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Joe Biden: Not Just President but Super-Superintendent of Insurance?

In addition to dramatically changing the policies of former President Trump on the pandemic, the economy, immigration, and other key issues, the Biden Administration is likely to substantially increase the federal government’s oversight of the insurance industry in at least two ways. First, by regulating non-bank companies that own insurers, and, second, through HUD, scrutinizing homeowners insurers for discriminatory underwriting, rating, and claims practices.

A.      The Federal Reserve May Again Supervise Non-Bank Companies Which Own Insurers

The federal Financial Stability Oversight Council, under the leadership of Treasury Secretary Yellen, will probably revive the Obama Administration view that large financial firms that own operating insurance companies are fit candidates for designation as “systemically important financial institutions,” whose solvency will ultimately be regulated by the Federal Reserve. Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act created the Council, and authorized it to make such designations, even though insurers themselves would remain subject to state regulation. The Council is comprised of key federal financial officials, such as the Chairman of the Federal Reserve Board of Governors, the head of the Securities and Exchange Commission, the Comptroller of the Currency, and the head of the Commodities Futures Trading Commission, with one member with insurance expertise. The head of the Federal Insurance Office is a non-voting member, as is one current state insurance regulator designated by the NAIC.

Beginning in 2012, AIG, and then Prudential, were designated as “systemically important financial institutions” (over the objection of the insurance expert in Prudential’s case). In 2014, MetLife was also so designated (again over the objection of the Council’s expert on insurance). In 2016, the federal District Court for the District of Columbia granted MetLife’s motion for summary judgment, holding that the Council had acted arbitrarily in designating MetLife without reasonably rigorous analysis. MetLife Inc. v. Financial Stability Oversight Council, 177 F. Supp. 3d 219 (D.D.C. 2016) (Collyer, J.). The Council appealed the decision.

The Trump Administration abandoned the Government’s appeal in Metlife Inc., and MetLife was formally de-designated in 2017. The other two designees who owned insurers were also subsequently de-designated.

Today, the Biden Administration’s financial regulatory agencies are stocked with Obama-era officials, such as Gary Gensler (nominated to be the SEC head), and Secretary Yellen herself (whom President Obama chose to be the Federal Reserve Chairman), both of whom had approved some of those prior designations. So one should not be surprised if large financial companies whose holdings include operating insurers are again under the Council’s scrutiny for Federal Reserve oversight. Hopefully, if any designations occur like those involving MetLife and Prudential, officials will heed Judge Collyer’s thoughtful opinion dissecting the flaws in the Council’s designation of MetLife, and any disputes between the Federal Reserve and state insurance regulators over the financial health of insurer subsidiaries will be resolved without harmful friction.

B.        Homeowners Insurance Companies Should Prepare for Greater HUD Oversight

By an Executive Order issued on January 26, 2021, President Biden has essentially directed the Department of Housing and Urban Development (HUD) to re-promulgate a 2013 regulation, which stated that homeowners insurance companies could be found to have violated Title VIII of the Civil Rights Act if their underwriting, rating, and claims-paying practices effected a “disparate impact” on classes of persons protected by the Act. See Implementation of the Fair Housing Act’s Discriminatory Effects Standard, 24 C.F.R. § 100.500. Under the Obama Administration, HUD expressly refused to categorically exempt state-regulated insurers from the scope of the regulation, notwithstanding the McCarran-Ferguson Act’s grant of authority to states to regulate the business of insurance unless the U.S. Congress has specifically legislated otherwise. Instead, the 2013 HUD regulation imposed a burden-shifting procedure under which a defendant insurer could argue that the challenged practice was actually mandated by state insurance regulation to achieve a legitimate, substantial, and nondiscriminatory interest, and, crucially, that this interest could not be served by a practice with a less discriminatory effect. In 2016, HUD reiterated its opposition to categorically exempting the insurance industry from the 2013 regulation. See 81 Fed. Reg. 69012 (10/05/16). Both the Property Casualty Insurance Association and the American Insurance Association brought separate suits to invalidate the 2013 HUD regulation insofar as it purported to apply to state-regulated insurers, and the PCIA obtained partial summary judgment. Property Cas. Insurers Ass’n of America v. Donovan, 66 F. Supp. 3d 1018, 1046–54 (N.D. Ill. 2014); Am. Ins. Ass’n v. HUD, No. 14-5321, 2015 U.S. App. LEXIS 16894 (D.C. Cir. Sep. 23, 2015), vacating, 74 F. Supp. 3d 30 (D.D.C. 2014).

