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Saunders v. Farmers Insurance Exchange: CIVIL PROCEDURE | INSURANCE - McCarran-Ferguson barred state discrimination insurance price claims

United States Court of Appeals
No. 07-1894
Marva Jean Saunders, et al., *
Plaintiffs - Appellants, **
v. **
Farmers Insurance Exchange, et al., *
Defendants - Appellees. *
Appeals from the United States
No. 07-1897 District Court for the
___________ Western District of Missouri
Marva Jean Saunders, et al., *
Plaintiffs - Appellants, **
v. **
American Family Mutual Insurance *
Company, *
Defendant - Appellee. *
No. 07-1903
Coleman McClain, et al., *
Plaintiffs - Appellants, **
v. **
Shelter General Insurance *
Company, et al., *
Defendants - Appellees. *
------------------------------------------------ *
United States of America; Lawyers' *
Committee for Civil Rights *
Under Law; National Community *
Reinvestment Coalition, *
Amici on Behalf of Appellants. *
Submitted: January 17, 2008
Filed: August 12, 2008
Before LOKEN, Chief Judge, HANSEN and MURPHY, Circuit Judges.
LOKEN, Chief Judge.
These are purported class actions on behalf of persons living in a single,
contiguous black community in Kansas City. Plaintiffs allege, inter alia, that
defendant insurance companies (the Insurers) violated the Fair Housing Act, 42
U.S.C. 3601 et seq., and 42 U.S.C. 1981 and 1982, by charg[ing] higher
1The federal civil rights statutes on which plaintiffs rely do not specifically
relate to the business of insurance, so the McCarran-Ferguson Act bars applying
these statutes to invalidate, impair, or supersede state insurance laws. Like the
Seventh Circuit, we reject the contention by amicus Lawyers Committee for Civil
Rights Under Law that the McCarran-Ferguson Act does not apply to subsequently
enacted federal civil rights legislation such as the Fair Housing Act. See NAACP v.
Am. Family Mut. Ins. Co., 978 F.2d 287, 294 (7th Cir. 1992) (the term No Act of
Congress could not be more comprehensive), cert. denied, 508 U.S. 907 (1993).
Accord Murff v. Profl Med. Ins. Co., 97 F.3d 289, 292 n.4 (8th Cir. 1996), cert.
denied, 520 U.S. 1273 (1997).
premium rates for the same type of homeowners coverage to homeowners in the
Community . . . than [they] charged homeowners in white communities. In Saunders
v. Farmers Insurance Exchange, 440 F.3d 940 (8th Cir. 2006), after years of related
litigation, we affirmed the dismissal of other claims that minority residents of the
community were denied coverage due to the Insurers discriminatory underwriting
criteria. But we reversed the district courts dismissal of the price discrimination
claims under the filed rate doctrine, and we remanded those claims.
In remanding, we noted that the discriminatory pricing claims might be barred
by the McCarran-Ferguson Act, 15 U.S.C. 1011-1015, as construed by the
Supreme Court in Humana Inc. v. Forsyth, 525 U.S. 299 (1999). Enacted in response
to the decision in United States v. South-Eastern Underwriters Assn, 322 U.S. 533
(1944), the McCarran-Ferguson Act preserves the traditional role of state insurance
regulation by providing, in pertinent part, that no federal statute shall be construed
to invalidate, impair, or supersede any law enacted by any State for the purpose of
regulating the business of insurance . . . unless such Act specifically relates to the
business of insurance. 15 U.S.C. 1012(b). In Humana, the Court construed the
word impair to mean, in addition to a direct conflict with state law, any
application of federal law that would frustrate any declared state policy or interfere
with a States administrative regime. 525 U.S. at 310. We concluded that the record
on the prior appeal was not adequate to decide that issue.1
2The HONORABLE FERNANDO J. GAITAN, JR., Chief Judge of the United
States District Court for the Western District of Missouri.
On remand, the Insurers renewed their Rule 12(b)(6) motions to dismiss,
arguing that analysis of plaintiffs lengthy complaints and the Missouri insurance laws
establishes that the McCarran-Ferguson Act bars plaintiffs price discrimination
claims. Without objecting to deciding the issue on Rule 12 motions, plaintiffs argued
that the McCarran-Ferguson Act does not preclude their federal civil rights claims.
