance Code is unavailing in

light of the additional considerations, other than some similar language,

present in the federal case law.

C. The

Legislative History of the Insurance Code Is Inconsistent

with a Disparate Impact Theory of Liability

In addition to the express language

of the statute, courts have looked to a statute’s legislative history when

determining whether the statute gives rise to a disparate impact theory of

liability. See, e.g. , Smith , 544 U.S. at 238 (“[W]e think the history of the enactment of the ADEA . . . supports

the . . . consensus concerning disparate-impact liability.”); Gen. Bldg.

Contractors Ass’n , Inc. v. Pennsylvania , 458

U.S. 375, 389 (1982) (examining the legislative history of 42 U.S.C. § 1981 and

holding the statute did not give rise to a disparate impact claim);

Griggs , 401 U.S. at 436 (“From the sum of the legislative history

relevant in this case, the conclusion is inescapable that the [agency’s]

construction . . . comports with congressional intent.”); Dearing , 240

S.W.3d at 351 (“When ascertaining legislative intent, we may also consider . . .

the law[ ’s ] . . . history . . . .”); see also

Tex. Gov’t Code

§ 311.023(3) ( allowing courts to consider legislative history

when construing statutes). We also look to

legislative history in this instance because the declared policy of the MFA is

to ensure that state legislatures are able to regulate the business of insurance

without unintended federal interference. 8

The legislative history of the credit scoring bill and the arguments of its

opponents indicates that the Texas Legislature was

aware of the possibility of a disparate impact on racial minorities, yet did not

expressly provide for a disparate impact claim as it did in the Texas Labor

Code. Despite its longstanding prohibition

of unfair discrimination, the Legislature first expressly authorized the use of

credit scoring in setting insurance rates in 2003. Act of June 2,

2003, 78th Leg., R.S., ch . 206, § 3.01, 2003 Tex.

Gen. Laws 916 , 916–21, repealed by Act of May 24, 2005, 79th Leg., R.S.,

ch . 728, § 11.020(b), 2005 Tex. Gen. Laws 2188 ,

2217 ( recodifying the relevant credit scoring sections

of the Insurance Code into Tex. Ins.

Code chapter 559) (originally codified at Tex. Ins. Code Ann . art. 21.49-2U, § 7(a) (West Supp.

2003)) . Opponents of the credit scoring bill admonished:

The state

should ban the practice of credit scoring altogether. Tornadoes do not

strike homeowners on the basis of their credit scores, and no independent

studies have proven any statistical relationship between a consumer’s credit

history and his or her ability to drive or maintain an automobile. . . .

Credit scoring is discriminatory, especially against women, minorities,

low-income consumers, and consumers who conduct all of their personal business

on a cash basis.

House Research Org., Bill Analysis, Tex. S.B. 14, 78th

Leg., R.S., 20 (May 21, 2003). Despite those concerns, the

Legislature decided to authorize credit scoring in pricing insurance, but

addressed some of the concerns with certain statutory restrictions. In addition to prohibiting the use of “factors that constitute

unfair discrimination,” Tex. Ins. Code Ann . art. 21.49-2U, § 7(a) (West Supp. 2003) (current version at Tex. Ins. Code § 559.051), the Legislature

prohibited insurers from denying, cancelling, or refusing to renew a policy

“solely on the basis of credit information,” as well as from denying coverage

solely because the consumer does not have a credit card account. Id. § 3(a) (current version at

Tex. Ins. Code § 559.052). Also,

certain information could not be used as a negative factor in an insurer’s

scoring methodology, such as a collection account with a medical industry

code. Id. § 4(a )( 3) (current version at

Tex. Ins. Code § 559.101). However,

even with these restrictions, the Legislature included no language expressly

providing for a cause of action based on disparate impact.

The Legislature also directed the Commissioner of the Texas Department of

Insurance (TDI) to conduct a study and submit a report to state officials and

the 79th Legislature before January 1, 2005, containing, among other

things:

•

a summary statement regarding the use of credit

information, credit reports, and credit scores by insurers . . . ;

•

any disproportionate impact on any

class of individuals, including classes based on income, race, or ethnicity

. . . ; and

•

recommendations from the department to

the [L] egislature regarding the use of credit

information by insurers.

Act of June 2,

2003, 78th Leg., R.S., ch . 201, § 3.01, sec.

