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merely a misperception of misinformed insurance consumers, and that underwriting decisions are based strictly on objective, reliable, loss-related rating classifications. 14 Such classifications, it is maintained, include the factors of construction, occupancy, fire protection and exposure 15 but not, for example, whether a neighborhood is racially changing or is principally composed of ethnic minorities. 16

Nonetheless, geographic redlining by property insurers has been documented by many investigators. Their reports reveal that insurers' techniques have included: selectively placing agents only in certain areas; formally or informally instructing agents to refuse to accept applications from residents of certain neighborhoods; and varying underwriting standards and requirements or selectively pricing property insurance according to geographic area. 17

Areas that allegedly have been redlined are principally older urban areas. 18 Occasionally, these areas are already in economic decline when the apparent decision to redline is made. 19 In other cases, the areas are not yet declining but instead represent racially or ethnically changing neighborhoods or stable but principally minority areas. The unavailability of essential

20

14. Allstate Insurance Company, for example, claims to have identified 12 Chicago postal zones with adverse loss ratios in which it applies more stringent underwriting procedures and six Chicago rating territories based upon loss experience. Valukas & Bollow, supra, note 2, at 59, 67, Address by L. Jordan, General Counsel. State Farm Insurance Company, Insurance Redlining and Reinvestment: Directions for Change Conference (Chicago, Ill., Mar. 23, 1979) 15. U.S. DEPt of Justice, THE PRICING AND Marketing OF INSURANCE 189 (1977) [hereinafter cited as PRICING and MARKETING).

16. See Rights and Remedies Hearings, supra note 5, at 174-77 (statement of James R. Faulstich, Vice President, Industry Relations, and C. Robert Hall, Vice President, National Association of Independent Insurers). This was a joint statement in which they indicated that the objective of risk classification is to reflect the degree of risk posed. Their remarks dealt with real property insurance where the effect of inflation is that replacement cost far exceeds worth in some areas and, consequently, insurers do not want to, and in many instances have stopped, insuring in those areas. They stated that risk assessment should not be restricted. They also noted that the insurance industry makes no moral judgments; it merely seeks to equate risk with degree of loss and to make a profit.

17. See B. Malewski & M. Lampi, Where Do You Draw the Line?—Insurance Redlining in New York (May, 1978) U.S. Dep't of Hous. AND URBAN Dev., Insurance CRISIS IN URBAN AMERICA (May 24, 1978), (hereinafter cited as INSURANCE CRISIS), G. KEENAN, INSURANCE REDLINING: PROFITS VS. Policyholders (2d ed. 1979); The Lakeview Citizens' Council, Selective Placement of Homeowners Insurance Agents in Chicago-1967-1978 (1978); Public Technology, Inc., Presentation to the D-2 Subcomm. Task Force on Redlining (Madison, Wis., Oct. 11, 1977).

18. Essential Insurance, supra note 4, at 5-7.

19. Rights and Remedies Hearings, supra note 5, at 98-99 (testimony of Richard D. Rodgers, Deputy Director, Consumer Division, Illinois Department of Insurance); C. Levin, Homeowners Insurance in Detroit: A Study of Redlining Practices and Discriminatory Rates app. 12 (1976).

20. U.S. COMM'n on Civil Rights, Insurance Redlining: FACT Not FICTION 10 (Feb. 1979) (hereinafter cited as INSUrance RedliniNG], Note, Property Insurance and the American

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[Vol. 29:315 insurance to an area, of course, almost certainly guarantees that economic decline will follow. 21 Furthermore, the impact of insurance redlining on those least able to afford the consequences, those who for economic or other reasons are restricted to certain neighborhoods, 22 is patently unfair and economically destructive.

In a recent study of the availability of property insurance to risks located in urban areas, in particular the availability to those risks located in urban areas with large minority populations, the Midwestern State Advisory Committees to the United States Commission on Civil Rights (MSAC), focusing on Chicago, analyzed the underwriting practices of insurers writing residential property insurance. 23 According to the report, Chicago was targeted because it was the only Midwestern state in which the data essential to a statistical analysis were available. Further, at the time of the study, only Illinois had enacted legislation requiring property/casualty insurers to disclose routinely to the chief state regulatory officer the number of new policies written, policies renewed, policies cancelled, and policies nonrenewed. 24 These data were available from the Illinois Department of Insurance. Thus, the study did not depend on obtaining the necessary data from individual insurers.

25

Not only did the study analyze activity in the voluntary insurance market, but it also looked at the involuntary or residual insurance market—the Fair Access to Insurance Requirements (FAIR) plan. That plan was selected

26

Ghetto A Study in Social Irresponsibility, 4S CAL. L. Rev: 218. 229 (1971). The note sets forth the proposition that the problem of availability of property insurance in the ghetto areas of American cities (1) discriminates against ghetto owned and operated businesses, (2) contributes to the overall physical decay of ghetto areas. (3) impedes the flow of new capital into ghetto areas and (4) leads to a general unavailability of property insurance in the ghetto. Id. at 218-19. The author includes empirical data which show that, contrary to the insurance industry's Claim that the unavailability of property insurance in the ghetto is the result of risk/loss experience, race is the real factor that insurance companies use to set rates and terms or to deny insurance protection altogether. Id. at 233-36. This is, of course, in violation of the fourteenth amendment, the Civil Rights Act of 1866, and the antitrust laws. Id. at 219, 247-68.

