Opinion ID: 1211200
Heading Depth: 2
Heading Rank: 2

Heading: The District Court Erred in Dismissing Ojo's Claim Based on McCarran-Ferguson Reverse-Preemption

Text: 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. Humana, 525 U.S. at 310, 119 S.Ct. 710. Importantly, where the state and federal regulatory goals are in harmony, reverse-preemption is not triggered. Dehoyos, 345 F.3d at 299. The district court properly concluded that the first two prongs of the McCarran-Ferguson framework were satisfied: (1) the federal FHA is a law of general applicability; and (2) both the Texas Insurance Code and Texas's subsequent 2003 credit scoring law were enacted specifically to regulate insurance. As to the third prong, however, we hold that the district court erred in concluding that the federal FHA would invalidate, impair, or supersede Texas's state insurance law. We review whether the district court was correct in concluding that Ojo's federal FHA claim impairs Texas state law. As the district court stated, [t]he question thus becomes whether Texas's [2003 credit scoring law]`requires or authorizes' insurers to . . . charge different rates on the basis of credit information such that they are exempt from the general prohibition on discrimination set forth in Section 544.002 [of the Texas Insurance Code]. Ojo at . The district court recognized that the 2003 credit scoring [law] does not explicitly authorize the alleged disparate impact that results from credit scoring. Ojo at  n. 42. But based on its statutory analysis, the district court read the phrase in question,  except for factors that constitute unfair discrimination,  Tex. Ins.Code § 559.051, as prohibiting only disparate treatment based on invidious classifications, and not the use of actuarially sound credit scoring models that . . . disparately impact minorities. Id. For purposes of McCarran-Ferguson analysis, we hold that the district court erred in reading Texas insurance law as permitting disparate impact race discrimination resulting from credit scoring. In interpreting the phrase unfair discrimination, the district court applied Texas's rules of statutory construction: [w]hen a statute is ambiguous, Texas courts `must consider all laws in pari materia, meaning we are to consider all laws related to the subject of the act and the general system of legislation of which the act forms a part.' Ojo at  (citing Collins v. County of El Paso, 954 S.W.2d at 147). The district court stated, [o]ur objective is to `ascertain the consistent purpose of the [Texas] legislature in the enactment of the laws and to carry out the legislative intent by giving effect to all laws bearing on the same subject matter.' Id. `The cardinal principle of statutory construction is to save and not to destroy. It is [the court's] duty to give effect, if possible, to every clause and word of a statute, rather than to emasculate an entire section. . . .' Estate of Reynolds v. Martin, 985 F.2d 470, 473 (9th Cir.1993) (quoting United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 99 L.Ed. 615 (1955)). First, while the district court properly referred to the statutory construction principle of consider[ing] all laws, the court failed to abide by that principle. In interpreting the phrase in question, unfair discrimination, the district court failed to consider other important provisions within Texas law and its legislative history which prohibit unfair discrimination based on race. The most significant oversight was the district court's failure to consider that Texas's own Fair Housing Act prohibits disparate impact race discrimination. Tex. Prop.Code §§ 301.001 et seq. (2004) (Texas FHA). A court must consider `all laws related to the subject of the act [in question] and the general system of legislation of which the act forms a part.' Collins, 954 S.W.2d at 147 (citation omitted). Here, the act in question is Texas's 2003 credit scoring law and the subject is disparate impact race discrimination resulting from Farmers' credit scoring system. The general system of legislation of which the 2003 credit scoring law forms a part is the Texas FHA. In enacting the Texas FHA, the Texas legislature sought to provide rights and remedies substantially equivalent to those granted under federal law. [12] Tex. Prop. Code § 301.001, § 301.002(3), § 301.021(b); 24 C.F.R. § 100.70(d)(4); see also Meadowbriar Home for Children, Inc. v. Gunn, 81 F.3d 521, 531 n. 8 (5th Cir.1996). The federal FHA prohibits both disparate treatment and disparate impact race discrimination. 42 U.S.C. §§ 3604 et seq. In implementing the Texas FHA, the state adopted a regulation identical to the federal regulation that banned both intentional and disparate impact race discrimination by insurers in refusing to provide property insurance or providing such insurance differently. 