Class Action Alleging Violations of Federal Fair Housing Act (FHA) Claiming Insurer used “Undisclosed Factors” to Compute Credit Scores and, Based on those Scores, Increase Insurance Premiums of Minorities should not have been Dismissed because Class Action did not Challenge Credit Scoring Per Se and because Class Action Claims were not “Reverse-Preempted” by McCarran-Ferguson Ninth Circuit Holds
Plaintiff filed a putative class action against various Farmers Group entities alleging violations of the federal Fair Housing Act (FHA); specifically, the class action complaint alleged disparate impact race discrimination in that Farmers “used ‘a number of undisclosed factors’ to compute credit scores and price homeowners’ insurance policies.” Ojo v. Farmers Group, Inc., 565 F.3d 1175 (9th Cir. 2009) [Slip Opn., at 5700-01]. According to the class action, “Farmers charged minorities higher premiums for homeowners’ property and casualty insurance than the premiums charged to similarly situated Caucasians.” Id., at 5701. Defense attorneys moved to dismiss the class action under Rule 12(b)(1) for lack of subject matter jurisdiction and under Rule 12(b)(6) for failure to state a claim. Id. The district court granted the 12(b)(1) motion on the grounds that the class action claims were “reverse-preempted” by federal law. Id. The Ninth Circuit reversed finding two errors in the district court’s ruling: “First, the district court erroneously read [plaintiff’s] claim as challenging the practice of credit scoring per se. Second, the district court erroneously interpreted Texas state insurance law as permitting disparate impact race discrimination that results from credit scoring, thereby triggering McCarran-Ferguson reverse-preemption.” Id.
Plaintiff, an African-American resident Texas, filed suit after Farmers increased the insurance premium on his homeowner’s policy by 9% on the basis of “unfavorable credit information” revealed by Farmers’ automated credit scoring system. Ojo, at 5703. The class action complaint alleged that Farmers used various factors to target minorities for higher premiums than those charged to “similarly situated Caucasians.” Id. After discussing the McCarran-Ferguson Act which leaves the business of insurance to state law, see id., at 5704-06, and the federal Fair Housing Act (FHA) and Texas state law, see id., at 5706-08, the Ninth Circuit noted that Farmers sought to use Texas state law “as a shield against any scrutiny of its credit scoring practices,” id., at 5709. The Circuit Court rejected this attempt, explaining at page 5709 that the class action “does not challenge Farmers’ use of credit scoring per se”; rather, the class action complaint challenges only Farmers’ use of certain “undisclosed factors” as part of its credit scoring system. The Ninth Circuit agreed with plaintiff that he should have been given an opportunity to conduct discovery in an effort to learn the specific factors used by Farmers’ as part of its credit scoring system. Id.
Reviewing the district court order de novo, Ojo, at 5710, the Ninth Circuit found that the district court erred. First, the Circuit Court held that the class action does not challenge credit scoring per se, but rather “only Farmers’ use of certain ‘undisclosed factors’ in credit scoring and the disparate impact that resulted.” Id. Accordingly, the lower court erred in finding that the class action complaint “challenges the very practice of credit scoring.” Id., at 5711. Secondly, the district court erred in finding that the class action claims were reverse-preempted by McCarran-Ferguson. The Ninth Circuit explained at page 5712, “A claim is reverse-preempted by McCarran-Ferguson when a federal law of general applicability conflicts with a state law relating to the business of insurance and when applying the federal law would ‘frustrate any declared state policy or interfere with a State’s administrative regime.’… Importantly, where the state and federal ‘regulatory goals are in harmony,’ reverse-preemption is not triggered….” (Citations omitted.) Specifically, the district court erred in concluding that Texas insurance law was invalidated, impaired, or superseded by the federal FHA. Id., at 5712. This was particularly true because “Texas’s own Fair Housing Act prohibits disparate impact race discrimination.” Id., at 5714. In essence, the district court’s ruling suggested that Texas insurance law would somehow condone discrimination – an obviously absurd conclusion. Id., at 5717-18. Accordingly, the Circuit Court reversed the district court order dismissing the class action and remanded the matter with instructions to allow the class action’s FHA claim to go forward. Id., at 5722.
NOTE: The opinion was not unanimous. Judge Bea filed a dissenting opinion. See Ojo, at 5722-33. Judge Bea concluded, “It’s as simple as this: Bell Atlantic laid down the rules for class action pleading. Class action litigation is too expensive to allow a plaintiff to engage in discovery unless and until the plaintiff can at least in good faith allege the defendant has done something prohibited by law.” Id., at 5733. Because he believed plaintiff had not done so, he would have affirmed the district court.