15(a), (b)(1), (b)(5)–(6), 2003 Tex. Gen. Laws 916 , 920–21 (expired Mar. 1,

2005) (emphasis added) (previously located at Tex. Ins. Code Ann. art. 21.49-2U, § 15 (West Supp. 2003)). Insurance

Commissioner Jose Montemayor completed this credit

scoring study and submitted his findings in December 2004, stating in part:

Similar to

other published studies , 9 there appears to be a strong relationship

between credit score and insurance risk (or loss). . . . [With regards to

auto insurance,] as credit scores improve, the frequency decreases, i.e. people

have fewer accidents or claims.

Tex. Dep’t of Ins., Report to the 79th

Legislature: Use of Credit Information by Insurers in Texas 18–20 (Dec.

2004), http://www.tdi.state.tx.us/reports/documents/creditrpt04.pdf. These

findings were supplemented with a report to the Legislature, which explained

that under a multivariate analysis:

For both

personal auto liability and homeowners, credit score was related to claim

experience even after considering other commonly used rating variables. . .

. For both personal auto liability and homeowners, the difference in

claims experience by credit score was substantial. Typically, the claim

experience for the 10 percent of policyholders with the worst credit scores was

1.5 to 2 times greater than that of the 10 percent of policyholders with the

best credit scores. The magnitude of the variation noted in the earlier

report remains unchanged even after considering other commonly used rating

variables.

Tex. Dep’t of Ins., Supplemental Report to the

79th Legislature: Use of Credit Information by Insurers in Texas: The

Multivariate Analysis 6 (Jan. 2005),

http://www.tdi.state.tx.us/reports/documents/credit05sup.pdf.

In a letter accompanying the report, Commissioner Montemayor explained that while disparate impacts result

from the use of credit scoring, he was without authority to ban or regulate the

use of credit scoring that produces disparate impacts as long as it is

actuarially sound and not intentionally discriminatory. 1 0 Commissioner Montemayor stated that “credit scoring, if continued, is not

unfairly discriminatory as defined in current law because credit scoring is not

based on race, nor is it a precise indicator of one’s race.” Letter from Jose Montemayor to the 79th Texas Legislature (J an . 31, 2005) ( accompanying Tex. Dep’t of Ins., Supplemental

Report to the 79th Legislature: Use of Credit Information by Insurers in Texas:

The Multivariate Analysis (Jan. 2005),

http://www.tdi.state.tx.us/reports/documents/credit05sup.pdf).

In addition, Commissioner Montemayor stated that the

use of credit scoring in pricing insurance inevitably carried the risk of

disproportionate impacts just as any risk-based assessment would, and that to

discontinue insurers’ assessment of risk factors would effectively homogenize

the risk and essentially charge everyone the same insurance rate, something that

would “be a set-back to all Texans, of all races, especially those of moderate

to lower income whose risk remains low.” Id.

“Even when a statute is not ambiguous on its face, we can consider other factors

to determine the Legislature’s intent, including . . . administrative

construction of the statute . . . .” Helena Chem. Co. v. Wilkins ,

47 S.W.3d 486, 493 (Tex. 2001) (citing Tex. Gov’t Code § 311.023). We cite the

Commissioner Montemayor’s letter and report here,

however, more for evidence of the Texas Legislature’s awareness of potential

disparate impacts, and to show that the Legislature, knowing this, still chose

not to expressly provide for disparate impact protection as it did in the Labor

Code. The Texas Legislature expressly directed the Commissioner to analyze

the effects of credit scoring in insurance pricing and report back during the

next legislative session. It was during this subsequent session that the

Legislature re-codified various portions of the Insurance Code, including the sections on credit scoring now codified

at Texas Insurance Code chapter 559, and made no relevant changes to the Code,

despite the Commissioner’s warnings of the potential for disparate

impacts. In fact, two bills banning credit scoring (H.B. 23 and S.B. 167),

which were introduced by members of the 79th Legislature before the submission

of Commissioner Montemayor’s January 2005 report, died

in committee after the report was submitted. See Tex. H.B. 23, 79th

Leg., R.S. (2005); Tex. S.B. 167, 79th Leg., R.S. (2005).

Given the Legislature’s and the Insurance

Commissioner’s awareness of the potential for disparate impacts, and the

Legislature’s decision to not enact any express prohibition of disparate impact

discrimination in the Insurance Code, we can only conclude that the Legislature

did not intend to create a cause of action for disparate impact discrimination

in insurance pricing based on credit scoring.

IV. The Texas Fair Housing Act (TFHA) Does Not Change Our

Conclusion

Regarding the Lack

of Disparate Impact Liability in the Texas Insurance Code

The certified question also asks us to consider other provisions of Texas law

that may provide for disparate impact protection. Ojo argues that the Texas Fair Housing Act (TFHA) should

provide such protection because the FHA, which the TFHA was intended to mirror,

provides for disparate impact liability in the provision of housing.

