State Farm accused of making it harder for Black customers to get insurance payouts
Suit alleges automated claims processing method disproportionately subjects claims of Black policyholders to greater suspicion
Black home insurance policyholders brought a federal class action against State Farm on Wednesday morning, alleging the multibillion-dollar company subjects their claims to greater scrutiny than it does those of white clients.
More specifically, the suit accuses State Farm of violating the 1968 Fair Housing Act by forcing Black policyholders to wait longer than their white counterparts for their claims to be approved.
It further alleges, using data drawn from 800 white and Black homeowners across the Midwest, that Black customers were 39% more likely than white customers to be asked to submit additional paperwork after filing a claim, and 20% more likely to need more than three meetings with State Farm employees in order to settle one. The additional hurdles Black customers have to clear in turn causes them to wait longer for necessary home repairs.
"Thirty-nine percent of white State Farm policyholder respondents had their claim paid out in one month or less from time of submission; by contrast, only 30% of Black homeowner respondents were paid out at the same rate," the suit claims.
Several hours after the complaint was filed, a State Farm representative released this statement:
"We take this filing seriously. This suit does not reflect the values we hold at State Farm. State Farm is committed to a diverse and inclusive environment, where all customers and associates are treated with fairness, respect, and dignity. We are dedicated to paying what we owe, promptly and courteously."
But attorney Aisha Rich of the law firm Fairmark Partners, who helped author the complaint, countered in her own prepared statement that “The data behind this lawsuit indicate that Black homeowners are subject to a fundamentally different and worse claims process at State Farm."
"State Farm should be a ‘good neighbor’ to all its policyholders, regardless of their race,” Rich said.
Other attorneys representing the putative class include a team from the Center on Race, Inequality and the Law at New York University School of Law, as well as the law firm Mehri & Skalet.
The class representative in the case, an Illinois woman named Jacqueline Huskey, is one of the many Black customers allegedly affected by State Farm's institutional bias. She filed a claim in June 2021 after a hail storm damaged her roof, but said it took the company two months to send adjusters to inspect the damages and four months for it to approve her claim for the cost of internal repairs. The insurer has still not approved her claim for external damages to the roof itself.
"As a result of State Farm’s delay, Huskey experienced further damage to her home—water damage to her kitchen and to two bathrooms caused by leaks in the unrepaired roof—and a decrease to her home’s overall value," the complaint states.
The cause of this alleged discriminatory practice is State Farm's automated claims processing system. Unlike the racism of yesteryear, when would-be Black homeowners faced explicit redlining by living human beings, modern discrimination can be carried out by computers using racially inflected data sets.
"In the insurance industry, as elsewhere in our society, racial discrimination has shifted from overt to covert," the lawsuit states. "Even though race-based redlining is now illegal, discrimination has persisted through practices such as using credit-based insurance scores and discriminatory underwriting guidelines that use age and home value as a proxy for race."
Automated processing systems are useful to large insurance corporations like State Farm because they both reduce labor costs and streamline customer intake. They also prevent any one employee's biases from affecting how a customer is treated by the company. But given that race, class and wealth are conflated in the U.S., the suit alleges that even the supposedly race-neutral economic factors an algorithm considers while evaluating the legitimacy of a claim can reinforce racial disparity.
"Unfortunately, algorithms too often have discriminatory effects, even where demographic data, such as race, are not included as inputs," the complaint states. "This is because algorithms can 'learn' to use omitted demographic features by combining other inputs that are correlated with race (or another protected classification), like zip code, college attended, and membership in certain groups." (Parentheses in original.)
The inherent bias of algorithmic systems has been noted beyond the insurance sector – their use is also criticized in policing, credit reporting and university admissions. The suit cites a 2021 Brookings Institute study which found that AIs trained on internet data often have "negative associations for the concept of an African American social group" due to the racist depiction of Black names online, and a 2020 article in the MIT Technology Review that argued that predictive policing algorithms ought to be abolished.
State Farm itself has acknowledged that racial bias can extend into the AI learning process, given that the company's automobile division filed a software patent in 2022 for a "method of controlling for undesired factors in machine learning models."
"The model is trained to probabilistically correlate an aspect of the applicant's appearance with a personal and / or health -related characteristic. Any undesired factors, such as age, sex, ethnicity and / or race, are identified for exclusion," the patent's abstract states, but there is no indication that this model has been applied to processing homeowners insurance claims.
Given the alleged breach of Black homeowners' civil rights, the suit asks a federal judge to enjoin State Farm from using its current automated claims processing system. It also calls for audits on the company to ensure an end to the discriminatory effects of that system.
"State Farm could examine the algorithmic bias that inflicts enormous harm on Black policyholders, but its failure to do so necessitates this litigation,” said attorney Alexander Rose of Fairmark Partners.