Getting and Using Adequate Fair Housing Insurance Coverage

This month, we are going to teach you about liability insurance that covers housing discrimination. This is important because even if you follow every lesson in Fair Housing Coach, someone someday may claim that you or your community discriminated against him in violation of fair housing laws. If that happens, you need to know whether your insurance covers the claim and, if it does, to what extent your community is covered.

This month, we are going to teach you about liability insurance that covers housing discrimination. This is important because even if you follow every lesson in Fair Housing Coach, someone someday may claim that you or your community discriminated against him in violation of fair housing laws. If that happens, you need to know whether your insurance covers the claim and, if it does, to what extent your community is covered.

Many different kinds of liability policies are available to communities and their owners, managers, and employees. You want to make sure that you have the right kind of coverage, so that your insurance will cover you for any discrimination claims you might face.

In this month's lesson, we will give you seven rules to follow to help you make sure you have fair housing discrimination insurance coverage and to use your policy properly. At the end of our lesson, you can take the Coach's Quiz to see how much you've learned. And you can copy and distribute the “At a Glance” box on the last page of this issue, so you and other staff members at your community will have a quick reference to help you remember and comply with the rules.



As you know, the Fair Housing Act (FHA) prohibits discrimination based on race, color, national origin, sex, familial status, disability, and religion. Liability for fair housing violations can arise from both intentional and unintentional acts that result in discrimination—and it can be very costly. The costs to you and your community can include not only a settlement or judgment but also the expenses involved in defending the claim or lawsuit.

There are more organizations than ever whose job it is to send out testers posing as prospects to seek out and document discrimination in housing. Also, many states and localities have and enforce their own fair housing laws. Some of the local and state fair housing laws are broader than federal law and protect more classes—for example, age, sexual orientation, source of income, or student status.

Thus, communities have a more pressing need for insurance that covers fair housing complaints and lawsuits, says D.J. Ryan, fair housing specialist and director of client education at the California law firm of Kimball, Tirey and St. John, LLP. If you don't have insurance that covers such costs and they are not covered by your general liability policy, they will have to come from out-of-pocket—which could be your savings, your salary, or your assets. And don't forget, if you lose, you could wind up paying the plaintiff's costs too, points out Ryan.


Rule #1: Know What Coverage You Have

Your community has or should have a general liability insurance policy. Review that policy to see what it covers. You may think that your insurance, usually the Errors and Omissions section, covers fair housing discrimination claims, but unless the policy says so specifically, chances are, you're not covered. If your insurer tells you that you're covered, but you don't see fair housing claims and lawsuits specifically mentioned in the policy, ask your insurer to tell you what the coverage includes. Then, ask the insurer to rewrite your policy to include fair housing claims specifically.

However, if the policy doesn't specifically state that it covers fair housing claims and lawsuits, it probably doesn't cover them at all. “The best bet for a property owner or manager is to obtain a stand-alone policy specifically to address your exposure to claims of discrimination against residents,” says Robert J. Cap, an attorney and product manager for Shand Morahan and Company, Inc., an insurer that provides housing discrimination coverage.

Example #1: A community organization sued the owner-developer of rental units for fair housing law violations, based on claims that several testers had been steered to particular buildings or neighborhoods because of the testers' race or color. In turn, the owner-developer sued its insurer for indemnification and defense costs under its general liability policy. The federal judge ruled that the policy did not cover fair housing discrimination and dismissed the lawsuit against the insurer [Rosenberg Diamond Development Corp. v. Wausau Insurance Co., June 2004].

Example #2: An African-American woman sued an owner for discrimination in violation of fair housing law. The case was settled, and the owner sought reimbursement, under his business owner's liability policy, for his costs in defending the suit and paying the settlement. The insurer denied coverage, so the owner sued. A New Jersey court ruled that the policy did not specifically cover the discrimination claim, so the insurer did not have to reimburse the owner [Powell v. Alemaz, Inc., November 2000].

Rule #2: Know Your Needs

If you decide to obtain a discrimination insurance policy, make sure you get the most coverage available for your premium. These types of policies are not available in abundance, says Cap, although they are available in all 50 states. The policy Cap's company writes covers damages and expenses up to the stated limits of liability, with a 5 percent co-insurance.

