Congress to include the safe harbor provision dealing with underwriting practices.
The legislative history of Title III also supports the court's conclusion. For example, one House Report, while discussing the safe harbor provision for insurers, emphasized that an insurer would not be able to "charge a different rate for [insurance] coverage solely because of a physical or mental impairment, except where the refusal, limitation, or rate differential is based on sound actuarial principles or is related to actual or reasonably anticipated experience." 1990 U.S.C.C.A.N. 267, 420. The Report goes on to emphasize that the safe harbor provision may not be "used as a subterfuge to evade the purposes of titles I, II and III of this legislation." 1990 U.S.C.C.A.N. 267, 420. In addition, another House Report stated that the safe harbor provision "makes it clear that insurers may continue to sell to and underwrite individuals applying for life, health, or other insurance on an individually underwritten basis, or to service such insurance products, so long as the standards used are based on sound actuarial data and not speculation." 1990 U.S.C.C.A.N. 267, 493 (emphasis added). If the ADA did not cover underwriting practices at all, as United of Omaha contends, such pronouncements in the legislative history would be rendered meaningless.
United of Omaha urges the court to find that Title III deals solely with physical barriers to access. To begin with, contrary to the court's analysis above, it contends that the safe harbor provision indicates that Congress adopted a hands-off approach to underwriting practices and instead left the issue to the states to decide. According to United of Omaha, the safe harbor provision makes clear that the ADA does not apply to underwriting procedures. This argument, however, is without merit. Although section 12201(c)(1) does refer to state law, it does not in any way suggest that Title III of the ADA is not applicable to underwriting practices. Instead, a more reasonable interpretation of the provision is that in order to comply with the mandate of the ADA, the risk underwriting engaged in by insurance companies must be based on or not inconsistent with state law. See, e.g., Kotev, 927 F. Supp. at 1322 (finding that insurers would not need the safe harbor provision if they "could never be liable under Title III for conduct such as the discriminatory denial of insurance coverage.")
Defendant also points to several cases in support of it argument.
For the following reasons, however, these cases are either inapposite to the issues currently before this court or the court respectfully disagrees with their reasoning.
The primary case relied upon by defendant is Parker v. Metropolitan Life Ins. Co., 121 F.3d 1006 (6th Cir. 1997), cert. denied, 118 S. Ct. 871, 139 L. Ed. 2d 768 (1997), where a divided en banc panel considered whether a benefit plan provided by an employer fell within the prohibitions of Title III. Concluding that "a benefit plan offered by an employer is not a good offered by a place of public accommodation," the court disagreed with Doukas and Kotev, and held that a benefit plan offered by an employer and administered by a insurance company was not within the purview of the ADA. 121 F.3d at 1014.
Although at first blush this case may seem to be problematic for plaintiff, a close reading demonstrates that its holding is limited to its facts, which are quite different from those of the instant case. For example, the court made clear that plaintiff Parker "did not seek the goods and services of an insurance office" but rather accessed a plan provided in the first instance by her employer. Id. at 1010. In fact, in holding that plan was not a good or service offered by a public accommodation, the Sixth Circuit emphasized that no member of the public could obtain the long-term disability policy that plaintiff had directly from Metropolitan Life as it was a product of negotiations between the insurance company and her employer. Id. at 1011. Chabner, on the other hand, purchased insurance directly from United of Omaha. His policy had nothing to do with his employer.
In addition, the Parker court recognized that employee benefit plans were governed by Title I and not Title III of the ADA. Id. at 1014-15. As Chabner's plan with United of Omaha was not connected to any employer, Title I is not at issue here. Furthermore, the Parker court held the ADA was not implicated because the ADA prohibits only discrimination between the disabled and the non-disabled, and the policy at issue discriminated between people with different types of disabilities (specifically, mental and physical). Id. at 1015. Here, however, plaintiff is alleging, and defendant does not dispute, that he was treated differently than non-disabled persons, not differently than persons with dissimilar disabilities.
It is true that the Sixth Circuit concluded that "a public accommodation is a physical place." Id. at 1014.
