When regulators in Maryland said this spring that the small company Erie Insurance had illegally avoided selling policies to people in mostly Black neighborhoods, Erie had a ready answer: It said it was being singled out for simply doing business as usual.
The insurer, which is based in Pennsylvania and is known for selling cheap auto and homeowner policies, then took an unusual step. It sued the Maryland Insurance Administration, arguing that the regulator was unfairly attacking its “frontline underwriting” practices — an approach in the insurance business requiring agents to consider subjective factors when choosing customers.
Maryland regulators had begun investigating Erie’s business after independent agents who sold its policies accused Erie of punishing them for selling policies to Black and Hispanic customers, most of whom lived in densely populated parts of cities like Baltimore where the insurer said there was too much risk. Often, these are neighborhoods in which Black Americans and other minority groups were forced to live throughout much of the 20th century, because of laws and racist lending practices known as redlining.
In May, Maryland officials concluded that Erie’s practices were “designed to reduce business, and did reduce business, in dense urban areas with high minority populations,” and ordered the company to pay agents compensation that it said had been improperly withheld. Maryland is also conducting a broader review of Erie’s underwriting methods, even as Erie has pushed back in federal court.
“We are confident that the business goals and service expectations we set for all our agents are appropriate and that our underwriting practices comply with all applicable state insurance laws and regulations,” an Erie spokesman, Matthew Cummings, said in an email, adding that the accusations against it are false. A spokesman for the Maryland Insurance Administration declined to comment.
The dispute reveals how a long-used insurance industry technique, ostensibly aimed at managing risk, can open the door to bias. Rather than relying on a fixed set of data points to determine which customers qualify for which policies and at what price, frontline underwriting puts the onus on agents determine who is worthy of an insurer’s services. As they evaluate a customer, agents are expected to decide whether a potential customer seems honest or reliable, or judge how tidy or well maintained their home is.
“If you have underwriting happening at the level of the individual agent, there’s no way to review that and it’s much more likely that you’re going to get bias,” said Daniel Schwarcz, a professor at the University of Minnesota Law School who focuses on insurance law and regulation. “There are all kinds of conscious and unconscious biases involved.”
Insurers have also been accused of discriminating against Black and Hispanic customers in other ways. A lawsuit filed in federal court in Chicago accuses State Farm, the nation’s largest insurer, of racial bias after a study showed Black customers waited longer, filed more paperwork and dealt with more visits from claims adjusters than white customers did when trying to make an insurance claim.
But the accusation against Erie is that its policies kept Black and Hispanic homeowners out of its customer rolls in the first place.
“They had us create separate guidelines to weed out some of the people that they didn’t want us to write in inner cities,” said BJ Borden, a Baltimore agent who is one of seven people claiming that Erie wrongfully withheld compensation or terminated their agency contracts in Maryland.
Mr. Borden said that over several years, Erie managers had punished him for selling policies to Black Baltimore residents by docking his commissions and threatening to cancel his sales contract entirely. Erie also pressured agents to direct the vast share of their sales its way instead of to other insurers whose policies they were authorized to sell, Mr. Borden said.
Maryland’s case also shows the patchiness of insurance regulation, which varies from state to state. Maryland law requires insurers to sell policies to all customers who want to buy them and who meet the financial guidelines the insurers have formally disclosed to regulators. But almost no other states — including the 11 other markets that Erie operates in — have that rule, granting Erie and other insurers broad powers to narrow their customer pool.
The company has faced accusations of redlining by federal authorities and agents in New York and Pennsylvania. But until Maryland’s order this spring, the only penalty Erie had faced was a $225,000 fine and a federal order to open more agencies in minority neighborhoods and to spend $140,000 advertising to Black customers, which Erie agreed to do in 2009.
Aaron Alder, an agent in Pennsylvania, tried to flag Erie’s behavior to regulators there in 2019, reporting to the Pennsylvania Insurance Department that Erie had warned him to stop selling policies in a ZIP code where the majority of residents were Hispanic, instructions that he called “discriminatory.”
But because Mr. Alder’s main conflict with Erie was over whether the insurer had improperly terminated his sales contract, the Pennsylvania regulator refused to address the issue of discrimination. A spokesman for the Insurance Department said the regulator did have the authority to investigate and punish companies for discrimination.
But if the Maryland regulator determines a broader pattern of redlining, which in turn could draw federal scrutiny, Erie could be on the hook for additional monetary penalties.
Mr. Cummings, the Erie spokesman, said Mr. Alder’s claims were baseless and the agents’ accusations in Maryland “are objectively false.” He said that the agents were disgruntled because their commissions had been reduced or they had been dropped by the company for poor performance or shoddy paperwork, and that they had not made any claims about Erie’s practices before these disciplinary steps.
Founded in 1925, Erie is the 12th-largest home insurer and 13th-largest auto insurer in the country, with a big presence on the East Coast. By the end of last year, it had issued just under $9 billion in property and casualty policies, compared with $79 billion by State Farm, data from the National Association of Insurance Commissioners shows.
Erie offers policies that are often cheaper than those of most competitors, with generally looser underwriting standards. That makes its products widely affordable. At the same time, to maintain its profits, the insurer relies on its agents to keep a key metric — its loss ratio — from getting too high.
An insurer’s loss ratio is the relationship between the claims it expects to pay out and the premiums it earns. The higher that number goes, the lower the company’s profits. At 78 percent, Erie’s loss ratio is higher than the 67 percent average for the 25 largest property and casualty insurers, according to the data from N.A.I.C.
Other insurers guard against losing money by raising prices or tightening underwriting standards. Erie relies more on frontline underwriting, which it describes as being “about choosing and developing the right relationships,” according to a sales guide the company issues to new agents that Maryland regulators quoted in their May findings against Erie.
In an email, Mr. Cummings, the Erie spokesman, said the practice helped agents “better understand each risk.”
The Maryland Insurance Administration declined to say when it expected to wrap up its broad review of Erie’s practices. Erie wants to bar Maryland regulators from discussing their findings, which for now are available for public viewing, or imposing any penalties until the broader investigation is finished. It also wants a court to toss the regulator’s determination that Erie had discriminated against potential customers.