The district court2 granted defendants motions, concluding that the price
discrimination claims would impair the Missouri laws that regulate the business of
insurance within the meaning of 15 U.S.C. 1012(b) as construed in Humana.
Saunders v. Farmers Ins. Exch., 515 F. Supp. 2d 1009 (W.D. Mo. 2007). Plaintiffs
appeal. Reviewing de novo the grant of motions to dismiss, we affirm. Benton v.
Merrill Lynch & Co., 524 F.3d 866, 870 (8th Cir. 2008) (standard of review).
I. Plaintiffs Price Discrimination Claims.
Plaintiffs complaints allege that the Insurers used a multi-tiered rate structure
based in whole or in part on the racial composition of Kansas City zip code areas
with the intentional and/or unintentional unlawful effect of extracting higher
premium rates from homeowners in the predominantly black community. Their
allegations of issues common to the class include:
Whether [the Insurers] used separate rating territories to charge higher
premium rates for risks located in the Community . . . than for
comparable risks located in white communities.
Whether [the Insurers] can provide any loss histories, or other actuarial
or statistical data, to support [their] use of such segregated and
discriminatory rating territories.
3A HUD regulation interprets 3604(b) as applying to the business of
homeowners insurance. See 24 C.F.R. 100.70(d)(4); American Family, 978 F.2d
at 297-301. However, HUD has never applied a disparate impact analysis to
insurers. Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1362 (6th Cir. 1995),
cert. denied, 516 U.S. 1140 (1996).
Plaintiffs allege that the Insurers violated 42 U.S.C. 3604(b), which bars race
discrimination in the terms, conditions, or privileges of sale or rental of a dwelling,
or in the provision of services or facilities in connection therewith, as well as 1981
and 1982. Their prayers for relief seek a declaration that the Insurers violated these
civil rights statutes, an injunction against any further conduct violating plaintiffs
rights, compensatory and punitive damages, and attorneys fees and costs.
Plaintiffs allegations of unintentional unlawful discrimination seek relief on
a disparate impact theory of Fair Housing Act liability, that is, challenges to practices
that are fair in form, but discriminatory in operation. Griggs v. Duke Power Co., 401
U.S. 424, 431 (1971). In a number of prior cases, we have recognized a disparate
impact cause of action under the Fair Housing Act against governmental authorities.
See, e.g., Darst-Webbe Tenant Assn Bd. v. St. Louis Hous. Auth., 417 F.3d 898, 902-
03 (8th Cir. 2005). Applying Department of Housing and Urban Development
standards, we have recognized a disparate impact Fair Housing Act claim against
private actors in another context. See United States v. Badgett, 976 F.2d 1176 (8th
Cir. 1992). But at least with respect to insurers, the question is not free from doubt.
See NAACP v. Am. Family Mut. Ins. Co., 978 F.3d 287, 290-91 (7th Cir. 1992).
However, the Insurers have not raised the issue and therefore we assume, without
deciding, that private insurers may be liable under the Fair Housing Act on a disparate
impact theory.3
Seeking to deflect the significance of their disparate impact theory on the
McCarran/Ferguson Act analysis, plaintiffs on appeal note that they complain of
racially disparate treatment, or intentional discrimination, as well as disparate impact.
They did not argue this distinction in the district court, which is reason enough to
ignore it on appeal. Moreover, after twelve years of litigation, plaintiffs provide no
factual basis for their conclusory allegations that the Insurers intentionally charged
rates based on a homeowners race. Their factually explicit allegations are that the
Insurers used rating zones based on facially neutral risk factors that have a disparate
racial impact. It is these disparate impact allegations that satisfied the threshold
pleading requirement of Rule 8(a)(2) -- allegations plausibly suggesting (not merely
consistent with) unlawful conduct. Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955,
1966 (2007). Viewing the complaints in their entirety, the lengthy litigation history,
and plaintiffs categorical argument that no Fair Housing Act claims are barred by the
McCarran/Ferguson Act, we conclude their conclusory allegations of discriminatory
intent are mere labels . . . and a formulaic recitation of the elements of a cause of
action. Id. at 1965. The point is important. Our opinion should not be read as
deciding whether disparate treatment claims against Missouri insurers are barred by
the McCarran/Ferguson Act. In this case, [t]he allegations of intentional race
discrimination . . . do not appear to be preempted, but they are a diversion. Dehoyos
v. Allstate Corp., 345 F.3d 290, 300 (5th Cir. 2003) (Jones, J., dissenting).