In so doing, it disagreed with Carparts Distribution Center, Inc. v. Automotive Wholesaler's Ass'n of New England, 37 F.3d 12, 19-20 (1st Cir. 1994) where the court held that a person need not have physically entered a structure in order to be protected from discrimination. See also, infra. The Sixth Circuit based its conclusion on the "clear connotation" of the statute. 121 F.3d at 1014. For the reasons discussed supra, however, this court finds that the plain language of the statute supports its application to insurance underwriting practices. Thus, it respectfully disagrees with the Sixth Circuit.
Defendant also relies on Pappas v. Bethesda Hospital Association, 861 F. Supp. 616 (S.D. Ohio 1994), in support of its' argument.
There, the court held that Title III claims were limited to "an inability to make physical use of the services of a place of public accommodation." Id. at 620. Pappas however, is also distinguishable from the case at bar as the Pappas plaintiff was challenging an insurance plan provided by her employer, not one provided directly by an insurance company. Id. at 617. In addition, the court cited to no cases supporting its finding, instead relying on its interpretation of the language of the statute. As discussed supra, this court has concluded that the plain language of the statute supports a finding that insurance underwriting practices are covered by Title III of the ADA and thus respectfully disagrees with the Pappas court.
Instead, this court adopts the sound reasoning underlying the opinions of the numerous courts that have held that claims of discrimination in underwriting are cognizable under the ADA. Although the Ninth Circuit has yet to consider the issue, two district courts in California have concluded, based on the language of the statute, the policies behind that ADA, and the legislative history, that Title III encompasses insurance underwriting. Kotev, 927 F. Supp. at 1320-23, Cloutier, 964 F. Supp. 299, 301-02. In addition, numerous other district courts, for similar reasons, have held the same. See, e.g., Doukas v. Metropolitan Life Ins. Co., 950 F. Supp. 422, 424-27 (D.N.H. 1996) (concluding that "under the plain language of Title III, the Act would extend to the substance or contents of an insurance policy"); Baker v. Hartford Life Ins. Co., 1995 U.S. Dist. LEXIS 14103, *9, 1995 WL 573430, *3 (holding that while the word "place" does imply a physical location, "the ADA does not require a plaintiff to be physically present at the place of public accommodation to be entitled to non-discriminatory treatment.")
In addition, while no circuit court has yet held that Title III encompasses insurance underwriting, the First Circuit has concluded that a person need not have physically entered a structure in order to be protected from discrimination. Carparts, 37 F.3d at 19-20. As the court succinctly stated:
Neither Title III nor its implementing regulations make any mention of physical boundaries or physical entry. Many goods and services are sold over the telephone or by mail with customers never physically entering the premises of a commercial entity to purchase the goods or services. To exclude this broad category of businesses from the reach of Title III and limit the application of Title III to physical structures which a person must enter to obtain goods and services would run afoul of the purposes of the ADA and would severely frustrate Congress's intent that individuals with disabilities fully enjoy the goods, services, privileges and advantages, available indiscriminately to other members of the general public.
Id. at 20; accord, Schultz v. Hemet Youth Pony League, 943 F. Supp. 1222, 1225 (C.D. Cal. 1996).
Thus, the clear weight of authority supports the court's conclusion that insurance underwriting is covered by Title III of the ADA.
II. Application of the Safe Harbor Provision
As discussed supra, the safe harbor provision of the ADA incorporates state law. Under section 10144 of the California Insurance Code, any rate differential must be based on "sound actuarial principles" or related to "actual and reasonably anticipated experience." In addition, a violation of the ADA also constitutes a violation of the Unruh Act. Cal. Civ. Code § 51. Therefore, each of plaintiff's claims require the court to make the same inquiry, specifically, whether United of Omaha based its rate differential on "sound actuarial principles" or on grounds related to "actual and reasonably anticipated experience."
