SARA K. PRATT
Director of Investigations, FHEO
Department of Housing and Urban Develeopment
Sept. 12, 1997
(This is the full text from Sarah
Pratt's Sept. 12, 1997, presentation at the John Marshall Law School's conference on mortgage
discrimination and insurance redlining. Special thanks to people at John Marshall for
supplying this to us.)
I would like to thank the John Marshall Law School for extending to me the invitation to
speak at this notable event. I have the highest regard for its program, and for its
training activities, and I am grateful for the opportunity to address this audience today.
I would also like to thank Galen Martin and Gregory Squires, who both got me thinking
about insurance discrimination years ago, & whose writing and thinking about this
subject has informed me through the years.
When we talk about the history of insurance
redlining, we must start by recognizing the effect that racial segregation has had on our
communities historically, because it is only with an understanding of that history that we
can understand the ways in which we have seen redlining issues develop over the years.
Racial segregation in residential areas was, and still is in many communities, a reality.
Whether segregated housing persists de facto, de jure or by choice, racially segregated
housing patterns weaken our communities when they result in limited or denied
opportunities for rehabilitated housing, new construction of housing or the opportunity
for loans to purchase or rehabilitate housing.
The importance of the availability of insurance on non-discriminatory bases to our
communities should not be underestimated. In 1968, twenty eight years ago, the President's
National Advisory Panel an Insurance in Riot Affected Areas said, "Insurance is
essential to revitalize our cities .... without insurance, banks and other financial
institutions will not--and cannot--make loans.... new housing cannot be repaired ...
efforts to rebuild our nation's inner cities cannot move forward. Communities without
insurance are communities without hope."
As a federal district court wrote in 1984, "it is elementary that without
insurance, mortgage financing will be unavailable because a mortgage lender simply will
not lend money on the property. Without mortgage financing, homes cannot be purchased.
Thus, the availability of insurance and ability to purchase a home go hand in hand and
vary, in direct proportion, to one another." McDiarmid v. Economy Fire and Casualty
Co., 604 F. Supp. 105 (S.D. Ohio 1984).
Even when old patterns of racial segregation and race-based decision making have begun
to break down, community infrastructure, and perhaps more importantly, community
perceptions, may not have changed sufficiently to change old patterns of doing business.
When subjective judgments, old stereotypes, or even the past practices of years are not
consciously reassessed and changed where necessary old patterns of conduct may not change.
The result may be insurance practices which violate the Fair Housing Act. At the same
time, we all must recognize that not every practice, not every decision to deny insurance
or offer it on different terms, constitutes a violation of the law.
The term insurance redlining, describes the practice or policy of refusing to write an
insurance product or varying the terms of an insurance product because of the geographical
location of the property and because of the racial or ethnic composition of the area.2 Insurance redlining is one manifestation of
discrimination in the provision of housing related insurance. There are also more general
forms of discrimination in housing-related insurance, including the unequal treatment in
the provision or terms of insurance, based on race, color, religion, national origin, sex,
handicap or familial status. Both forms violate the Fair Housing Act.
Like other forms of discrimination, the history of insurance redlining began in
conscious, overt racial discrimination practiced openly and with significant community
support in communities throughout the country. There was documented overt discrimination
in practices relating to residential housing--from the appraisal manuals which established
an articulated "policy" of preferences based on race, religion and national
origin. to lending practices which only made loans available in certain parts of town or
to certain borrowers, to the decision-making process in loans and insurance which allowed
the insertion of discriminatory assessments into final decisions about either.
In the 1920s and 1930s racial and ethnic minorities were assumed to be bad risks for
insurance. Report tome asked racial and ethnic origins and the racial composition of
neighborhoods, A 1933 report indicated that basing risk decisions on whether a name
sounded ethnic or not did not eliminate the groups believed to be risk hazards and
concluded that screening based on risk should not be performed by the name, but by further
investigation into racial or ethnic backgrounds. Another report described an
investigator's work as follows: The proposed insured's name "was Ellis, a good old
English name; however ... this was an Assyrian, and his company, under no consideration,
wrote this race, so he promptly wired cancellation." There was no evidence of any
assessment based on individual characteristics of the proposed insures; mere membership in
a facial or ethnic group was sufficient for denial.3
Underwriting manuals frequently included maps with red lines drawn on them to indicate
areas occupied by racial or ethnic minorities where policies should not be written, should
not be sought or should only be written after some type of special review or with
As recently as 1962, a Manhattan based insurance company was alleged to have used maps
in which large areas of various New York boroughs were shaded in with a red crayon.4
The Fair Housing Act was passed in April 1968 in the wake of the assassination of Dr.