II. Missouris Regulatory Regime.
Like most States, Missouri thoroughly regulates the business of insurance. The
premium rates charged by property and casualty insurers are governed by Chapter 379
of the Missouri Statutes. Insurers must file their rates and policy forms and, in the
case of homeowners insurance, may only charge the filed rates. See Mo. Rev. Stat.
379.321, 379.356. In setting rates, insurers must consider past and prospective
loss experience within and outside this state, catastrophe hazards, past and
prospective expenses both countrywide and those specifically applicable to this state,
a reasonable margin of underwriting profit and contingencies, and all other
relevant factors, including trend factors. 379.318(1). In establishing rates, insurers
may group risks by classifications that measure any differences among risks that can
be demonstrated to have a probable effect upon losses or expenses. 379.318(2).
4Public hearings are conducted in accordance with detailed, recently amended
administrative hearing procedures found in Mo. Code. Regs. Ann. tit. 20 800-1.100
(effective May, 30, 2008). See also Mo. Rev. Stat. 374.046.
Missouri prohibits rates that are excessive . . . or unfairly discriminatory, terms
carefully defined in 379.318(4):
No rate shall be held to be excessive unless such rate is unreasonably
high for the insurance coverage provided and a reasonable degree of
competition does not exist in the area . . . . Unfair discrimination shall
be defined to include, but shall not be limited to, the use of rates . . .
which unfairly discriminate between risks having essentially the same
hazard and having substantially the same degree of protection against
fire and allied lines.
Plaintiffs note that two provisions in Chapter 375 specifically address the issue of race
discrimination, prohibiting an insurer from canceling or refusing to insure or refusing
to continue to insure because of race. Mo. Rev. Stat. 375.007, 375.936(11)(g). But
they cite no authority extending those statutes beyond their plain meaning to cover a
disparate impact claim of racially discriminatory pricing. Thus, discrimination in
pricing is governed exclusively by 379.318(4).
The Missouri Department of Insurance is charged with the execution of all
laws . . . in relation to insurance and insurance companies doing business in this state.
374.010. The Director of Insurance may examine an insurer at any time he may
deem it advisable, but at least once every four years. 379.343. If the Director finds
that any rate filed by an insurer may not comply with the provisions of Chapter 379,
he shall hold a public hearing in connection therewith. 379.346.2.4 If he finds
after a hearing that the rate does not comply, he shall issue an order . . . stating when,
within a reasonable period of time thereafter, the further use of such rate . . . shall be
prohibited. 379.346.3. The Director may also order the insurer to cease and desist
violating the insurance laws, to take affirmative steps to comply with those laws, and
to pay a civil penalty and the reasonable costs of investigation. 374.046.1. The
authorized amount of civil penalties is specified. Charging unfairly discriminatory
rates is a level two violation for which the maximum penalty is ,000 per violation
or ,000 per year for multiple violations. 374.049.2(2), 379.361. The Director
may suspend or revoke an insurers license for a willful violation. 379.361.1.
A person aggrieved by any rate charged may ask the insurer to review the rate
and, if the request is denied, may file a written complaint and request for hearing
with the director, who must hold a hearing if he finds that the complaint is made in
good faith and with probable cause. 379.348. Plaintiffs filed no administrative
complaints in these cases. We assume -- though it appears the Supreme Court of
Missouri has never considered the question -- that a decision by the Director not to
hold a hearing in response to a 379.348 complaint could be judicially reviewed
under the contested case provisions of the Missouri Administrative Procedure Act.
See Mo. Rev. Stat. 536.063(1), 536.100; cf. Farm Bureau Town & Country Ins. Co.
of Mo. v. Angoff, 909 S.W.2d 348 (Mo. banc 1995). Under that statute, the court
reviews whether the agency action was in excess of its authority; unsupported by
substantial evidence; procedurally unlawful; arbitrary, capricious or unreasonable; or
an abuse of discretion. 536.140.
In July 2006 amendments, the Legislature authorized the Director to file a civil
action in state court seeking various remedies against a non-complying insurer,
including an order of restitution or disgorgement in favor of identifiable
consumers who have suffered financial loss from a violation of the insurance laws.
374.048.2(d). This remedy applies to violations of the rate-regulating provisions of
Chapter 379. 379.361.2. As with the administrative remedies, punitive damages are
unavailable and civil penalties are limited to ,000 per violation. 374.049.3(2).
