NU Online News Service, May 31, 3:28 p.m. EDT

Credit scoring using completely race-neutral factors is permitted under Texas law even if it has an unintended impact on minorities, the state's Supreme Court ruled late last week.

On Friday, the court ruled in an 8-0 decision in the case Ojo v. Farmers Group et al (No. 10-0245) that the state's law "does not prohibit an insurer from using race-neutral factors in credit-scoring to price insurance, even if doing so creates a racially disparate impact."

In the case, Patrick Ojo, an African-American resident of Texas, received a renewal on his homeowner's insurance with a 9 percent increase despite the fact he never had a claim.

He sued the company, claiming that the increase was the result "of unfavorable credit information acquired through its automated credit-scoring system."

Ojo sued the company on behalf of himself and other minorities who experienced the same increases because of credit-scoring, claiming that several "undisclosed factors" resulted in "disparate impacts for minorities and violate the federal Fair Housing Act."

The plaintiffs did not claim that the actions of the insurer were intentional, according to court documents.

The case went to the U.S. Court of Appeals for the Ninth Circuit, which went back to the Texas Supreme Court asking if the state's law would violate the federal Fair Housing Act if it were not for the McCarran-Ferguson Act, which puts the regulation of insurance in the hands of the state.

The court responded that the state's insurance code "is void of any language" that creates "a cause of action for a racially disparate impact." It also noted that the state's legislature has been very clear about creating "a cause of action" for disparate impact, but declined to do so here.

Responding to the ruling, David Snyder, vice president and associate general counsel of the American Insurance Association, says: "The vast majority of states (46) permit insurance scoring subject to such regulation as is the case in Texas. Credit-based insurance scoring continues to play a major role in creating a positive and competitive personal lines market. Its use allows insurance companies to give more favorable rates to consumers who are less likely to have costly losses."

Joe Woods, vice president for the Property Casualty Insurers Association of America, comments, "This decision will help add clarity regarding the use of insurance scores and the inappropriateness of disparate impact tests for property casualty insurance. For insurers, the issue has always been one of risk, not race. Insurance scoring is an objective process."

Neil Alldredge, senior vice president, state and policy affairs for the National Association of Mutual Insurance Companies said the association is pleased with the decision, noting that the decision is consistent with studies from around the nation.

"Credit-based insurance scoring has been the most debated, legislated, regulated, and adjudicated tool in recent memory, and in virtually every jurisdiction it has been found to be a benefit to consumers," he says.

This story was updated at 5:26 p.m.