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Insurance redlining is real—and it will hurt neighborhoods hit by looting

June 9, 2020, 11:00 AM UTC

Though the millions of protesters taking to the streets in recent weeks to protest George Floyd’s death have been largely peaceful, the pockets of unrest that broke out have led to fires, broken windows, and theft. For business owners, the good news is that the insurance industry is poised to pay for most of the losses—a different outcome than what resulted from coronavirus shutdowns, which saw many merchants denied coverage because of exclusions in their policies.

But whether stores and restaurants can recoup losses caused by looting and vandalism depends, of course, on their having adequate insurance coverage in the first place. And not all of them do.

In South Minneapolis, Bridget Schoffman started a GoFundMe page to help four immigrant-run small businesses that had been badly damaged by arson and looting. The businesses—a nursery service, an ice cream parlor, a grocer, and a wireless shop—are tenants in a building owned by her parents and had bare-bones insurance or none at all.

“The windows were broken, the doors were broken, their merchandise was stolen and looted. This is devastating for all of them and their families,” said Schoffman, calling special attention to Luis Tamay, the grocer who had opened his shop only weeks before and lost most of his inventory after vandals damaged his fridges and freezers.

The destruction of such businesses is obviously devastating for the owners but also for the communities they serve. When the likes of Target and Starbucks are hit by vandalism, they typically reopen days later—in part thanks to insurance—whereas inner-city businesses in low-income areas damaged during the same unrest may never open their doors again. The result is blight and a lack of services for communities that are often struggling already.

So why do businesses like Tamay’s lack insurance in the first place? While failing to purchase insurance does reflect a risk calculation by business owners, there are also larger economic and historical forces that have made it hard for those in underprivileged communities to obtain coverage in the first place.

Those forces were apparent in the aftermath of the riots that destroyed parts of Los Angeles following the police beating of motorist Rodney King in 1992. A contemporary news report recounted how, in impoverished neighborhoods, some businesses had obtained policies from fly-by-night operations based in the Caribbean that did not pay claims. And according to Robert Hunter, a former commissioner of insurance for the State of Texas, 45% had no coverage at all.

One result was L.A. store owners taking up arms to defend their shops—an increase in violent confrontation during the unrest. There have been similar reports of merchants trying to physically defend their businesses during the unrest of the past week. These include Ricardo Hernandez, the owner of the ice cream parlor in South Minneapolis. According to Schoffman, Hernandez spent the entire night of May 29 pleading with vandals not to destroy his shop even as five separate fires erupted on the block.

A long history of inequality

The inability of businesses in low-income urban neighborhoods to obtain adequate insurance is not lost on policymakers. According to Ken Abraham, who teaches insurance law at the University of Virginia and estimated that damage from the recent unrest could be in “the billions but not tens of billions,” the issue received special attention from a commission struck by President Lyndon Johnson to assess the riots that beset Detroit, Los Angeles, and other cities in the 1960s.

In a report titled Communities Without Insurance Are Communities Without Hope, the commission pointed to a lack of fire insurance coverage in poor urban areas. This in turn led to a federal program to subsidize riot coverage for disadvantaged communities. But according to Hunter, who now works for the Consumer Federation of America, the initiative was detested by the insurance lobby, which persuaded President Ronald Reagan to kill it in the 1980s.

Meanwhile, many state governments came to offer so-called FAIR plans, which serve as policies of last resort in areas where insurers would otherwise refuse to operate. But the scope of these initiatives has diminished in recent years in the absence of political will to support them, and Hunter notes many of these policies are neither affordable nor comprehensive.

Today most state governments provide scant data about whether the insurance industry is providing fair coverage to low-income neighborhoods. But a 2017 investigation by ProPublica on auto insurance concluded that people in nonwhite neighborhoods paid as much as 30% more than those with similar driving records in white areas. The report accused the industry of a form of redlining—a historical term that refers to a time when banks would draw lines on maps to exclude nonwhite communities from receiving home loans—when it came to car insurance.

The Insurance Information Institute (III), a trade group, blasted the ProPublica report when it came out, labeling it as “incendiary” and saying race or ethnicity plays no role in actuarial calculations.

“Insurance is a color-blind business. Policies are priced to reflect the risk to the insurer,” Michael Barry, a spokesperson for the III, told Fortune this week.

Barry said it is in the interest of the industry to sell as many policies as it can and noted that big insurers have worked in recent years to expand sales in majority nonwhite communities, in part by hiring salespeople fluent in languages other than English. He also noted that insurance policy is regulated by states rather than the federal government, and that state officials have done an excellent job in protecting consumers and ensuring insurers remain solvent.

Hunter, however, scoffs at the idea that the insurance industry doesn’t discriminate.

“Insurance companies may say they’re color-blind, but they’re not zip code blind. They don’t like selling to poor people—they prefer people they can multi-line,” he says, referring to customers who might buy multiple types of policies.

And while insurance companies do not use race or ethnicity to determine rates, Hunter says the industry uses a variety of surrogate metrics that can result in higher prices or lack of coverage for communities of color. Those metrics include zip codes but also ones like education, occupation, and home ownership—all of which typically favor customers who are affluent and white.

“Selling policies to a small deli owner from Bangladesh is not their first order of business,” says Hunter. “There’s a sort of nouveau redlining going on.”

And while a handful of states—notably California and Massachusetts—have regulations that restrict insurance companies from using metrics that are proxies for race, most do not.

On a broader level, insurance is primarily regulated by states, but that doesn’t mean the federal government doesn’t influence policy—and in some cases, Congress has taken actions that benefit wealthy Americans over poorer ones.

Subsidies for affluent homeowners

Indeed, the federal government subsidizes certain forms of insurance—most notably for wealthy homeowners in areas prone to flooding. This means the affluent and mostly white denizens of Cape Cod in Massachusetts and Florida’s Gold Coast can obtain policies on the cheap and count on the federal disaster agency FEMA to pick up most of the tab when disaster strikes. A similar phenomenon exists in states like Texas, which have programs like the Windstorm Insurance Association to make policy coverage affordable for many coastal counties.

No such taxpayer-backed schemes exist to help businesses in poor urban communities. This is the case even though they already face significant social challenges, and a lack of insurance makes community recovery difficult or impossible after a disaster.

So in the aftermath of the George Floyd protests, chains like Target and Starbucks, which had their windows smashed and merchandise stolen, as well as posh shops on L.A.’s Rodeo Drive and Center City in Philadelphia, simply instructed their legal counsel to redeem their property damage policies.

But in South Minneapolis, Bridget Schoffman and her tenants had only a GoFundMe to help them pick up the pieces. As of Monday, they had raised $6,296 of their $10,000 goal.