A federal judge said State Farm can’t completely end a class action accusing it of discrimination by unduly scrutinizing insurance claims from Black policy holders compared to those filed by white customers.
U.S. District Judge Virginia Kendall issued an opinion Sept. 11 granting only partial dismissal to State Farm, preserving certain claims brought by named plaintiffs Jacqueline Huskey and Riian Wynn, homeowners who alleged the insurer deployed “algorithmic decision-making tools that allegedly resulted in statistically significant racial disparities,” according to Kendall.
The lawsuit claimed such actions violated the Fair Housing Act.
Huskey, of Matteson, filed a claim for hail damage to her home’s roof after a June 2021 storm. She said the company didn’t send an adjuster until August, and that worker didn’t inspect the outside of her room. After she called repeatedly, State Farm sent a third-party adjuster and eventually granted part of her claim, covering repairs for internal damage. In the interim, “the unrepaired roof caused further water damage to her kitchen and bathrooms, and her home’s value decreased,” Kendall wrote.
Wynn’s Evanston townhome lost its roof in a March 2022 storm. She alleged State Farm worked more quickly to replace the roofs of her white neighbor. Though they filed claims the same day, Wynn said State Farm demanded she provide extra documents, estimates and inspections, resulting in “dozens more interactions with State Farm employees than her neighbor” and an extra three months for final resolution, which allegedly ended with less compensation than her neighbor and additional damage because of a delay in repairs.
Huskey and Wynn cited a 2021 survey of about 800 Midwestern State Farm homeowner clients that suggested “large and statistically significant racial disparities between Black and white homeowners.” They alleged State Farm has, since at least 2018, used automated tools to guess at fraud potential and determine which claims required additional scrutiny. They said even if the company doesn’t input race data, an algorithm can nonetheless produce discriminatory effects based on correlated factors.
Kendall agreed neither plaintiff adequately alleged State Farm made their homes “unavailable,” but said their theory of racial discrimination fits with how the U.S. Department of Housing and Urban Development interprets one relevant FHA section. While she said the women are “testing the FHA’s boundaries,” Kendall explained their arguments align with how the U.S. Seventh Circuit Court of Appeals has interpreted that law thus far and are allowed to proceed.
The relevant language in that clause was the homeowners’ argument “property insurance is a ‘service’ rendered ‘in connection’ with the sale of the dwelling.” Kendall said a third FHA claim failed because insurers don’t qualify as an “entity whose business includes engaging in residential real estate-related transactions” per the FHA’s definition.
Kendall then turned to whether the surviving FHA claim adequately alleged a disparate outcome for the plaintiffs based on their race. She agreed the survey evidence plausibly supports those allegations, as did Wynn’s claims of a “stark contrast” between her and a white neighbor. She also said the allegations about State Farm’s algorithm are sufficient to avoid dismissal.
State Farm also argued the complaint failed to defeat protection the McCarran-Ferguson Act gives to insurers from federal lawsuits. It said the FHA disparate impact claims conflict with state law or at least disrupt the state’s power to regulate insurance, but Kendall said the company didn’t show “Illinois law requires or condones claims-processing policies with racially disparate effects, so there is no direct conflict.”
While allowing that further litigation might indicate the McCarran-Ferguson Act does give State Farm “a defense to liability,” Kendall said, that possibility is speculative and not enough to win dismissal. She did, however, dismiss Huskey’s request for an injunction as she no longer holds a State Farm policy.
Kendall gave Huskey and Wynn until Oct. 2 to amend their complaint.
The plaintiffs are represented in the action by attorneys David Tracey and Albert Powell, of Sanford Heisler Sharp, of New York; Alexander Rose, Jamie Crooks and Michael Lieberman, of Fairmark Partners, of Washington, D.C.; and Deborah N. Archer and Jason D. Williamson, of the Center on Race, Inequality and the Law at New York University School of Law.
State Farm has been represented by attorneys Sondra A. Hemeryck, Patricia Brown Holmes, Joseph A. Cancila Jr., Sarah E. Finch and Lauren Abendshien, of the firm of Riley Safer Holmes & Cancila, of Chicago.