A. Burdens of Proof
The parties dispute who bears the burden of proof as to whether the insurance rate differential is based on sound actuarial principles or is related to actual and reasonably anticipated experience. Chabner's argument that section 10144 expressly places the burden on the defendant insurer is without merit. Similarly, the statute does not identify itself as an affirmative defense, perhaps because it is stated hortatorily and not as a cause of action.
However, in Piquard, after construing ADA section 501(c), 42 U.S.C. § 12201(c), to hold insurers to a standard virtually identical to California Insurance Code section 10144, the district court determined that the defendant in an action under the ADA bore the burden of proving the insurance plan conformed to state law. 887 F. Supp. at 1125. Basing its decision on the Equal Employment Opportunity Commission's ("EEOC") Interim Policy Guidance on ADA and Health Insurance, the court explained: "In the health insurance context, the defendant . . . insurer has control of the risk assessment, actuarial, and/or claims data relied upon in adopting the challenged disability-based distinction. The plaintiff has no access to such data." Id. Although the EEOC's Interim Policy addressed employer-provided health insurance plans and the Piquard court applied it within the employment benefit context, its reasoning is persuasive applied to insurance issues outside of the employment context. Furthermore, the prejudice to Chabner that might result from United of Omaha's control of the evidence regarding its actuarial process could be mitigated by shifting the burden of production instead of the burden of proof.
At least one court applying the ADA has employed the burden-shifting analysis from Title VII discrimination cases. See Doe v. Kohn Nast & Graf, P.C., 862 F. Supp. 1310, 1316 (E.D. Pa. 1994) (Title VII standard applied under in employment case under ADA). Under Title VII discrimination law, generally, if the plaintiff "satisfies the minimal requirements" of proving a prima facie case of discrimination by a preponderance of the evidence, the burden shifts to the defendant to produce evidence of a legitimate, nondiscriminatory reason for the challenged conduct. See, e.g., St. Mary's Honor Center v. Hicks, 509 U.S. 502, 113 S. Ct. 2742, 2746-47, 125 L. Ed. 2d 407 (1993). The ultimate burden of persuasion, however, remains with the plaintiff. 113 S. Ct. at 2747.
Here it is undisputed that Chabner was charged a substantial rate differential based solely on his disability. Analogous to a Title VII defendant's burden of producing a nondiscriminatory reason, United of Omaha must now come forward with evidence that the rate differential was based on sound actuarial principles or experience. United of Omaha's argument that Chabner's prima facie case also must include proof that there was no sound actuarial basis finds no support in case law or logic. However, if United of Omaha produces evidence that the differential was based on the permitted exception, Chabner must overcome that evidence and ultimately prove otherwise.
Under the Unruh Act, "[a] violation of the right of any individual under the [ADA] shall also constitute a violation of [section 51 of the Unruh Act]." Cal. Civ. Code § 51. At least where, as here, a plaintiff bases an alleged Unruh Act violation solely on liability under the ADA, the allocation of burdens should be the same for the purpose of determining liability under both statutes.
United of Omaha argues that because it has identified the sources it consulted to establish the rate differential, Chabner is equally capable of proving whether those sources, including his own medical records, represent sound actuarial principles or actual and reasonably anticipated experience as required by Insurance Code section 10144. The question, then, is whether United of Omaha produced evidence sufficient to create a genuine issue of material fact that the process it used conformed to sound actuarial principles or experience.
B. Sound Actuarial Principles or Experience
Chabner's argument boils down to this: United of Omaha has discriminated against Chabner by increasing his insurance rate solely due to his disability and without any sound actuarial basis or relation to actual experience. His summary judgment motion is based primarily on these facts: first, United of Omaha's underwriter authorized a nonstandard rate for Chabner based on her subjective evaluation of his medical records, which merely described his disability, and on industry manuals which lacked any sound actuarial basis; then, for unknown reasons, United of Omaha set an actual insurance cost different from that recommended by its underwriter. United of Omaha does not dispute that its underwriter relied on neither personal experience with FSH MD applicants nor internally developed actuarial data regarding FSH MD. Instead, it argues that its underwriter's discretionary evaluation of Chabner's application and medical records and consultation of industry manuals constituted sound actuarial principles or experience. Chabner essentially contends that United of Omaha has failed to carry its burden of producing evidence to show Chabner's rate differential is based on sound actuarial principles. Chabner further contends that even if the burden were upon him to prove United of Omaha failed to base the rate differential on actuarial data, he has met that burden.