Before the Associations’ respective suits were finally decided, however, the U.S. Supreme Court decided a non-insurance case in 2015 that involved disproportionate allocation of tax credits for low-income housing. The Court allowed certain well-pleaded “disparate impact” claims to be litigated under Title VIII, provided that the plaintiffs could plead and prove robust causality between the challenged practice and the allegedly discriminatory effect, and did not rely solely on statistical discrepancies. Tex. Dep’t of Housing & Cmty. Affairs, et al. v. The Inclusive Communities Project, Inc., et al., 135 S. Ct. 2507 (2015).

The Supreme Court decision resulted in the HUD regulation remaining on the books and nominally applicable to insurers, although the Trump Administration made no attempt to actually enforce the HUD regulation against insurers. In September 2020, the Trump Administration formally revised the HUD regulation and, as to insurance specifically, adopted the McCarran-Ferguson principle, stating that HUD would not apply the regulation in such a way as to impair, invalidate, or supersede any state law regulating the business of insurance. See 85 Fed. Reg. 60288 (Sep. 24, 2020). The day before the revised HUD regulation was to become effective, however, the federal District Court of Massachusetts stayed its effectiveness in a suit brought by two Massachusetts fair housing organizations, which attacked the revised regulation as inconsistent with both Title VIII and the 2015 Supreme Court decision. Mass. Fair Hous. Ctr. Inc. v. HUD, No. 1:20-cv-11765 (D. Mass.).

As one example of how a revived 2013 HUD regulation could affect homeowners insurers, the use of credit scoring as a valid underwriting tool, if expressly allowed under state law, might still be considered illegal under Title VIII, contrary to the decisions of both the Ninth Circuit and the Texas Supreme Court in Ojo v. Farmers Ins. Group, 600 F.3d 1205 (9th Cir. 2010) (certifying state law question to Texas Supreme Court); 356 S.W. 421 (Tex. Sup. Ct. 2011) (on certified question, court held that Texas law expressly allows use of credit scoring in underwriting homeowners’ coverage even if disparate impact results, so long as insurer does not engage in intentional racial discrimination).

On the other hand, in some instances, using underwriting and rating factors, such as educational attainment, that are illegal under state law for effecting unfair discrimination, could also be barred under Title VIII with no conflict between state and federal law. For example, the New York Department of Financial Services has barred auto insurance companies from using educational level or occupational status as a rating factor to effect unfair discrimination, even if the discrimination was not intentional. See 11 N.Y.C. R.R. Part 154.6 (“The insurers’ consideration of these factors has resulted in cases where classes of insureds have been placed in less favorably rated tiers, which may lead to higher premiums, without adequate substantiation that an individual’s level of education attained and/or occupational status relates to his or her driving ability or habits such that the insurer would suffer a greater risk of loss.”). A homeowners insurance company that, hypothetically, invariably charged college graduates in New York lower rates than high school dropouts may well be found to have violated both Article 23 of the New York Insurance Law and, under a resurrected HUD regulation, Title VIII of the Civil Rights Act.

Clearly, HUD under the Biden Administration will take a much more proactive approach to housing discrimination than its predecessor administration, which is likely to involve federal scrutiny of the operations of state-regulated insurance companies. We will continue to monitor and report to you pertinent developments in this regard.

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