See Tex. Prop.

Code § 301.002(3) (“The purposes of this chapter are to provide rights

and remedies substantially equivalent to those granted under federal law .”). Federal courts have interpreted the FHA

to apply to the provision of homeowner’s insurance. See, e.g. , Am. Family Mut . Ins. Co. , 978 F.2d

at 299 . Ojo is correct that Texas courts

will generally construe Texas statutes implementing federal rights consistently

with federal case law. See, e.g. , Quantum Chem. Corp. , 47

S.W.3d at 476 (holding that the Texas Commission on Human Rights Act (TCHRA) was

enacted to implement the policies of Title VII, and thus federal case law

interpreting Title VII guides this Court’s reading of the TCHRA). However,

the TFHA contains a “carve-out” provision, which provides that provisions of the

TFHA “ do[ ] not affect a requirement of

nondiscrimination in any other state or federal law.” Tex. Prop. Code

§ 301.044(b). In

addition, Ojo cannot direct us to, and indeed there is

very little, federal authority confirming the existence of disparate impact

liability even under the FHA in the field of insurance. See,

e.g. , Saunders v. Farmers Ins. Exch. , 537 F.3d 961, 964 (8th

Cir. 2008) (“Applying [HUD] standards, we have recognized a disparate impact

[FHA] claim against private actors in another context. But at least with

respect to insurers, the question is not free from doubt. However, the

Insurers have not raised the issue and therefore we assume, without deciding,

that private insurers may be liable under the [FHA] on a disparate impact

theory.” ( internal citations omitted)); Dehoyos v. Allstate Corp. , 345 F.3d 290 , 299

n.7 (5th Cir. 2003) (“We . . . decline to differentiate claims of disparate

impact and claims of intentional discrimination at this preliminary stage of

litigation”); Nationwide Mut . Ins. Co. v.

Cisneros , 52 F.3d 1351, 1362 (6th Cir. 1995) (stating that “HUD has never

applied a disparate impact analysis to insurers”); Allstate Fair Hous . Opportunities of Nw. Ohio v. Am.

Family Mut . Ins. Co. , 684 F. Supp. 2d 964 ,

967–70 (N.D. Ohio 2010) (holding that plaintiffs failed to make a prima

facie case of disparate impact discrimination regarding the use of a specific

valuation method as an underwriting criterion). Because the relevant

provisions of the Texas Insurance Code are more recent and specific regarding

discriminatory liability in the field of insurance, and because we have

determined that the Insurance Code does not provide for disparate impact

liability, we conclude that Ojo’s argument that Texas

provides for disparate impact liability in the field of insurance under the TFHA

lacks merit.

V.

Conclusion

The Texas Insurance Code is void of any language creating a cause of action for

a racially disparate impact. The Texas Legislature has demonstrated that

it is well aware of how to create a cause of action for disparate impact in

other contexts, but it has chosen not to do so in the field of insurance.

When dealing with issues of policy, this Court has consistently deferred to the

judgment of the Legislature, and has not created causes of action where the

Legislature did not clearly express a desire to do so. See Edgewood

Indep . Sch. Dist. v. Meno , 917 S.W.2d 717, 726 (Tex. 1995)

(recognizing that it is not our responsibility “to judge the wisdom of the

policy choices of the Legislature, or to impose a different policy of our own

choosing.”). The decision to either allow or prohibit the use of credit

scoring in pricing insurance that creates disparate impacts properly rests with

the Legislature, and we leave to the Legislature’s judgment the question of

whether to expressly create a cause of action for disparate impact in the field

of insurance, as it expressly created within the Texas Labor Code. See

Tex. Labor

Code § 21.122(a )( 1) (defining the burden of proof in asserting a

cause of action for discrimination based on disparate impact). Allowing a

claim against Texas insurers for using completely race-neutral factors in credit

scoring would frustrate the regulatory policy of Texas that the MFA is meant to

protect, which is the continued regulation of the field of insurance by the

states without unintentional congressional intrusion. See 15 U.S.C.

§§ 1011 (“[T]he continued regulation and taxation by the several States of the

business of insurance is in the public interest . . . .”), 1012(b) (“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 . . . .”). Therefore, we answer

the certified question by holding that Texas law does not prohibit an insurer

from using race-neutral factors in credit-scoring to price insurance, even if

doing so creates a racially disparate impact.