Where underwriters are permitted to exercise significant discretion in setting insurance rates for people who represent nonstandard risks, the potential for disability-based discrimination surely exists. Similarly, if underwriters rely on industry manuals and standards which lack any basis in actuarial data or experience to determine the extra mortality corresponding to a non-standard risk, the specter of institutionalized discrimination looms.
United of Omaha has not carried its burden of producing evidence that the rate differential was based on sound actuarial principles. According to United of Omaha, its underwriter determined Chabner's rate differential by reviewing his application and medical records, by applying her experience, which included some experience with MD but none with FSH MD specifically, and by consulting generally accepted underwriting sources.
While sound actuarial principles may include elements of discretion and judgment based on individual circumstances, they must also include reference to some sort of actuarial data either in the form of actuarial tables or clinical studies estimating mortality rates. See 28 C.F.R. Ch. I, Pt. 36, App. B, § 36.212, at 612 (1995) (individual underwriting standards must be based on sound actuarial data and not on speculation). The excerpts of the Brackenridge manual found in the record contain no relevant actuarial tables whatsoever. United of Omaha argues that the Brackenridge manual summarizes actuarial data and points to a footnote following the chapter assigning a 75 to 150 percent extra mortality rating to FSH MD as evidence that the rate differential is based on a clinical study.
However, United of Omaha concedes that this twenty-six-year-old reference contains no "hard data" regarding the mortality risk of a person with FSH MD. Similarly, it produces no actuarial data to indicate that the specific complications of Chabner's disease have adverse effects on mortality. Where the record is devoid of actuarial data regarding the mortality rate associated with FSH MD, no reasonable trier of fact could draw an inference that United of Omaha adhered to sound actuarial principles in charging Chabner a rate differential.
It is a closer question, however, whether the evidence supports an inference that the rate differential was based on "actual and reasonably anticipated experience." The California statute's requirement of actual and reasonably anticipated experience departs from the model statute, which requires "actual or reasonably anticipated experience." See NAIC Model Regulation § 3. United of Omaha does not dispute that it had no actual, internal experience with FSH MD. Therefore, if the statute were read literally, United of Omaha could not prevail under the "experience" prong of section 10144's exception. However, section 10144's exception is read more logically to allow an exception for actual or reasonably anticipated experience.
Drawing from the language of the NAIC Model Regulation, the Department of Justice has construed section 501(c)(1) of the ADA to require that the standards an insurer employs to individually underwrite a nonstandard applicant must be "'based on sound actuarial data and not on speculation.'" 28 C.F.R. Ch. I, Pt. 36, App. B, § 36.212 at 612 (1995) (quoting H.R. Rep. No. 485, 101st Cong., 2d Sess., pt. 3 at 70 (1990) (hereinafter, "Judiciary Report"). Both the DOJ and the legislature expressly considered the language of the model regulation's experience prong before requiring that insurers base their underwriting standards on actuarial data. Id. Thus, a basis in actuarial data is required under both the actuarial principles and the experience prongs.
United of Omaha, however, has produced no evidence that it relied on actuarial data regarding Chabner's anticipated mortality rate drawn from mortality studies, its own experience, or reasonably anticipated experience. United of Omaha's failure to produce any actuarial data upon which it based the 96.5% rate differential, therefore, precludes it from invoking the exception to section 10144. Chabner is entitled to summary judgment because United of Omaha has failed to produce evidence to rebut Chabner's prima facie case of discrimination based on disability.
For the foregoing reasons, plaintiff's motion for summary judgment is GRANTED.
IT IS SO ORDERED.
Dated: Jan 15, 1998
MARILYN HALL PATEL
Chief United States District Judge