# Opinion

> Texas Supreme Court · May 27, 2011

URL: https://www.frixlaw.com/law-library/cases/2829342

## Case

- **Full name:** Patrick O. Ojo, on Behalf of Himself and All Others Similarly Situated v. Farmers Group, Inc., Fire Underwriters Association, Fire Insurance Exchange, Farmers Underwriters Association, and Farmers Insurance Exchange
- **Court:** Texas Supreme Court
- **Decided:** May 27, 2011
- **Precedential status:** Published
- **Opinion:** Opinion
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2829342

## How later opinions describe it (automated extraction)

- 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
- holding that the Department of Housing and Urban Development (HUD
- 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
- holding that there was no disparate impact liability where “the [state law] does not include such effects-based language”

## Opinion text

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).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2829342. Public record. Not legal advice.