CIVIL RIGHTS IMPLICATIONS OF Ruthanne DeWolfe. Gregory Squires, ** In a recent study of insurance redlining the Midwestern State Advisory Committees to the United States Commission on Civil Rights determined that Chicago communities with predominantly minority populations were the principal victims of adverse underwriting decisions. In this article, the authors, focusing on Illinois, discuss various theories of liability for insurance redlining. With increasing frequency, residents of urban areas are complaining that they cannot obtain essential property insurance at affordable rates through the voluntary market. These complaints are being registered with community organizations, state insurance regulatory officers, 2 and city, 3 state, and federal legislative committees. In many cases, the complaints go beyond individual grievances and charge that entire neighborhoods are unable to obtain property insurance. This practice of denying insurance to residents of a particular geographic area has come to be known as insurance "redlining."7 Regional Counsel. U.S. Commission on Civil Rights, Midwestern Regional Office. B.A.. Heidelberg College; M.S., Ph.D., Northwestern University; J.D., DePaul University College of Law. ** Research/Writer, U.S. Commission on Civil Rights, Midwestern Regional Office. B.S.. Northwestern University; M.A., Ph.D., Michigan State University. *** Professor of Psychology. Loyola University, Chicago, Illinois. B.A.. Oberlin College; M.S., Ph.D., Northwestern University. 1. Address by G. Cincotta. National Training and Information Center, Insurance Redlining and Reinvestment: Directions for Change Conference (Chicago, Ill., March 23, 1979). 2. A. Valukas & R. Bollow. An Investigation of Discrimination in the Sale of Homeowners Insurance in Illinois 8 (Sept. 6, 1977) [hereinafter cited as Valukas & Bollow]; ILLINOIS DEPT OF INSURANCE, RedLINING: THE ILLINOIS EXPERIENCE 1 (Oct. 1977). 3. B. Soldwisch, testimony presented before the Finance Committee of the City Council, Chicago, Ill. (Jan. 12, 1978). 4. Insurance Bureau, Michigan Dep't of Commerce, Essential Insurance in Michigan: An Avoidable Crisis 6 (Mar. 14, 1977) (hereinafter cited as Essential Insurance]. 5. Rights and Remedies of Insurance Policyholders: Hearings Before the Subcomm. on Citizens and Shareholders Rights and Remedies of the Senate Comm. on the Judiciary, 95th Cong., 2d Sess., pts. 1, 31, 53, 61, 67 (1978) (testimonies of Barbara Pertz (Cleveland), Morton Olshan (real estate investor), Grace Evans (St. Louis), and James McBride (Chicago)) (hereinafter cited as Rights and Remedies Hearings]. 6. See Valukas & Bollow, supra note 2, at 20. 7. Insurance redlining, for purposes of this article, is defined as refusing, because of the geographic area within which property is located, to insure or refusing to continue to insure, or varying the amount or type of insurance coverage, or varying the terms or conditions under which insurance coverage is available to homeowners or tenants. 316 DEPAUL LAW REVIEW [Vol. 29:315 This article discusses insurance redlining within the framework of federal antitrust and selected federal and state constitutional and statutory civil rights laws that afford an aggrieved person a cause of action. State statutes regulating insurance companies are not reviewed except to the extent that state regulatory law is germane to federal law. 10 Further, this article examines the potential impact of state constitutions on redlining abuses. Particular emphasis is placed on the Illinois Constitution because of its unique provision concerning the rights of “all persons" to buy and sell property, provision that echoes federal civil rights law 12 and that must surely include insurance. It should be noted that no civil rights statutes have been enacted, at least in Illinois, that specifically prohibit racial discrimination in the sale of property, including insurance. THE PROBLEM 11 Insurance companies generally have responded to redlining complaints by denying that they use factors associated with a geographic area, such as neighborhood racial or ethnic composition, as determinants of insurability, 13 Insurers typically have maintained that geographic redlining is 8. Administrative remedies with judicial review are available for redress of violations of the Illinois Insurance Code. ILL. REV. STAT. ch. 73. §§ 1013-1019.2, 1028-1040 (1977). 9. See id. §§ 204.1-1153 (1977). 10. Under the McCarran-Ferguson Act, insurers are exempt from federal antitrust laws to the extent they are regulated by state law. 15 U.S.C. § 1012 (1976). See notes 50-53 and accompanying text infra. 11. ILL. CONST. art. I, § 17. This provision states: All persons shall have the right to be free from discrimination on the basis of race, color, creed, national ancestry and sex in the hiring and promotion practices of any employer or in the sale or rental of property. These rights are enforceable without action by the General Assembly, but the General Assembly by law may establish reasonable exemptions relating to these rights and provide additional remedies for their violation. Also, an insurance policy generally is itself personal property. 12 J. Appleman, InsuRANCE LAW AND PRACTICE §§ 7007, 7016 (1968); Hanover Ins. Co. v. Tyco Indus., Inc., 500 F.2d 654 (3d Cir. 1974); Gurnett v. Mutual Life Ins. Co., 356 Ill. 612, 191 N.E. 250 (1934); Oldham's Trustee v. Boston Ins. Co., 189 Ky. 844, 226 S.W. 106 (1920); In re Helpert's Estate, 300 N.Y.S. 886, 165 Misc. 430 (1938). 12. 42 U.S.C. § 1982 (1976) provides: "All citizens of the United States shall have the same right, in every State and Territory, as is enjoyed by white citizens thereof to inherit, purchase, lease, sell, hold, and convey real and personal property." 13. Rights and Remedies Hearings, supra note 5, at 200, 202 (testimony of Stephen I. Morton, Vice President, The Hartford Group). Martin stated that the automobile insurance industry does not discriminate on basis of race, color, creed, national origin, or religion but rather uses a rating system composed of objective criteria such as territory, place of garaging, age of driver, sex, martial status, use of motor vehicle, driver education completion, age, make and model of vehicle, and traffic violations. He further stated that the objective of such an underwriting system is to limit loss, which the Hartford Group placed at $162.3 million over the period 1972-76 for personal automobile underwriting. Finally, since many legislative acts in the various states (unspecified) inhibit underwriting practices, his company discourages new business in those areas. a 1980] INSURANCE REDLINING 317 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. 20 The unavailability of essential 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 318 DEPAUL LAW REVIEW [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. 26 That plan was selected Ghetto A Study in Social Irresponsibility, 44 S. CAL. L. REV: 218, 229 (1971). The note sets 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 |