The author also stated that the Fair Access to Insurance Requirements (FAIR) plan, established by 12 U.S.C. § 1749bbb-3 to -10 (1976) is not an adequate remedy and that legislation to bring the insurance industry in line with the law, is required. Id. at 237.

21. Essential Insurance, supra note 4, at 5-6.

22. J. KAIN & J. QUIGLEY, HOUSING MARKETS AND RACIAL DISCRIMINATION: A MICROECONOMIC ANALYSIS (1975); Insurance Redlining, supra note 20, at 8-9.

23. See INSURANCE REDLINING, supra note 20.

24. See ILL. REV. STAT. ch. 73, § 755.25 (1977); ILL. ADM. ORDER, Mar. 21, 1977; Insurance Redlining, supra note 20, at 26, 46-50.

25. INSURANCE REDLINING, supra note 20, at 32.

26. The FAIR plan was established by the Housing and Urban Development Act of 1968, 12 U.S.C., tit. XII §§ 1749bbb-3 to -10 (1976). The purpose of the Act was to ensure that essential property insurance would continue to be available to prevent the abandonment of urban areas by insurers and mortgagees. Only fire and extended coverage along with vandalism and malicious mischief are mandated. 24 C. F. R. § 1905.3(a) (1979). Four states-Illinois, Massachusetts, Rhode Island, and Wisconsin-offer full coverage through a homeowners' policy. Participating insurers in states that create a FAIR plan in accord with the minimum requirements of federal

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for study as a measure of the past adverse underwriting decisions of insurers that had forced insurance consumers into the involuntary, residual market. 27 The decision to analyze FAIR plan data was based in part on a 1977 report prepared for the Illinois Department of Insurance. 28 That work indicated that certain areas of Chicago and in some cases the entire city had been written-off by insurers in the recent past. Thus, the availability of insurance through the voluntary market was limited. To study only current underwriting activity in the voluntary market would not have revealed whether certain areas of the city with older housing, lower incomes, and higher minority compositions were continuing to suffer from these past adverse underwriting practices. By looking at the FAIR plan, as well as the voluntary market, the impact of past underwriting decisions as well as current underwriting activity could be evaluated. Furthermore, at the time the MSAC data were collected, coverage available in the Illinois FAIR plan, limited to fire and extended coverage, 29 still was far less comprehensive than property insurance available through the voluntary market. Thus, it was reasonable to assume that individuals would not voluntarily seek coverage in the FAIR plan but rather would accept coverage under that plan only when they had been unable to purchase insurance through the voluntary market or had found such insurance priced beyond their reach.

Analysis of the data revealed that in the voluntary market and in the FAIR plan, minority composition of the Zip code was the factor correlated most highly with underwriting activity, 30 In the voluntary market, the lower the minority composition of a Zip code, greater was the availability of insurance. In the FAIR plan, the opposite relationship prevailed; the higher the minority composition of a Zip code, greater was the concentration of FAIR plan policyholders. 32

31

Further, the data were analyzed to determine if, when differences in fire and theft rates between Zip codes were held constant, minority composition remained a significant predictor of underwriting activity. In both the volun

law are eligible for federal riot reinsurance. Twenty-eight states have enacted a FAIR plan. Insurance Crisis, supra note 17, at 6.

27. Telephone interview with R. Gossrow, Property and Casualty Actuary, Illinois Dep't of Insurance (Oct. 2, 1978).

28. Valukas & Bollow, supra note 2, at 2.

29. Homeowners insurance did not become available under the Illinois FAIR plan until August 1978. See ILL. REV. STAT. ch. 73, § 1065.70 (Smith-Hurd) (West Supp. 1979).

30. In other words, minority composition was the single most important factor in explaining underwriting activity. The correlation between minority composition (percent minority in population) and voluntary market activity (new and renewed homeowners policies minus cancellations and nonrenewals per 100 housing units) was .78 (probability (p) < .001). The correlation between minority composition and involuntary market activity (new and renewed FAIR plan policies per 100 housing units) was + .72 (p < .001). Insurance Redlining, supra note 20, at 35-36.

31. Id.

32. Id.

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tary and involuntary insurance markets, even with the effect of differences in fire and theft eliminated, minority composition remained a significant predictor of underwriting practices. When the intercorrelation between minority composition and income was controlled, minority composition still was found to be a significant predictor of underwriting activity in both the voluntary and involuntary property insurance markets. 34 Thus, the effect of minority composition on underwriting activity was not solely the inadvertent result of individual economic factors but rather was a significant predictor of underwriting activity independent of income.

