Insurance Redlining

“Redlining,” in the insurance context, is an illegal practice in which insurance companies avoid providing insurance to individuals living in communities because of the race, color, or national origin of the residents in those communities. While we celebrate Martin Luther King Day, as noted in yesterday’s post, Martin Luther King Day, it is important to recognize the Civil Rights Movement prompted “anti-redlining” laws that still impact insurance today.   

The term “redlining” has been noted in Wikipedia as follows:

The specific process termed ‘redlining’ in the United States occurred on the background of racial segregation and discrimination against minority populations. It had its origins in sales practices of the National Association of Real Estate Boards and theories about race and property values codified by economists surrounding Richard T. Ely and his Institute for Research in Land Economics and Public Utilities, founded at the University of Wisconsin in 1920. With the National Housing Act of 1934 the federal government began to be involved in the practice and the concurrent establishment of the Federal Housing Administration (FHA). The FHA’s formalized redlining process was developed by their Chief Land Economist, Homer Hoyt, as part of an initiative to develop the first underwriting criteria for mortgages. The implementation of this federal policy accelerated the decay and isolation of minority inner-city neighborhoods through withholding of mortgage capital, making it even more difficult for neighborhoods to attract and retain families able to purchase homes. The discriminatory assumptions in redlining exacerbated residential racial segregation and urban decay in the United States.

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Redlining maps even became prominent under private organizations, such as appraiser J. M. Brewer’s 1934 map of Philadelphia. Private organizations created maps designed to meet the requirements of the Federal Housing Administration’s underwriting manual. The lenders had to consider FHA standards if they wanted to receive FHA insurance for their loans. FHA appraisal manuals instructed banks to steer clear of areas with ‘inharmonious racial groups’, and recommended that municipalities enact racially restrictive zoning ordinances. Between 1945 and 1959, African Americans received less than 2 percent of all federally insured home loans.

Banks and mortgage lenders were not the only private entities to develop redlining practices. Property insurance companies also instituted rigid redlining policies in the post-World War II period. According to urban historian Bench Ansfield, the postwar advent of comprehensive homeowners’ insurance was limited to the suburbs and withheld from neighborhoods of color in U.S. cities. One Aetna bulletin from 1964 advised underwriters to ‘use a red line around questionable areas on territorial maps.’ The New York Urban Coalition warned in 1978, ‘A neighborhood without insurance is a neighborhood doomed to death.’

A law review article published last year, The Color of Property and Auto Insurance: Time for Change,1 set forth a historical issue of race discrimination in the property insurance market with the following example of it against a future black Supreme Court Justice:

Thurgood Marshall was denied auto insurance when he lived in Harlem in 1940 because, he was told, it was a ‘congested area.’ He wrote that although the problem of insurance discrimination was getting worse, it was ‘practically impossible to work out a court case because the insurance is usually refused on some technical ground.’

The law review article noted the long history of racial discrimination of property insurance leading to laws preventing the practices:

Property insurance has been unevenly distributed by race; the story of property insurance in urban areas in the mid-twentieth century is in part a story of racism. Many public and private forces excluded African Americans from homeownership including insurance companies and the federal government….

Insurers refused to insure property in neighborhoods where African Americans lived years before the 1960s; this practice often was known as ‘redlining.’ Where insurance was offered in these areas, it was priced higher than elsewhere. As the Hughes Report found, ‘adequate insurance was unavailable in the urban core even before the riots [of the 1960s].’ This refusal to insure large parts of urban areas extended to reinsurance. Reinsurance is insurance that insurance companies buy to protect themselves from claims that are greater than their assets. Insurance companies were not able to obtain reinsurance for urban areas at all, or at reasonable prices, in the 1960s, either before or after the urban riots. The financial structure of the industry conspired against insuring African American neighborhoods – rewarding structures of private insurance companies and informal steering practices which in turn encouraged brokers to not sell insurance in African American neighborhoods.

The Hughes Report found that insurance company decisions to completely refuse to write policies in urban areas or to charge urban residents more were not actually based on data but rather on unsupported assumptions about costs and risks, noting that ‘although insurance companies have catalogued a list of restrictions on underwriting urban core business, responses to the Panel’s requests for information established that companies have virtually no separate statistical information on their experience in urban core areas.’ Witnesses from the insurance industry admitted that they had assumed without data that core urban areas were more expensive to insure than other areas. Race, ethnicity, and risk were intertwined in the insurance industry; 1950s insurance textbooks instructed underwriters on the need to determine applicants’ ethnicity and race in determining their riskiness. Yet, redlining did not reflect the actual riskiness of urban areas or the cost to insure properties in those areas accurately.

Despite laws attempting to address this inequity, issues of “redlining” and racial discrimination still exist in the property insurance market. Insurance law professor Daniel Schwarcz noted the following:

Despite the significance of insurance discrimination in modern America, the law does remarkably little to police against the risk that this discrimination will unfairly harm minority or low-income communities. For instance, state laws prohibiting ‘unfair discrimination’ in property and casualty insurance markets simply require insurers to have an actuarial justification for their discriminatory practices. Although some states also prohibit discrimination on the basis of factors like race, ethnicity, national origin, or income, courts and regulators construe these laws extremely narrowly. As a result, these more specific anti-discrimination laws merely prohibit insurers from formally incorporating prohibited characteristics into their models or intentionally constructing proxies for these characteristics.

By contrast, state insurance law and regulation entirely ignores the prospect that facially-neutral practices might disparately impact minority or low-income populations. This, of course, is a risk whenever a correlation exists between a policyholder trait used by insurers (such as zip code) and a suspect policyholder characteristic (such as race or income). Insurers and some commentators vehemently defend this approach, suggesting that disparate impact analysis of any kind is fundamentally incompatible with risk-based insurance pricing. And undermining risk-based pricing, the argument goes, risks jeopardizing the competitiveness and efficiencies of personal lines insurance markets in the United States.2

The point of today’s blog post is to highlight that the Civil Rights Movement led by Martin Luther King resulted in laws impacting property insurance and its availability. Laws are rarely perfect. The issues of racial discrimination in the property insurance market are still being studied today, with new laws addressing novel methods of such discrimination.    

Wishing you a Happy Martin Luther King Day!

Thought For The Day

…nonviolence is the answer to the crucial political and moral question of our time – the need for man to overcome oppression and violence without resorting to violence and oppression. Civilization and violence are antithetical concepts. Negroes of the United States, following the people of India, have demonstrated that nonviolence is not sterile passivity, but a powerful moral force which makes for social transformation. Sooner or later all the people of the world will have to discover a way to live together in peace, and thereby transform this pending cosmic elegy into a creative psalm of brotherhood. If this is to be achieved, man must evolve for all human conflict a method which rejects revenge, aggression and retaliation. The foundation of such a method is love.

—Martin Luther King

1 Jennifer Wriggins, The Color of Property and Auto Insurance: Time for Change, 49 Fla. St. U. L. Rev. 203 (2021-2022).

2 Daniel Schwarcz, Towards A Civil Rights Approach to Insurance Anti-Discrimination Law, 69 DEPAUL L. REV. 657 (2020), available at https://scholarship.law.umn.edu/faculty_articles/697.