No provision of the Missouri insurance statutes allows an aggrieved insured to file a
lawsuit in state court challenging an unlawful rate. Only the Director, in his
discretion, may do so. Plaintiffs also concede there is no implied private right of
action under Missouri law to enforce the mandate in 379.318(4) that rates not be
5There appears to be no direct conflict because, as the court observed in
Dehoyos, 345 F.3d at 297-98 n.5, the federal regulatory goal of disallowing racially
discriminatory insurance pricing is in harmony with the states goal of disallowing
racially discriminatory insurance pricing. See Mo. Rev. Stat. 379.318(4), defining
unfair discrimination to include, but . . . not be limited to risk and hazard
discrimination. However, the Supreme Court observed in Humana that the term
supersede ordinarily means to displace (and thus render ineffective) while providing
a substitute rule. 525 U.S. at 307 (quotation omitted). The Missouri insurance laws
allow rate classifications based on factors such as loss experience and define when a
rate is unfairly discriminatory in terms specific to the business of insurance -- risks
having essentially the same hazard. 379.318(4). In this disparate impact case,
plaintiffs seek to displace the state law definition of unfair discrimination with a
federal rule that is based on a single factor -- disparate racial impact -- and looks
suspiciously like a substitute rule. Arguably, therefore, these pricing claims would
supersede state law, as that term was defined in Humana. But the issue was not
raised in this case, and we need not decide it.
excessive or unfairly discriminatory. Cf. Dierkes v. Blue Cross & Blue Shield of Mo.,
991 S.W.2d 662, 667 (Mo. banc 1999). In Dierkes, the Court dismissed claims based
solely on the statutory violation but allowed common law fraud and breach-ofcontract
claims against an insurer for misrepresenting that its policies met all state
and federal requirements because those claims existed independent of the foregoing
statute. Id. at 667-68.
III. Applying The McCarran-Ferguson Act and Humana.
The McCarran-Ferguson Act bars the application of federal statutes to
invalidate, impair, or supersede state laws regulating insurance. In this case, it is
not argued that the federal laws invoked by plaintiffs would invalidate or supersede
state law.5 Rather, the issue is whether the theory of liability asserted and the relief
sought by plaintiffs would impair state law by interfering with Missouris
comprehensive administrative regime.
In Humana, the Supreme Court resolved a conflict in the circuits when it
clarified that Congress in using the word impair intended to encompass more than
direct conflicts with state law but did not intend to cede the field of insurance
regulation to the States. 525 U.S. at 308. The Court went on to conclude that the
McCarran-Ferguson Act did not bar the civil RICO fraud claim at issue because
Nevadas insurance laws also prohibited insurance fraud, and those laws permitted
statutory and common law private actions to remedy such misconduct and allowed the
recovery of damages exceeding the treble damages available under RICO. Therefore,
the RICO claims at issue complemented rather than impaired Nevadas administrative
regime. Id. at 311-13.
In applying Humanas fact-intensive interpretation of the word impair, our
focus must be on the precise federal claims asserted. Federal civil rights statutes are
drafted broadly, so a statute might impair state insurance laws when applied in some
ways, but not in others. For example, a federal claim alleging that an insurers
coverage denial was the product of overt racial animus would doubtless be in harmony
with state insurance regulation, while a suit challenging the racially disparate impact
of industry-wide rate classifications may usurp core rate-making functions of the
States administrative regime. Compare Moore v. Liberty Natl Life Ins. Co., 267
F.3d 1209, 1222-23(11th Cir. 2001), cert. denied, 535 U.S. 1018 (2002). It is one
thing to say that an insurance company may not refuse to deal with . . . persons . . . .
It is another thing to require federal courts to determine whether limitations on
coverage are actuarially sound and consistent with state law. Doe v. Mut. of Omaha
Ins. Co., 179 F.3d 557, 564 (7th Cir. 1999), cert. denied, 528 U.S. 1106 (2000).