40 Tex. Admin. Code § 819.124(b)(4); 24 C.F.R. § 100.70(d)(4). Considering all laws in pari materia, Collins, 954 S.W.2d at 147, we would be remiss in recognizing the Texas FHA's prohibition against disparate discrimination while condoning the district court's interpretation that Texas's credit scoring law permits the same. In failing to consider the Texas FHA, the district court erroneously concluded that the phrase unfair discrimination, read in light of Texas's general system of legislation, permits disparate impact race discrimination by insurers. The district court also failed to consider another Texas law that prohibits race-based discrimination: Texas Insurance Code article 1.02. Article 1.02(c)(3) states that an insurance rate is unfairly discriminatory if it is (i) not actuarially sound, (ii) not correlated to risk,  or  (iii) based in whole or in part on race. Tex. Ins.Code art. 1.02(c)(3) (emphasis added). The use of the disjunctive term or indicates that an insurance rate based on one factor (such as race) is unfairly discriminatory even though it may be actuarially sound and correlated to risk. Pacific-Atlantic Trading, 64 F.3d 1292, 1302 (9th Cir.1995); In re Porter, 126 S.W.3d 708, 711 (Tex. App.2004). Thus, Article 1.02(c)(3) further suggests that the district court erred in reading the phrase unfair discrimination as precluding disparate impact race discrimination. Second, in addition to failing to consider all laws in pari materia,  the district court failed to apply the cardinal principle of statutory construction: to save and not destroy. Applying that rule to the phrase except for factors that constitute unfair discrimination necessitates the conclusion that Texas insurance law prohibits all forms of unfair discrimination, and not just one. Farmers, by contrast, urges us to bifurcate the phrase into two partsdisparate treatment and disparate impact discriminationand to give meaning to one while flatly dismissing the other. [13] But we must `give effect to [a] statute as a whole, and not render it partially or entirely void.' Id. (quoting Bresgal v. Brock, 843 F.2d 1163, 1166 (9th Cir.1987)). Therefore, we understand unfair discrimination to prohibit both disparate treatment and disparate impact discrimination. Third, the district court overlooked that Texas's 2003 credit scoring laws themselves were designed to prevent discrimination. The district court stated that the Texas legislature authorized the practice of credit scoring to help `creat[e] a transparent process that would protect consumers and prevent discrimination.' Ojo at  (citing TX B. An., S.B. 14, 5/21/2003). It is difficult to imagine that a state legislature would at once seek to proscribe insurance practices that are unfairly discriminatory as to race, color, religion, ethnicity, or national origin, and explicitly seek to prevent discrimination, while permitting insurers to use a credit scoring system that results in disparate impact race discrimination. While the district court is correct that Texas's clear legislative desire [was] to authorize at least some use of credit scoring, Texas's numerous prohibitions against any type of race-based discrimination certainly do not support the conclusion that the Texas legislature intended to permit disparate impact race discrimination. Fourth, the district court erred in concluding that, because Texas law permits differences in rates . . . due solely to credit scoring so long as the differences are based on sound actuarial principles, 28 Tex. Admin. Code § 5.9941(a), an actuarially sound system can inflict disparate impact discrimination on minorities and still be lawful. Texas insurance law generally prohibits discrimination by insurers. . . . Tex. Ins.Code § 544.002. This general prohibition, read together with Texas Insurance Code's broad ban against discriminatory insurance practices, Tex. Ins.Code § 544.002d, strongly suggests that the 2003 credit scoring law was not intended to permit disparate impact discrimination on minorities. [14] The Eleventh Circuit's decision in Moore v. Liberty Nat'l Ins. Co., 267 F.3d 1209, 1222 (11th Cir.2001) is instructive. In interpreting whether McCarran-Ferguson reverse preempted insurance discrimination claims brought by African American policyholders against an insurer, the court held: We have not been directed to any relevant Alabama authority that has required, condoned, or suggested that racial distinctions in the provision of life insurance are acceptable. Indeed there is nothing in Alabama's insurance law that directs or encourages insurers to engage in such practices. . . . Moore, 267 F.3d at 1222. Similar to the Texas law at issue here, the Alabama law at issue in Moore forbade unfair discrimination between individuals that occupied the same class of risks. Id. at 1220. In an argument similar to the one that Farmers posits, the insurer in Moore argued that Alabama permitted racial discrimination so long as it was actuarially based. Id. at 1220-21. The Eleventh Circuit rejected the insurer's argument and refused to construe Alabama's scheme of insurance regulation in such a formalistic and narrow way. Id. at 1221. The Moore court concluded that, absent. . . convincing evidence that racial discrimination in the insurance context is an integral part of Alabama's regulatory scheme, no direct conflict exists between the federal FHA and Alabama state law. Id. at 1222-23. Therefore, Moore's claims were not reverse-preempted by McCarran-Ferguson. [15] Because Texas law is similarly bereft of evidence that Texas encourage[s] or condone[s] racial distinctions in the provision of . . . insurance, Moore, 