TEXAS CLASS ACTION ON CREDIT-SCORING NOT BARRED BY McCARRAN.

The McCarran-Ferguson Act reserving regulation of the business of insurance to the states doesn't preempt a nationwide class action filed by Texas consumers challenging insurance companies' credit-scoring practices, the Fifth U.S. Circuit Court of Appeals has ruled.

The insurance company defendants "do not point to an insurance pricing regulatory goal which is hampered by the application of the civil rights laws to the credit-scoring practice at issue here, save the implied goal of allowing the states to pursue their pricing regulatory goals in isolation, Judge Fortunato P. Benavides wrote for the two-to-one majority in Dehoyos et al. v. Allstate Corp. et al. (02-50721).

And in Humana Inc. v. Forsyth, the Supreme Court rejected that as a relevant state policy goal, Benavides wrote.

Jose C. Dehoyos and other plaintiffs are black and Hispanic customers who filed suit under 42 U.S. Code Sections 1981 and 1982 - the Civil Rights Act of 1866 - and the Fair Housing Act.

They alleged Allstate and its affiliates use a credit-scoring system to sell non-Caucasian policyholders more expensive policies than they sell to Caucasians.

Allstate filed a motion to dismiss on grounds of McCarran-Ferguson preemption. The federal judge hearing the case granted the motion but gave permission for an appeal to be filed on the question.

Judge Benavides relied upon the Supreme Court's Humana decision, which held a lawsuit under the federal Racketeer Influenced and Corrupt Organizations Act was not preempted by McCarran-Ferguson.

In that opinion, he said, the high court said "federal law is to be applied in an insurance context where it can be applied in harmony with state law."

He said the Fifth Circuit has yet to address the question of McCarran-Ferguson preemption of federal civil rights law, but the Fourth, Sixth, Seventh, Ninth and Eleventh Circuits have.

"Every circuit that has considered the question has determined that federal anti-discrimination laws may be applied in an insurance context, even where the state insurance agencies have mechanisms in place to regulate discriminatory practices," Benavides wrote.

All parties are agreed the civil rights statutes in question do not specifically relate to the business of insurance, he said, so the first Humana test is met.

Nor does Allstate point to any state law or regulatory policy with which those statutes conflict, he said.

Judge Edith H. Jones dissented on a key part of the ruling.

"The allegations of intentional race discrimination under 42 U.S.C. s.s. 1981 and 1982 do not appear to be preempted, but they are a diversion," she wrote.

"Plaintiffs' principal attack is under the Fair Housing Act against the alleged disparate impact of a facially-neutral component of insurance pricing decisions," she said, and "a disparate impact claim goes to the heart of the risk adjustment that underlies the insurance business.'

Insurance rates have a disparate impact on young male drivers, she said, "but hardly anyone argues that the impact is unjustified. The relevant inquiries are whether the price differential reasonably conforms to the risk differential and whether, in a regulated rate system, the insurer has received an appropriate return."

The class action inevitably draws the federal courts into the mechanics of insurance pricing and thus interfere with state rate regulation, Jones said.

"Disparate impact claims under the Fair Housing Act are, in my view, squarely preempted by the McCarran-Ferguson Act," she said.