Court of Appeals Expands Scope of Discrimination Statute

With its recent ruling in Cortez v. Progressive County Mut. Ins. Co., No. 3-99-00846-CO (Tex. App.—Austin, Sept. 13), the Austin Court of Appeals called into question the scope of the anti-discrimination statute and potentially expanded it significantly. In an opinion issued on rehearing, the court held the statute applied to any discrimination between persons of the same class and hazard and was not limited to classically protected classes.

At issue in the Cortez opinion was a flexible commission arrangement, under which an agent could select, within certain parameters, his commission structure. The commission selected by the agent did not affect the premium actually received by Progressive. Thus, depending upon the agent’s choice, and the customer’s choice of agent, some customers could potentially be charged slightly more than others for essentially the same coverage. The trial court granted summary judgment in favor of Progressive, and the Court of Appeals initially affirmed it. On rehearing, however, the court withdrew its prior opinion, reversed its position and concluded Progressive was not entitled to summary judgment. The case was remanded for further proceedings.

Article 21.21-8 of the Texas Insurance Code precludes unfair discrimination and applies to any person engaged in the business of insurance. The statute requires, in part, that “no person shall engage in any unfair discrimination by making or permitting any unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees or rates charged for any policy or contract of insurance or in the benefits payable thereunder, or in any of the terms or conditions of such contract, or in any other manner whatever.”

While “unfair discrimination” is not defined in Article 21.21-8, many have assumed that it would incorporate the definition in a preceding section, Article 21.21-6, also entitled “unfair discrimination.” That section provides, broadly, that “no person shall engage in any practice of unfair discrimination which is defined in this article, or is determined pursuant to this article to be a practice of unfair discrimination in the business of insurance.”

“Unfair discrimination” is further defined as:

(a) refusing to insure; refusing to continue to insure; limiting the amount, extent, or kind of coverage available; or charging an individual a different rate for the same coverage because of race, color, religion, or national origin;

(b) refusing to insure; refusing to continue to insure; limiting the amount, extent, or kind of coverage available; or charging an individual a different rate for the same coverage because of the age, gender, marital status, or geographic location of the individual; however, nothing in this paragraph shall prohibit an insurer from taking marital status into account for the purpose of defining persons eligible for dependent benefits;

(c) refusing to insure; refusing to continue to insure; limiting the amount, extent, or kind of coverage; or charging an individual a different rate for the same coverage because of disability or partial disability.

The breadth of discrimination, as defined in 21.21-6, is familiar, however, and includes most of the “protected classes” recognized in other areas of law. But article 21.21-6 also includes certain exceptions, including an exception for differences based on sound actuarial principles. The language regarding refusal to insure based on sound actuarial principles, is echoed in Article 21.21-8, Section 4. The two articles were enacted in 1995, and have been the subject of little reported case law.

In its initial opinion the Court of Appeals agreed with Progressive’s argument that the two articles were intertwined, reasoning that one addressed administrative enforcement, while the other created a private cause of action. The court also “presumed” that the term “unfair discrimination” would have a uniform meaning throughout the statutory scheme.

However, in the opinion on rehearing the court severed interpretation of the two provisions, and broadened the range of discrimination, as prohibited by Article 21.21-8, beyond the confines of redlining and protected classes. According to the court, any underwriting distinction between individuals of the same class and hazard is a violation of the statute.

Even under the Cortez court’s analysis the alleged discrimination must still be within the same class and hazard. Nevertheless, this opinion could have wide-ranging ramifications. Not only could it subject insurers to possible exposure, but it could also lead to potential exposure on the part of agents. Article 21.21-8 expressly applies to any person engaged in the business of insurance, and specifically includes agents. Arguably, an independent agent who fails to offer each customer the lowest possible premium is in violation of the statute. And, the penalties are steep. The statute allows a private cause of action for recovery of economic damages and additional penalties up to $25,000 per claimant for a knowing violation.

In addition, Article 21.21-8 addresses not only underwriting but also claims and, therefore, has additional implications for insurers and adjusters. Some policyholder lawyers are already contending that insurers’ changing positions over time on how certain claims are handled, such as coverage for mold resulting from water damage, is in violation of Article 21.21-8.

While this argument appears to be far beyond the legislative intent, the lack of clarity and definition regarding unfair discrimination make it a likely source of litigation.

Certainly, the issues are far from resolved and appear ripe for attention by the Texas Supreme Court. Until then, the debate–and litigation–will likely continue as to the scope of the statute, the meaning of “unfair discrimination,” and the application of the same class and hazard requirement.

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowner’s policies.

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