Cap says the policy should provide coverage for the wrongful discrimination of a resident in areas related to a lease—for example, refusing a lease, refusing to give a resident's guest access to the community, or evicting the resident.

Cap says that the policy his company writes “provides coverage to the Named Insured, its directors, officers, partners, shareholders, trustees, and any salaried manager or employee acting under the authority of their employment, as long as the Named Insured is included in the suit as a party defendant.” Thus, employees who are accused of discrimination in violation of fair housing law are covered by these policies as long as the acts cited in the complaint occurred in the course of their employment.

Rule #3: Know What Is or Can Be Covered

Be sure that your housing discrimination policy covers not only the resident's tenancy but also the leasing process. Ryan has seen some policies that cover only claims of violations that occurred during the leasing process. Therefore, if a resident files a fair housing claim accusing a staff member of refusing to make repairs on his unit because he is Hindu, your employee, you, and your community would not be covered under that particular housing discrimination insurance policy.

You also want to be sure that complaints and lawsuits are covered under your insurance policy, not just one or the other. If a prospect files a complaint with HUD, you want to be covered whether or not the complaint turns into a full-blown lawsuit. You need to know that your fair housing insurance covers every step of the process. Likewise, you want to be sure that the costs incurred in your defense are covered even if the claims turn out to be false. There are costs associated with winning a complaint or lawsuit, too. You need to know that your insurer will pay your expenses even when you succeed in defeating a fair housing claim.

In terms of financial liability, make sure that your policy covers not only the amount of the award or settlement, but the costs of your defense, such as attorneys' fees. Verdicts and fines are rising, many reaching into hundreds of thousands of dollars and more, says Nadeen W. Green, fair housing expert and senior counsel at For Rent Media Solutions.

COACH'S TIP: Find out whether your policy will cover acts that occurred prior to your purchase of the policy. In other words, know when the coverage begins. If your policy starts in April and a claim is filed in June for an act alleged to have occurred the prior January, will your policy cover it?

Rule #4: Know What Can't or Won't Be Covered

In most jurisdictions, intentional discrimination will not be covered by insurance policies. For example, in Circular Letter No. 6 (1994) and an opinion dated Dec. 20, 2005, the New York State Insurance Department states that it is against public policy in New York State to insure intentional discrimination under fair housing law.

This doesn't mean that it is against the law to issue fair housing discrimination insurance in New York; it means that acts that are not intentionally discriminatory, but are the results of community policies that are later found to have discriminatory impact, can be covered by insurance in New York. However, acts that are deliberately discriminatory cannot be insured in New York and in most other places.

Example: The decision in the Rosenberg case referred to above was appealed. The federal appeals court ruled that insurance coverage for intentionally discriminatory acts is barred by public policy in New York [Rosenberg Diamond Development Corp. v. Employers Insurance Company of Wausau, March 2005].

Similarly, very often a court will award punitive, or disciplinary, damages as part of an award in a fair housing discrimination lawsuit. These awards are meant to punish owners, managers, and communities for violating fair housing law and to discourage them and others from committing the same kinds of violations in the future. Most states do not allow insurance to cover punitive damages. Cap says that the policy his company issues covers punitive damages unless prohibited by law.

Also excluded from coverage are claims that are finally determined to be in any way related to any dishonest, fraudulent, criminal, or malicious act or omission committed by any insured, according Cap. This exclusion does not apply to damages that result solely from the “vicarious liability” of the named insured—that is, the liability an employer assumes for the actions of an employee.

Rule #5: Make Sure Your Policy Gives You Control

Since your insurer will ultimately be responsible for paying your costs and any settlement or award ordered, your insurer's interests may differ from yours at several points during the proceedings. Thus, you will want your policy to specify that you have the right to make the final decisions in certain key areas.

First, you want the right to choose your own attorney. If you own or manage a community and have done so for any period of time, you probably already have a relationship with an attorney who is familiar with fair housing law and can represent you in a fair housing proceeding. You may decide that you would rather choose that attorney than one chosen for you by your insurer, especially when you are unsure of the attorney's qualifications or the firm your insurer chooses.

Second, legal fees and costs can be very expensive, as Green says, and you may not want or be able to afford to wait until the end of the proceedings to get reimbursed for your costs from your insurer. As Cap notes, expenses are covered, up to the policy limit.