______________________________

Paul W. Green

Justice

OPINION DELIVERED: May 27,

2011

1

The McCarran-Ferguson Act (MFA) allows state

insurance law to “reverse-preempt” federal law that does not directly relate to

insurance. See 15 U.S.C. § 1012 (b); Ojo v. Farmers Group, Inc. , 600 F.3d 1201,

1203 (9th Cir. 2010) (en banc) (per curiam ).

2

See Metro. Hous . Dev.

Corp. v. Vill . of Arlington Heights , 558

F.2d 1283 , 1293–94 (7th Cir. 1977) (recognizing that a village’s refusal to

rezone plaintiffs’ property to accommodate federally financed low-cost housing

had the potential to effect a strong discriminatory impact capable of violating

the federal FHA); United States v. City of Black Jack , 508 F.2d 1179,

1184 (8th Cir. 1974) (“Title VIII [the FHA] is designed to prohibit all forms of

discrimination, sophisticated as well as simple-minded.” ( internal quotation marks omitted)); cf. Pfaff v. U.S.

Dep’t of Hous . and Urban Dev. , 88 F.3d 739 , 747–50

(9th Cir. 1996) (holding that the Department of Housing and Urban Development

(HUD) failed to establish a prima facie case against a private landlord that a

facially neutral, numerical occupancy restriction illegally discriminated

against families with children, and admonishing HUD for alleging such

restrictions were discriminatory); Simms v. First Gibraltar Bank , 83 F.3d

1546 , 1555–56 (5th Cir. 1996) (holding that a jury verdict awarding damages for

disparate impact discrimination under the federal FHA was not supported by

sufficient evidence when the plaintiff identified only a bank’s rejection of his

loan application, rather than a specific bank policy or practice, as having

adverse, discriminatory effects on minorities). But

see Town of Huntington v. Huntington Branch, NAACP , 488 U.S. 15, 16 (1988)

(per curiam ) (refusing to address whether a town’s

refusal to rezone violated the federal FHA and provided a cause of action based

on disparate impact).

3

We note the conundrum this creates: without

reverse-preemption of the federal FHA by Texas law, Ojo would have a disparate impact cause of action for

insurance pricing under the federal FHA, and yet, reverse-preemption is

only at issue if the federal FHA does not “specifically relate[] to the business

of insurance.” 15 U.S.C. § 1012 (b).

However, this is not an issue the certified question requires us to

resolve. We instead focus our attention on whether Texas law provides for

a disparate impact cause of action for insurance pricing based on credit

scoring.

4

The Texas Government Code also prohibits fire

departments from administering tests that disparately impact “any group defined

by race.” Tex. Gov’t Code §

419.103. These tests must also comply with Chapter 21

of the Labor Code, which occurs when “the disparate impact on a group is the

result of a bona fide occupational qualification.” Id. §

419.103(b).

5

See

Harris County Hosp. Dist. v. Tomball Reg’l Hosp.,

283 S.W.3d 838, 847 (Tex. 2009) (“The

judiciary’s task is not to refine legislative choices . . . . The

judiciary’s task is to interpret legislation as it is written.”); Cameron v.

Terrell & Garrett , Inc. , 618 S.W.2d 535, 540 (Tex. 1981) (“It is

a rule of statutory construction that every word of a statute must be presumed

to have been used for a purpose . . . [and] we believe every word excluded from

a statute must also be presumed to have been excluded for a purpose.”) ;

cf. Tex. Natural Res. Conservation Comm’n v.

IT-DAVY, 74 S.W.3d 849, 854 (Tex. 2002) (similarly holding that in the realm

of statutory waiver of sovereign immunity, it is the Texas Legislature’s task to

“weigh the conflicting public policies” in enacting statutes providing for such

waiver).

6

See, e.g. , Rizzo , 564

F.2d at 147 (noting that “[a] lthough the legislative

history of Title VIII [the FHA] is somewhat sketchy, the stated congressional

purpose demands a generous construction of Title VIII”); City of Black

Jack , 508 F.2d at 1184 (recognizing that the FHA was “passed pursuant to the

congressional power under the Thirteenth Amendment to eliminate the badges and

incidents of slavery,” and noting that the United States Supreme Court has

treated the entire Civil Rights Act of 1866, another act passed under the power

of the Thirteenth Amendment, broadly (citing Jones v. Mayer Co. , 392 U.S.

409 , 442–43 (1968) (“[W]hen racial discrimination herds men into ghettos and

makes their ability to buy property turn on the color of their skin, then it too

is a relic of slavery.”))).