The Missouri insurance laws require insurers to establish rates based upon
economic factors such as loss experience that are essential to insurer solvency, and
permit insurers to classify risks based upon standards that measure any differences
among risks that can be demonstrated to have a probable effect upon losses or
6As the Seventh Circuit observed in American Family, 978 F.2d at 290,
Insurance works best when the risks in the pool have similar characteristics. . . . To
curtail adverse selection, insurers seek to differentiate risk classes with many
variables. Risk discrimination is not race discrimination.
expenses. Mo. Rev. Stat. 379.318.1-2.6 These state statutes prescribing what rates
may be charged are essential to the core of Missouris regulation of the business of
insurance. See SEC v. Natl Sec., Inc., 393 U.S. 453, 458-59, 463 (1969). In these
cases, plaintiffs ask a federal court to determine that the Insurers filed rates are
unlawful using a different federal standard -- disparate racial impact -- and then to
award damages based upon the lower rates they would have paid absent
discrimination plus injunctive relief to prevent further violations of federal law. But
in Missouri, the Director of Insurance has been delegated the essentially legislative
task of rate-making by reviewing Insurer risk classifications and pricing differentials.
If a federal court may assess damages based upon what a non-discriminatory rate
would have been, and then prescribe the future rate in an injunctive decree, [a] more
complete overlap with the state [agencys] pricing decisions is impossible to
conceive. Dehoyos, 345 F.3d at 302 (Jones, J., dissenting).
Moreover, unlike Nevada law at issue in Humana, 525 U.S. at 312, neither the
Missouri insurance laws nor Missouri common law provide a private right of action
for unfairly discriminatory insurance rates. Rather, aggrieved insureds must seek
relief from the Director of Insurance, who has the exclusive authority to conduct an
administrative hearing, or to commence an action in state court to remedy an insurer
violation and the insureds financial injury. By mandating an exclusively
administrative remedy, Missouri law preserves the agencys primary authority to
determine whether rates are excessive or unfairly discriminatory, 379.318(4), subject
only to judicial review for arbitrary and capricious agency action. Even if the same
legal standards apply under federal and state law (which would not be the case),
transferring their administration from state agency to federal court obviously would
7We reiterate that our decision is limited to the impact of the specific claims
asserted and relief sought by plaintiffs on the exclusively administrative insurance
rate-setting regime under Missouri law. The McCarran-Ferguson Acts application
might well be different if other disparate impact claims were asserted or if Missouri
were to allow private actions challenging unfairly discriminatory rates.
interfere with the administration of the state law. The states are not indifferent to who
enforces their laws. Doe, 179 F.3d at 564.
In response, plaintiffs rely on Dierkes to argue that the Missouri insurance laws
do not exclude remedies available under other state laws. But Dierkes held only that
the insurance laws do not preclude common law claims arising under a private
agreement or from private misconduct . . . . not new rights created solely by the
statute. 991 S.W.2d at 668. The state law right not to pay unfairly discriminatory
insurance rates is solely a creature of the insurance statutes. By barring private actions
to enforce that right, and by granting the Director of Insurance exclusive authority to
seek the limited remedies for violations of Chapter 379 prescribed by statute, Missouri
law creates an administrative regime that would be frustrated and interfered with, if
not supplanted, by a rate-payers cause of action to recover damages measured by the
difference between the filed rate and the rate that would have been charged absent
some alleged wrongdoing. Taffet v. Southern Co., 967 F.2d 1483, 1491 (11th Cir.)
(en banc), cert. denied, 506 U.S. 1021 (1992); see LaBarre v. Credit Acceptance
Corp., 175 F.3d 640, 643 (8th Cir. 1999).7
For the first time on appeal, plaintiffs -- joined by the United States as amicus --
argue that Missouri allows private actions against insurers for rate discrimination
under the Missouri Human Rights Act (MHRA), Mo. Rev. Stat. 213.010 et seq.
They fail to cite a case in which a state or federal court has applied the MHRA, which
does not specifically mention insurance, to unlawful discrimination in the provision
or pricing of insurance. More significantly, after the Insurers moved to dismiss
plaintiffs price discrimination claim as barred by the McCarran-Ferguson Act,
plaintiffs failed to raise this issue, even though in Saunders we specifically stated that
the availability of state remedies was crucial to the issue of preclusion under the
McCarran-Ferguson Act after Humana. 440 F.3d at 946. Therefore, plaintiffs did not
preserve the issue for appeal. We decline to consider it, or its significance. See
Snider v. United States, 468 F.3d 500, 512 (8th Cir. 2006); Von Kerssenbrock-
Praschma v. Saunders, 121 F.3d 373, 375-76 (8th Cir. 1997).
The judgment of the district court is affirmed.


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