However, some policy forms are not written on a “duty to defend” basis. Those policy forms require the insured to initiate, and pay for, the defense of the claim. With those types of policies, an insured community may want to be reimbursed for defense costs and expenses as the case proceeds, not when it's over. In contrast, a “duty-to-defend” policy requires the insurer to undertake and pay for the defense of the claim.

Third, you and your insurer may disagree on whether to fight a fair housing discrimination claim or to settle it out of court. A fair housing lawsuit and settlement can mean bad publicity for your community, says Green. If you or your staff did not commit the acts complained of, you may want to fight the claim. And you will want your fair housing discrimination insurance policy to give you, and not the insurer, the right to decide whether to go forward.

Don't forget that a court will look at prior verdicts, settlements, and awards when evaluating a new claim, and may increase damages because of prior awards.

COACH'S TIP: Often when a policy allows the insured the right to make settlement decisions, it also contains a “hammer clause.” A hammer clause usually says that an insurer will pay to defend you up until the point when the insurer decides it's time to settle the case. If you decide to go ahead anyway, your coverage will probably cease. If your policy does have a hammer clause, ask your insurer whether it is willing to negotiate the clause.

Some insurers use a modified hammer clause in their fair housing discrimination policies. If a client chooses to go ahead with a lawsuit after the insurer recommends a settlement, the client is responsible for the monetary difference between the amount the insurer recommended and the amount actually awarded.

Rule #6: Know How to Use Your Policy

If you do obtain fair housing discrimination insurance, you need to know when and how to use it. Cap says his firm's policy is issued on a claims-made and-reported basis and on a duty-to-defend basis. This means that you need to report a claim as soon as you become aware of it.

Even if you are not notified of a claim formally, you should report it to your insurer and your attorney as soon as possible. The insurer may assist in the investigation, and as we know from the February 2007 issue of Fair Housing Coach, the sooner you start your investigation of a fair housing claim, the better your position to respond. For example, if a staff member hears a rumor that a resident has said she thinks her request for a modification has been denied because of her religion, report the rumor to your insurer as soon as you hear about it.

Remind your staff to let you know as soon as they hear about a fair housing complaint. They don't have to believe that the acts occurred, and they don't have to agree with the claimant. They just need to tell you as soon as they hear that someone is complaining about discrimination. This may help you make sure the costs are covered by your insurer. It also may help you head off a formal complaint by allowing you to take remedial action.

Rule #7: Continue to Comply with Fair Housing Law

As the cases in the examples above show, intentional acts of discrimination will probably not be covered by fair housing insurance in most cases. And you know that one sure way to prevent intentional discrimination is by making and enforcing community policies that are nondiscriminatory.

Another way to prevent intentional fair housing discrimination is by continuing to have your staff trained and educated about fair housing issues. A fair housing insurance policy is no substitute for knowing how to comply with fair housing law.

And even if your insurance coverage pays for damages and legal fees associated with a fair housing claim, it won't protect you from the bad publicity generated by a fair housing lawsuit. Nor will it protect you from the consequences of that lawsuit—that is, fewer rentals and renewals, says Green. Proper staff training can go a long way toward preventing a bad reputation. Green reminds us that training not only reduces the number of fair housing complaints but also saves money.

COACH'S TIP: An insurer is likely to raise your premiums or refuse to renew your fair housing discrimination policy if you get too many fair housing complaints. Also, most insurers will require you to have functioning community fair housing policies and procedures before they will issue fair housing insurance coverage to you and your community.

Circular Letter No. 6: N.Y. Insurance Circular Letter No. 1994-6.

Fair Housing Act: 42 USC §3601 et seq.

Coach Sources

Robert J. Cap, JD, CPCU, ASLI: Product Manager - EPLI, Non-Profit DandO, and Tenant Discrimination, Shand Morahan and Company, Inc.; Deerfield, IL

Nadeen W. Green, Esq.: Senior Counsel, For Rent Media Solutions; Atlanta, GA

Letha Heaton: Sr. Vice President Marketing, Shand Morahan and Company Inc.; Deerfield, IL

D.J. Ryan: Fair Housing Specialist, Director of Client Education, Kimball, Tirey and St. John, LLP; San Diego, CA


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