Martin Luther King. The Act prohibited a variety of forms of housing discrimination,
including the general catch-all phrase, to "otherwise make unavailable or deny, a
dwelling to any person" based on race, color, religion or national origin. The
"make unavailable" language was broadly construed to apply to mortgage
redlining, exclusionary and discriminatory zoning practices and discriminatory terms in
appraisals. In the somewhat sketchy legislative history of the passage of the Act,
Congress emphasized that the Act was designed to curb racially segregated housing
patterns, including the elimination of racially discriminatory business practices which
might prevent a person economically able to do so from purchasing a house regardless of
In a 1978 memorandum, HUD's then General Counsel wrote to the then Assistant Secretary
for Equal Opportunity that "adequate insurance coverage is often a prerequisite to
obtaining financing. Insurance redlining, by denying or impeding coverage makes mortgage
money unavailable, rendering dwellings unavailable" as effectively as the denial of
financial insurance on other grounds .... " Proposed amendments to the Fair Housing
Act that same year, which were defeated, and which would have made coverage of insurance
discrimination explicit under the Act, were described as clarifying and strengthening the
then current provisions of the Act.5 HUD's
comments on the same bill confirmed that it was considered to be clarifying legislation
Also in 1978, a federal district court in Ohio held, for the first time, that the 1968
Fair Housing Act prohibited insurance redlining, and, more, that a state FAIR plan which
was designed to provide insurance when insurance was not obtainable in the normal market,
may assist in the creation of two insurance markets, the "normal market and the FAIR
insureds, who were in many states typically people of color.6
As a footnote in history. this decision, which in terms of the case itself was preliminary
only, is particularly a precursor of today's picture in looking at insurance
discrimination. It not only held that the Fair Housing Act held a special role in
prohibiting race- based insurance redlining, it also rejected a claim that federal
legislation--the McCarran Act--precluded a federal role in prohibiting insurance
redlining. The issue of whether and to what extent the now McCarran-Ferguson Act preempts
the Fair Housing Act in dealing with claims of insurance discrimination has persisted.
As did courts considering other forms of housing discrimination, the court rejected
procedural challenges to the Act's coverage and adopted a broad interpretation of the Act.
By 1884. there had been two more court decisions, a second in the southern district of
Ohio (due to a strong combination of attorneys, private fair housing groups, and
advocates, Ohio has been a particular for litigation and other challenges relating to
mortgage lending and insurance discrimination) and the Fourth Circuit decision in the
Mackey case. The Mackey Court held for the first, and only, time, that insurance redlining
cases did not fall under the Act's coverage.7
To the extent that Mackey, and another failed effort to amend the Act to explicitly
cover insurance in the mid-1980s, created confusion about the scope of the Act's coverage,
subsequent events dissolved the confusion.
As we all know by now, the Act was amended in 1988. Once again, it did not explicitly
include insurance discrimination. After the Act's amendment, however, HUD adopted
regulations that stated that "refusing to provide ... property or hazard insurance
for dwelling or providing such... insurance differently because of race..." violated
the Act. 24 CPR 100.70(d)(4). The regulation's interpretation of the Act, consistent with
years of similar interpretations, was the weighing factor when the Seventh Circuit Court
of Appeals considered a case against American Family.
At the same time, the indicators suggested that insurance discrimination was becoming
more subtle, less open, but that it existed in a variety of forms of unequal treatment.
