NID Housing President: Profit Maximizing and Algorithms May Cause Racial Bias in Home Warranty Claims

August 26, 2019

NID Housing President and Founder, Mr. Ray Carlisle, Sr., recently commented on a study linking rejection of homeowners’ home warranty insurance claims and the race of the homeowner.  The study involved self-reported claims approval by homeowners and established a nearly 20-percentage point difference between white homeowner claims and minority homeowner claims.  White homeowners reported that 73% of their home warranty claims were approved versus only 55% approval rate reported by minority homeowners.

Results Differ for Racial Groups Even Without Discriminatory Intent

The study admitted the limits of self-reported data and did not impute discriminatory motives by insurance companies in the consideration of home warranty claims.  Instead, experts like Mr. Carlisle, Sr. pointed out that profit maximizing algorithms based on geo-coded data (for example, data based on income or crime rates) could run along racial lines and cause disparate claims rejection.

“Everybody measures their risk in different ways, and yes there is racial discrimination in the measuring of those risks. Companies will say they’re not discriminating, they’ll say they’re measuring risk factors based on historical data,” Carlisle said.  One legal scholar pointed out that an insurer’s motive to maximize customer satisfaction, and thus maximizing profits, could lead to an approach that pays claims differently according to race or ethnicity.  It is this overarching motive to maximize profits, without regard for the racially disparate claim approval results, that Mr. Carlisle sees as potentially causing the disparity.

Education and Advocacy Can Empower Clients

Consumers, especially minority consumers, are not powerless in the process, however.  Mr. Carlisle urges homeowners to increase their knowledge of home warranty policies and close the knowledge gaps between racial groups.  “[I]t’s very important that everyone understands what they’re buying . . . you have to be able to advocate for yourself.”

NID Housing is a HUD-approved National Housing Counseling agency with decades’ worth of experience in educating homeowners and closing gaps in knowledge.  With experienced counselors around the country, NID can help homeowners advocate for themselves and be better positioned to receive fair treatment throughout the homebuying process.

The original article, written by Ms. Alivia McAtee, can be found here.  All quotes and information, including the chart, are taken from the original article.