Financial Institutions May Soon Look to Their Insurance Companies for Relief Against Lending Discrimination Claims

A recent court decision has opened the door for lending institutions to count on their comprehensive general liability insurance to defend them when they are accused of discrimination. No published decisions now exist that require an insurance company to defend a discrimination complaint under the Equal Credit Opportunity Act (the “ECOA”); however, a recent employment discrimination case has established a relevant precedent in this area.

The growing trend toward borrowers alleging lending discrimination under the ECOA has become a huge problem for many financial institutions. The ECOA prohibits discrimination by creditors against any applicant on the basis of race, color, religion, national origin, gender, marital status or age. Violators can be held responsible not only for actual damages, but also for stiff punitive damages, as well as attorneys' fees and any other relief a court deems appropriate.

In today's politically correct climate, more and more of these discrimination claims are being upheld. While many of the cases involve banks accused of discriminatory practices in refusing to grant loans to African-Americans and other minorities, a growing number of ECOA claims are now filed as a counterclaim to a bank's action to collect a debt. The situation has become so dire that the financial industry will look anywhere for relief -- and they may have found it in a recent employment discrimination decision that draws some very interesting parallels.

In American Management Association v. Atlantic Mutual Ins. Co. (Dec. 6, 1996), a New York Appellate Court upheld a lower court decision holding that insurance companies must defend policyholders against all claims alleging age discrimination. The ruling went so far as to mandate that if an insurance company wrongfully refuses to defend, the insurance company must cover any settlement or judgment made against the policyholder.

The case involved Atlantic Mutual Insurance Company's duty to defend American Management Association (AMA) for a "willful" age discrimination complaint. Atlantic Mutual refused to defend AMA, since the complaint involved intentional, and thus uncovered, discrimination. Atlantic Mutual also refused to defend under the "bodily injury" coverage in its primary policy, even though the underlying complaint alleged "mental anguish."

The trial court found that in every claim for intentional discrimination there is an implied claim for unintentional discrimination. Thus, insurance companies have a duty to defend all discrimination claims.

How long will it be before a financial institution drowning in ECOA claims grabs hold of this legislative life preserver? The smart money is on sooner rather than later.

Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail:, Web site: or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, Sarasota, FL 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.