For example, in 1986, a private fair housing group in Milwaukee, Wisconsin, conducted
tests of three large insurance companies. Using paired testers, posing as homeowners
seeking homeowners insurance, a total of 60 tests were conducted. The difference between
the testers was based on the racial composition of the neighborhood where they purported
to reside. There were significant differences in treatment based on this factor: agents
requested the names of callers from white areas 91.6% of the time, but in only 77.8% of
the cases of callers from non-white areas. Callers from white areas were asked detailed
information about their current policies in 91.7 % of the cases compared to 66.7% of the
callers from non white areas. 44.4% of the callers from white neighborhoods were offered a
minimum type of inspection: 15.8% of callers from nonwhite areas were offered that type of
inspection. A more rigorous inspection was to be required of 55.6% of the callers from
white neighborhoods but of 84.2% of the callers from non-white neighborhoods. The
indications of refusing outright to write insurance were only minimally present; it was
the terms required for pursuing insurance coverage which showed differences. While this
testing project did not cover price or type of coverage, one analyst described it as
revealing "an expressed preference on the part of these insurance agents to solicit
business in white neighborhoods and a systemic tendency to place additional barriers in
the way of homeowners in nonwhite communities..."8
By this point in the evolution of insurance discrimination issues, the formerly overt
indicators of discrimination had disappeared, at least in this study, but there were
differences in treatment. They were more subtle, but still indicated that race was a
factor in the terms and conditions of insurance. The focus appeared to be not whether the
policy would be available, at least preliminarily, but on what terms and with which
information to whom. Nonetheless, in 1988 there was still information about some insurers
which indicated that race was an overt consideration. A sales manager was quoted as saying
to an employee of the American Family insurance company that "I think you write too
many blacks ... You gotta get good, solid premium paying white people.'
This kind of statement, while the type that lawyers on one side of a case dream of and
lawyers on the other side of a case have nightmares about, is undoubtedly a vestige of old
patterns and old stereotypes about racial and ethnic minorities.
It is also still the type of statement which appears in occasional housing rental and
sales cases. Mostly unspoken these days, discrimination is more likely to occur in more
subtle ways, often unspoken, sometimes unrecognized even by the actor, by the acceptance
of outdated subjective standards and assumptions. At the same time, not all instances of
different treatment, particularly in the insurance arena, are unlawful discrimination,
even when they adversely affect people of color. or others who claim unlawful
discrimination. Consideration of risk in insurance is, and never has been, unlawful.
Application of subjective judgment, rather than of objective standards, is, in another
sense, risky business because it gives credence to a claim of discrimination and because
it may lead to the unspoken application of discriminatory principles.
But this development in the insurance area, it must be emphasized, tracks developments
in other areas where discrimination is claimed. Not all differences in treatment violate
the law, not all subjective judgments exclude on a discriminatory basis, not all criteria
which may operate to exclude or limit opportunities for a housing-related benefit violate
the law, not all actions designed to prevent risk of lose violate the law. However, where
underwriting criteria are not carefully examined, where subjective judgments are applied,
where standards for offering policies or types of coverage are not uniform, the
opportunity for discrimination is created, and may occur--just as it may in the
landlord-tenant area, or any other area covered by the Act.
Continued process challenges to jurisdiction over insurance discrimination in the Act
have continued. But in 1992, in a case brought on behalf of the NAACP in Milwaukee against
American Family, the Court of Appeals in the Seventh Circuit held that the Act does
prohibit insurance redlining and rejected a claim that the federal McCarron-Ferguson Act
required that state law prevail over the Act, because the state law was inconsistent with
the Act's language and interpretations.9
In 1995 the Sixth Circuit Court of Appeals did as well in a case involving Nationwide;
a petition for rehearing was denied, and this past January the Supreme Court denied cert.
in the Nationwide case." 10 The Sixth
Circuit, following the American Family decision, rejected all of the arguments which had
been successful in Mackey, finding that the Act's "make unavailable or deny* language
and HUD's application to that language to insurance relating to housing was reasonable and
that the McCarron-Ferguson Act did not require that state or local law preempt the Fair
Housing Act, either-as applied to HUD's regulation, the remedies available under the Act
or the potential, unestablished possibility that a disparate impact analysis would be
applied in the case. It is clear that the courts will continue to find that claimed
discrimination in the provision of housing-related insurance may violate the Fair Housing
Act; it is equally clear that some insurers will continue to resist that decision.