7

See, e.g. , Rizzo , 564 F.2d at

146 (“Given the increased burden of proof which Washington v. Davis and

Arlington Heights now place upon equal protection claimants, we suspect

that Title VIII will undoubtedly appear as a more attractive route to

nondiscriminatory housing, as litigants become increasingly aware that Title

VIII rights may be enforced even without direct evidence of discriminatory

intent.”); Vill . of Arlington

Heights , 558 F.2d at 1290 (“[A] requirement that the plaintiff

prove discriminatory intent . . . is often a burden that is impossible to

satisfy.”); City of Black Jack , 508 F.2d at 1185 (“Effect,

and not motivation, is the touchstone, in part because clever men may easily

conceal their motivations . . . .”); see also Peter E. Mahoney, The End(s) of Disparate Impact:

Doctrinal Reconstruction, Fair Housing and Lending Law, and the

Antidiscrimination Principle , 47 Emory L.J. 409 , 425–26 (1998)

(noting that many federal courts in the years after enactment of the FHA

“aggressively expand[ ed ] the scope and application of

equal protection analysis to a host of local governmental activities” because of

the “difficulty of proving an overt intent to discriminate,” which led to a

similar expansion of the protection afforded by the FHA).

8

See 15 U.S.C. § 1011 (“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.”); W. & S.

Life Ins. Co. v. State Bd. of Equalization of Cal. , 451 U.S. 648, 654 (1981)

(stating that Congress passed the MFA “believing that the business of insurance

is ‘a local matter, to be subject to and regulated by the laws of the several

States’” (citing H.R. Rep. No. 143, at 2 (1945))); In re Title Ins.

Antitrust Cases , 702 F. Supp. 2d 840, 871 (N.D. Ohio 2010) (“Indeed, it

would seem that this type of activity [setting insurance rates] is precisely the

kind that the McCarran-Ferguson Act meant to leave to the state legislatures to

regulate.”).

9

In 2003, EPIC Actuaries, LLC published a study

reviewing more than 2.7 million auto insurance policies and found that an

insured’s credit-based insurance score is directly connected to the insured’s

likelihood of filing a claim, and that credit scoring measures risk not

previously measured by other rating factors and is among the top predictors of

risk. See Michael J. Miller & Richard A. Smith, The Relationship of Credit-Based Insurance

Scores to Private Passenger Automobile Insurance Loss Propensity (June

2003),

http://www.ask-epic.com/Publications/Relationship%20of%20Credit%20Scores_062003.pdf.

10 The letter

specifically stated:

Disproportionate impact is a lack of symmetry, or

unequal percentages. In other words, disproportionate impact is an uneven

distribution of each racial group with a given risk factor, although the uneven

distribution is not caused by one’s race. . . . By the

nature of risk-based pricing and underwriting, all factors used in insurance

have a disproportionate impact to some extent. One could make a convincing

argument to ban the use of all risk-related factors based solely on

disproportionate impact. Effectively, we would ban risk-based pricing and

underwriting and revert to a pricing system where we homogenize the risk and

essentially charge everyone the same price—regardless of risk. That would

be a set-back to all Texans, of all races, especially those of moderate to lower

income whose risk remains low.

As Commissioner, I have the authority to end a practice

that is either unfairly or intentionally discriminatory. However, I do not

have a legal basis to ban a practice that has a disproportionate impact if it

produces an actuarially supported result and is not unfairly or intentionally

discriminatory. Prior to the study, my initial suspicions were that while

there may be a correlation to risk, credit scoring’s value in pricing and

underwriting risk was superficial, supported by the strength of other risk

variables. Hence, there would be evidence that credit scoring was a

coincidental variable that served as a surrogate for an unlawful factor in

rating and underwriting. If this were proven to have been the case, I

would have had a legal basis to make the connection between disproportionate

impact and intentional discrimination, and . . . ban credit scoring outright . . .

.

The study, however, did not support those initial

suspicions. Credit scoring, if continued, is not unfairly

discriminatory as defined in current law because credit scoring is not based on

race, nor is it a precise indicator of one’s race. . . .

. . . .

Allowing credit scoring to be used . . . will ensure its

link to risk under some of the strongest consumer protections in the nation,

especially for people that suffer hardship. However, if the presence of

credit scoring in insurance will only feed suspicion and divide us as Texans,

its continued use to any degree may simply not be worth it. If the

Legislature determines that credit scoring should be eliminated, then I

recommend that it be phased out over time.

Letter from Jose Montemayor to the 79th Texas Legislature (Jan. 31, 2005)

(accompanying Tex. Dep’t of Ins., Supplemental

Report to the 79th Legislature: Use of Credit Information by Insurers in Texas:

The Multivariate Analysis (Jan. 2005),

http://www.tdi.state.tx.us/reports/documents/credit05sup.pdf) (emphasis

added).