267 F.3d at 1222, we hold that the federal FHA and Texas FHA are in regulatory harmony. Ojo's claim is therefore not reverse-preempted by McCarran-Ferguson. Dehoyos v. Allstate Corp., 345 F.3d 290, 293 (5th Cir.2003), further corroborates our decision. In Dehoyos, six non-Caucasian policyholders alleged that an insurance company's credit scoring system targeted minorities by placing them in more expensive policies based on credit report information. Plaintiffs brought a class action asserting violations of the federal FHA and of 42 U.S.C. §§ 1981 and 1982. Allstate moved to dismiss, citing McCarran-Ferguson reverse-preemption. The district court denied the motion to dismiss and the Fifth Circuit affirmed, holding that Allstate had failed to identify any state statute or declared policy goal of [a] state scheme that would be frustrated by application of federal laws. Id. at 299. Our case is analogous to Dehoyos. [16] Here, Farmers has not identified any declared policy goal within Texas state law that permits disparate impact race discrimination. While Dehoyos was decided at a preliminary stage of litigation during which the district court decided not to differentiate between disparate treatment and disparate impact claims, 345 F.3d at 299 n. 7, the court nonetheless rejected the insurer's claim that disparate impact claims are particularly likely to impair state [insurance] law. [17] Id. Lastly, we note the importance of a case decided after the district court decided Ojo. In Lumpkin v. Farmers Group, Inc., No. 05-cv-02868-SHM (W.D. Tenn. April 16, 2007, reconsideration denied July 6, 2007), a case involving an almost-identical set of facts as those before us, the district court held that Tennessee state insurance lawwhich is almost identical to Texas insurance lawcreated no distinction between intentional and disparate impact discrimination. On that basis, the Lumpkin district court denied the insurer's motion to dismiss based on McCarran-Ferguson reverse-preemption. Lumpkin, an African-American plaintiff, on behalf of herself and all others similarly situated, brought a class action against Farmers alleging disparate impact race discrimination in the issuance and pricing of homeowners' insurance policies, in violation of the federal Fair Housing Act. In a claim almost identical to Ojo's, Lumpkin alleged that Farmers' credit scoring system resulted in disparately high premiums charged to racial minorities than those afforded to similarly situated Caucasians. Lumpkin, Order Denying Def.'s Motion to Dismiss (Order Denying MTD) at 3. Farmers moved to dismiss on the grounds that McCarran-Ferguson barred Lumpkin's claim because Tennessee law prohibited disparate treatment discrimination, but not disparate impact. Id. For purposes of the McCarran-Ferguson analysis, we note that Tennessee insurance law is almost identical to its Texas counterpart. [18] In pertinent part, Tennessee prohibits insurers from using an insurance score that is calculated using . . . [an] ethnic group as a negative factor in any insurance scoring methodology. Id. at 13. Similarly, Texas prevents an insurer from calculating a credit score using factors that constitute unfair discrimination, Tex. Ins.Code § 559.151, and prevents an insurer from us[ing] a credit score that is computed using factors that constitute unfair discrimination. Tex. Ins.Code § 559.052. In denying Farmers' motion to dismiss, Lumpkin expressly rejected Farmers' reading of Tennessee lawthe same reading that Farmers' urges us to adopt here. Lumpkin, Order Denying Mot. for Recons. at 16. There, the phrase that required interpretation was unfairly discriminatory. Id. Just as the district court did here, Lumpkin looked to other provisions of state law to interpret whether unfairly discriminatory permitted disparate impact race discrimination. The Lumpkin court concluded that Farmers fail[ed] to show how Tennessee . . . permits disparate impact in insurance rates between Caucasians and non-Caucasians. Id. at 17. The Lumpkin court went on to explain that a distinction between intentional discrimination and disparate impact [discrimination] . . . has not been recognized in controlling case law and is not mandated by Tennessee insurance law. Id. at 10. Significantly, the district court also stated that, [e]ven if such a distinction were acknowledged by courts, careful scrutiny of the Tennessee insurance law scheme indicates that Defendants' motion to dismiss should have been denied because Tennessee insurance law does not create such a distinction. Id. (emphasis added). The Lumpkin court criticized Farmers for reading the phrase unfairly discriminatory too broadly to permit disparate impact as long as the rates are actuarially sound. Id. It stated that the goals of federal and Tennessee law are the same, preventing impermissible racial and ethnic discrimination, and that the two bodies of law can be applied in harmony to effect that purpose. Order Denying MTD at 14. Lumpkin is indistinguishable from the case here: the goals of the federal FHA and Texas FHA, including the 2003 credit scoring law, are to prevent unlawful discrimination based on race, regardless of whether the discrimination involves disparate treatment or disparate impact.