The MSAC report concluded that minority composition of an area is a significant predictor of whether residential property located in that area will be insured through the voluntary insurance market or whether the property owner will be forced to seek coverage in the residual, involuntary market. 35 The study stopped short of concluding that insurers intentionally use either the minority status of the applicant or the neighborhood as a basis for determining eligibility for property insurance. Thus, the report leaves unanswered the crucial inquiry: have insurers deliberately refused to insure residential property because of the minority status of the owner or neighborhood or have insurers used racially and ethnically neutral underwriting criteria that have had the effect of denying essential property insurance to members of those racial and ethnic minorities? Because liability under several of the laws to be discussed in the subsequent sections of this article requires proof of intentional racial discrimination, the difference is significant 36 Appropriate private litigation appears justified, as the gross

33 The part correlation between minority composition and voluntary market activity after removing the effects of fire and theft was 05) The part correlation between minority composition and involuntary market activity, after removing the effects of fire and theft was 41 sp_~_~_01) Part correlations permit calculation of the relationship between a predictor variable eg, mmority composition) and a criterion variable (eg, voluntary or involuntary market activity after clminating the interrelationship between a predictor variable and another predictor variable (e.g., minority composition with fire or theft). Second order part correlations in which the interrelationship between minority composition and both fire and theft were eliminated were calculated. Insurance Redlining, supra note 20, at 36.

34. The correlation between minority composition and voluntary market activity after eliminating the relationship between minority composition and income was 39 (p < .01). The correlation between minority composition and involuntary market activity after eliminating the relationship between minority composition and income was .34 (p < .05). INSURANCE REdlinING, supra note 20, at 36-37.

35. Id. at 60.

36. Both 42 U.S.C. 1985 and 15 U.S.C. § 1013(b) clearly require an element of intent because both are based on conspiratorial agreement. 42 U.S.C. § 1985(c) provides: If two or more persons in any State or Territory conspire or go in disguise on the highway or on the premises of another, for the purpose of depriving, either directly or indirectly, any person or class of persons of the equal protection of the laws, or of equal privileges and immunities under the laws, or for the purpose of preventing or hindering the constituted authorities of any State or Territory from giving or securing to all persons within such State or Territory the equal protection of the laws or if two or more persons conspire to prevent by force, intimidation, or threat,

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statistical disparities revealed by the MSAC study are sufficiently suggestive of intentional policies and practices that, whether by design or effect, are foreseeably racially discriminatory, 37

THE MCCARRAN-FERGUSON ACT

38

39

The business of insurance initially was considered to be a contractual concern that involved only insurer and insured. 3 By the nineteenth century, states had become actively involved in monitoring and regulating the practices of insurers in order to protect insureds from insolvent companies. In 1914, the German Alliance Insurance Company challenged the right of the Kansas Insurance Commissioner to regulate and control rates and premiums. The company argued that the business of insurance was like any other commercial enterprise. 41 The cost of insurance was, according to the company, a matter to be determined solely by the parties to the transaction, the insurer, and the insured. 42 The United States Supreme Court dis

40

any citizen who is lawfully entitled to vote, from giving his support or advocacy in a legal manner, toward or in favor of the election of any lawfully qualified person as an elector for President or Vice President, or as a Member of Congress of the United States; or to injure any citizen in person or property on account of such support or advocacy; in any case of conspiracy set forth in this section, if one or more persons therein do, or cause to be done, any act in furtherance of the object of such conspiracy, whereby another is injured in his person or property, or deprive of having and exercising any right or privilege of a citizen of the United States, the party so injured or deprived may have an action for the recovery of damages occasioned by such injury or deprivation, against any one or more of the conspirators. 15 U.S.C. 1013(b) renders the Sherman Act, not an antidiscrimination statute, applicable to agreements to boycott and provides: "Nothing contained in this chapter shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation."

37. The significant statistical disparities revealed by the INSURANCE Redlining report. supra note 20, should be sufficient to create a prima facie case of racial discrimination and thus shift the burden to the defendant-insurers to prove that race was not even one reason among many for adverse underwriting decisions in minority areas. See Williams v. Matthews Co., 499 F.2d 819, 826 (8th Cir. 1974) (prima facie inference that housing developer discriminated on basis of race shifted burden to developer to explain practice). See also Arlington Heights v. Metropolitan Hous. Corp., 429 U.S. 252, 256-66 (1976) (discriminatory purpose, not merely a racially disproportionate impact, must be shown to be a motivating factor in defendant's decision); Riley v. Adirondack S. School for Girls, 541 F.2d 1124, 1126 (5th Cir. 1976) (private school cannot deny admission to student if race is one of motivating factors behind denial), Smith v. Sol D. Adler Realty Co., 436 F.2d 344, 349-50 (7th Cir. 1970) (use of race as a factor in rental decisions impermissible regardless of whether it was the sole or even one of a series of motivating factors). See notes 110-115 and accompanying text infra.

38. See Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183 (1869) (insurance company incorporated in one state is subject to regulation by other state in which company does business). 39. See id. at 168.

40. German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914).

41. Id. at 400.

42. Id.