In America at century’s end, the surest way to obtain special treatment for a social group is to assert that its members suffer from "discrimination." That catechism is well understood by feminists who are currently lobbying the National Association of Insurance Commissioners (NAIC) on behalf of victims of domestic violence.
Bowing to pressure from a handful of self-styled consumer advocates, an NAIC working group that polices "unfair discrimination" in the insurance industry has spent the past several months drafting something called the "Unfair Discrimination Against Subjects of Abuse in Property and Casualty Insurance Model Act." The law would prevent property insurers from denying a claim if a policyholder’s loss occurred because of "abuse." Insurers would also be prohibited from canceling policies or raising premiums "on the basis of abuse status or abuse-related claims of the applicant or insured." Similar legislation has been introduced in Congress.
The impetus for this kind of regulation isn’t hard to understand. The O.J. Simpson trials greatly increased public awareness of – and sympathy for – victims of domestic abuse. As a consequence, politicians and citizen activists suddenly look askance at insurance companies that respond to an abuse victim’s escalating damage claims by raising rates or canceling coverage. Terry Fromson of the Women’s Law Project captured their visceral revulsion well when she announced to the NAIC working group at its June meeting in Chicago, "Victims of domestic abuse shouldn’t be penalized for something they’re not responsible for."
Unfortunately, that maxim misconceives the nature of insurance underwriting. Insurers are not moral arbiters. They don’t assign blame for life’s misfortunes, and they don’t apply sanctions. Moreover, it is extremely disingenuous to suggest insurers are practicing unfair discrimination when they respond to the higher loss costs associated with domestic violence by raising rates or denying coverage. That is, after all, how insurers treat all high-risk insureds.
Like any business, insurance providers try to structure the price of their products to reflect their costs. An insurer’s costs are largely determined by the loss experience of its customers. Since not all insureds have the same risk of incurring a loss, insurers try to control their costs by selecting and classifying the persons or properties to be insured on the basis of characteristics that are known to be associated with risk. The price and amount of coverage offered is determined by the risk class to which one is assigned.
Typically, if a property-casualty policyholder files three or more damage claims within a given period, either his premium will increase or his coverage will not be renewed. The proposed law prohibiting "discrimination" against victims of abuse would require insurers to grant a special dispensation if the policyholder claimed that a loss occurred because of domestic abuse. That this would establish fertile ground for fraud is only too obvious. But it should also be noted that to treat abuse-related claims less rigorously than other claims, as the model law would require, is itself an act of discrimination in favor of a particular class of high-risk individuals.
One must not overlook the significance of the qualifier "unfair" when considering what might constitute unfair discrimination in the context of insurance underwriting. Insurers practice fair and reasonable discrimination every day when they assess and classify applicants for insurance on the basis of risk.
Because insurance regulators understand that the modern system of insurance could not survive if insurers were required to treat all risks the same, they have tended historically to define "unfair discrimination" as discrimination unrelated to risk. Thus, if an insurer denied coverage due to racial or religious animus, rather than if the applicant presented an unacceptably high degree of risk, that would constitute unfair discrimination under the laws of all states. The subjects-of-abuse model law attempts to mimic this tradition by pretending that victims of abuse are an oppressed minority group – as if being abused were an immutable characteristic akin to race, gender, or disability.
So insulating claims that are ostensibly abuse-related from neutral, risk-based underwriting standards has nothing to do with preventing unfair discrimination. But that doesn’t mean policymakers are precluded from deciding that society’s interests are best served by mandating special treatment for a particular class of insureds.
There may, after all, be a broad social consensus in favor of recognizing yet another victim group and creating for it an entitlement to insurance coverage. Framing the issue in this way, however, raises troubling questions. Is it fair to force low-risk insureds to subsidize the increased cost of insuring high-risk policyholders? Considering the already high incidence of fraudulent damage claims plaguing the insurance industry, how are insurers to verify that a given policyholder’s claim stems from domestic abuse? And what might be the long-term effect of establishing a regulatory precedent that equates risk-based discrimination with invidious discrimination motivated by malice or bigotry? Also deserving scrutiny is the notion that insurance regulation should protect consumers from adverse underwiting decisions that stem from circumstances they cannot alter. A prominent argument advanced by the model law’s proponents is that since being a victim of abuse is not within the insured’s control, it is unfair for an insurer to treat abuse-related claims similar to damage claims resulting from voluntary high-risk activities, such as skiing or skydiving. In testimony before the NAIC, proponents of the model act repeatedly stressed that being a victim of chronic domestic violence is "not a voluntary lifestyle." As a rationale for special treatment, however, this assertion is problematic.
There are potentially a great many high-risk insureds who could plausibly argue that their risk characteristics are beyond their control. An incompetent driver, for example, could explain his history of multiple accidents by citing his congenitally slow reflexes.
Conundrums such as these are obscured when the question of how to treat abuse-related property insurance claims is cast in terms of prohibiting discrimination. So it is hardly surprising that advocates have persistently invoked the discrimination mantra. In written comments submitted to the Unfair Discrimination Working Group at the NAIC’s summer meeting, the Northwest Women’s Law Center urged regulators to "protect the innocent victims of domestic violence from discriminatory insurance practices." According to the Illinois Coalition Against Domestic Violence, the NAIC’s mission must be to "prohibit insurers from penalizing victims of abuse on the basis of the acts of the batterer." A complex policy debate is thus reduced to a Manichean struggle that pits the enemies of discrimination against its practitioners.
None of this is to suggest, of course, that the problem of domestic abuse should be ignored. The state has a fundamental obligation to identify, arrest, and prosecute those responsible for domestic violence. Charitable and religious organizations can lend their assistance by counseling victims to disengage themselves from their abusers. But the NAIC should reject the canard that treating abuse-related claims like other claims constitutes unfair discrimination. Then perhaps we can have a rational conversation about how insurance companies and others should respond to a tragic and vexatious social problem.
Robert Detlefsen is Director of CEI’s Insurance Reform Project.