But I'd like to issue a call to higher ground; to a ground that I believe that everyone
in this room can agree to.
There is no place in today's society for discrimination based on any of the categories
listed in the Fair Housing Act. There is no place for consideration of race or ethnicity,
or of any other protected status, whether based on the composition of the neighborhood or
the status of the applicant or the insured.
Old assumptions about where insurance can or should be written must be examined. Old
assumptions about who is or is not a good risk must be examined with respect to objective,
and not subjective, criteria. Practices must be examined to ensure that they are being
objectively and consistently applied. insurers must be sure that their employees and
agents are aware of the Fair Housing Act and of its application to their activities and
conduct the kind of "smart management" techniques that they are already applying
in the employment arena--set a non- discrimination policy at the highest levels, set
objective and non-discriminatory standards which take into account all appropriate risk
factors but which do not sweep overbroadly, ensure equal access to products and services
wherever they are provided, make individualized decisions based on objective criteria and
not based on assumptions, set up customer service systems which enable applicants or
insureds who feel that they are treated unfairly to get a hearing. As management,
recognize that not every employee or agent will perceive or act on a non- discriminatory
basis unless they understand that it is the law, and the company's practice.
Consider the range of creative marketing and customer service changes that many in the
lending arena have already undertaken. Show leadership in getting past the claims of
discrimination, and the rather natural concerns about what it all means and what it could
mean and move into the process of working to apply preventative strategies to educate and
guide agents and employees. This is the route that many other industries have undertaken
in their own courses of self-education and change after considering the
anti-discrimination policies of this country and its laws. Realtors, newspaper publishers,
lending institutions, property management companies--all have learned that good management
means the kinds of leadership, direction and change that allow agents and employees to
practice non- discrimination as a matter of practice, and, to be honest, to recognize the
new markets and new business potential which can come from actively indicating to untapped
markets the availability of services on a non-discriminatory basis.
As the history of insurance redlining, and other forms of insurance discrimination
indicates, consistent with the history of situations where other forms of housing
discrimination have been claimed, thoughtful consideration and institution of a systemic
re-evaluation of processes and standards by the industry, is key to addressing issues of
discrimination. Without such efforts, both administrative complaints and litigation will
Denial of this challenge only ignores the potential for the kinds of changes which we
have seen in the lending industry. And denial of this challenge dooms us to continued
failures in re- building our communities to be strong, equal and welcoming to all people.
To quote the late Dr. Martin Luther King, "we are caught in an inescapable network
of mutuality, tied in a single garment of destiny." Together, we must use all of our
tools, our skills, and our history to build our communities.
1. The opinions expressed in this material are those of its author and not those of the
Department of Housing and Urban Development.
2. See Squires and Venez., "Insurance Redlining and the Process of
Discrimination,," The Review of Black Political Economy, Winter 1988.
3. Heimer, Carol. "The Racial and organizational origins of insurance
Redlining," Journal of Intergroup Relations, Vol. X, No. 3, Autumn, 1982.
5. H.R. 3504, 95 Cong. let Sees. Sec. 804 (1977): Hearings before the Subcommittee on
Civil and Constitutional Rights of the Committee on the Judiciary, House of
Representatives, 95 Cong. 2d Session (1978), Testimony of co-sponsor, Rep. Don Edwards.
6. Dunn v. Midwestern Indemnity Mid-American Fire and Casualty Co., 472 F.Supp. 1106
(S.D. Ohio 1979).
7. Mackey v. Nationwide Insurance Co., 724 P.2d 419 (4th Cir.. 1984).
8. Squires and Velez, supra, pp. 65-70.
9. NAACP v. American Family Mutual Insurance Co., 978 F.2d 287 (7th Cir. 1992), cert.
den. 113 S.Ct. 2335 (1993).
10. Nationwide Mutual Insurance Company v. Cisneros et al., 53 F.3rd 1351 (6th Cir.