How Racial Discrimination in Homeowners Insurance Contributes to Systemic Racism and Redlining

Over the last few years, policymakers and advocates have become increasingly aware of the role that housing discrimination plays in systemic racism and unfair discrimination, denying people stable homes and economic opportunity. But one area of housing discrimination has remained extremely understudied: homeowners insurance. While it may not be as flashy as other aspects of housing, dismantling discrimination in homeowners insurance is essential for fair housing.

To begin with: what exactly is homeowners insurance? It is personal property insurance for homes, condos, apartments, and mobile homes and includes a bunch of protections, which can include the losses occurring to your home, its contents, and the loss of use (additional living expenses, like if you have to stay in a hotel while your home is being repaired). Homeowners are not legally required to have homeowners insurance, but banks and other lenders, as well as the federally backed mortgage companies Fannie Mae and Freddie Mac, require it as a condition for mortgages, so the vast majority of homeowners have this insurance. A number of factors affect how high your homeowners insurance premium is — history of past claims, the neighborhood and its crime rate, how widely available your building materials are, coverage options and the coverage amount you want, the condition of the home, and a consumer’s credit history, among others.

This market, like the housing market itself, is tarnished by a history of unfair and discriminatory practices that directly or indirectly target people based on their race, color, national or ethnic origin, religion, or sex or disability. Practical examples of this discrimination can happen at the individual level, where they include:

· Offering insurance policies with inferior coverage

· Not returning calls or requests for information from consumers interested in getting policies

· Denying coverage completely based on someone’s race.

But this discrimination can also take place on an institutional level. Examples of this include:

· Imposing different terms and conditions based on someone’s neighborhood

· Refusing to write policies for homes in these neighborhoods

· Refusing to underwrite buildings based on age, which often disproportionately impacts mostly Black neighborhoods

· Requiring inspection reports in certain areas but not others

· Fewer/inferior options compared to wealthier neighborhoods, and

· Discouraging applicants in these neighborhoods.

Discrimination in homeowners insurance dates back many years. In the 1930s the newly created Federal Housing Administration, founded to help homeowners by providing federal insurance for mortgages, drew up appraisal maps of neighborhoods and based its underwriting policies on those maps. The FHA limited or refused to provide mortgage insurance for people in neighborhoods deemed risky — and Black neighborhoods, immigrant neighborhoods, and neighborhoods that had people of different races living together were all considered risky.

This discrimination in homeowners insurance continued. In the late 1990s, the housing nonprofit Housing Opportunities Made Equal (HOME) investigated Nationwide’s homeowners insurance policies in and around Richmond, Virginia. HOME found dramatic evidence of racist discrimination and excessive prices, and sued Nationwide for unfair discrimination.

What forms did Nationwide’s discrimination take? The company did the following:

· Nationwide used racial profiling to identify “target markets” that were white and excluded Black consumers

· Nationwide labelled every ZIP code in Richmond with lots of Black residents undesirable and withdrew most of its agents from those areas

· Nationwide actively discouraged agents from selling in Black neighborhoods, and limited its hiring efforts to draw from mostly white neighborhoods

· Nationwide denied insurance to owners of insurable homes in Black neighborhoods, and

· Nationwide used actuarially unsound underwriting criteria that excluded older homes (most of the homes in urban, black neighborhoods).

When all these facts came out, an appalled jury required Nationwide to pay $100 million in damages, although this later got struck down by the Virginia Supreme Court. Eventually Nationwide agreed to pay a settlement of $17.5 million.

Another example of unfair discrimination in auto insurance is when insurers more frequently deny claims made by Black homeowners, or assume that their claims are more likely fraudulent. Recently the insurance giant State Farm has been accused of using fraud as a pretext to deny the insurance claims of Black consumers and is facing multiple lawsuits. In one case, Dr. Carla Campbell-Jackson, a Black woman who worked for State Farm for twenty eight years, recounted how senior executives pressured investigators to investigate and deny as many claims from inner city neighborhoods as possible. When she tried to fix this, she was fired.

And there is another contributing factor to discrimination in homeowners insurance: someone’s credit history. A recent study by Bankrate found that people with poor credit pay on over 77% more on average for homeowners insurance than people with excellent credit ($2,180 annually vs. $1,232 annually). Most states allow insurers to charge homeowners more based on credit history; only California, Maryland, and Massachusetts ban this.

The impacts of unfair discrimination in homeowners insurance are substantial. Consumers wind up paying higher premiums, and if they are denied insurance coverage, they can’t get the mortgage to buy a home in the first place. Since homeownership is one of the biggest avenues to wealth accumulation and intergenerational mobility in America, this perpetuates racial inequality and the wealth gap. If unfair pricing leads an insured homeowner to miss a payment and have coverage canceled on them, then their mortgage company will “force place” insurance on the property that protects only the lender. The lender will add the (high) cost of that force-placed coverage onto the homeowner’s mortgage payments. Additionally, insurers undervalue Black homes and often pay often fewer and less generous claims. And neighborhoods are affected as well; expensive insurance policies can burden homeowners and contribute to foreclosures, which can cause neighborhoods to deteriorate.

How can we stop racism in homeowners insurance? Here are several reforms that consumers should advocate for:

1. State Insurance Departments should launch in-depth investigations of insurers if they hear complaints from homeowners.
2. They should test premiums of various homeowners insurance policies in areas around their states, to get a better picture of the market and identify correlations between premiums and demographic make-up of communities. They should also use secret shopper tests to determine if applicants of color and white applicants are provided different company and coverage options or otherwise face different treatment.
3. Departments should aggressively prosecute and punish company lawbreaking — fines should be substantial enough to deter repeat offenses and not just be a cost of doing business.
4. States should ban the use of socioeconomic factors in insurance pricing, such as credit history.
5. Companies should be required to demonstrate that the models they use in each segment of their business — marketing, underwriting, pricing, claims handling, and fraud fighting — do not have built in biases or disparate impacts.

These same concerns, of course, apply to renters and mobile or manufactured home insurance as well. It is critically important that everyone living in the country can access the insurance market in order to protect their home free from the systemic bias and racial and ethnic discrimination that has plagued America’s housing markets for generations.