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Following a federal district court’s dismissal last year of Erie Insurance’s suit against the Maryland Insurance Administration over the agency’s determination that Erie pushed local agents to reject customers from majority-Black areas of Baltimore, Erie has taken its claims to the U.S Court of Appeals for the 4th Circuit.

In arguments Tuesday before a three-judge panel of Judge Roger L. Gregory, Judge Toby J. Heytens and Judge DeAndrea Gist Benjamin, counsel for Erie argued that the U.S. District Court for the District of Maryland at Baltimore committed reversible error by applying the wrong standard in dismissing Erie’s case against the Maryland Insurance Administration without prejudice.

Alex J. Brown, counsel for Erie, argued that the Pennsylvania-based insurer is “in an impossible position” because to defend against the MIA’s determination letters that accused the company of unlawful discrimination, the insurer must either not disclose any confidential information and appeal after losing, or waive its trade secrets, confidential information and attorney-client privilege.

Both options, Brown said, violate the insurer’s due process rights.

“There was literally zero reason to switch from the confidential market conduct exam to the public determination letters, other than political bias,” Brown said.

John Van Lear Dorsey, counsel for the Maryland Insurance Administration, argued the 4th Circuit should affirm the district court’s judgment and find it did not abuse its discretion in abstaining.

“This is not the first and only case where the MIA has in fact had confidential documents before it,” Dorsey said. “Frankly, it happens all the time.”

Dorsey denied that any bias motivated the MIA, noting the regulator had “many reasons” to take the actions it did, including releasing the determination letters.

“There were significant violations in this case by the insurer that were found by MIA,” Dorsey said. “It was important to go ahead and issue the orders. That was the determination of the associate commissioner who issued the determination letters.”

In its complaint, Erie claims the MIA conducted an incomplete investigation into its practices and released confidential information in a determination letter. The insurer requested a federal judge to declare the MIA’s determination letters unlawful and find the MIA violated Erie’s constitutional rights.

The MIA’s determination letters claimed that Erie used pretextual metrics to justify rejecting eligible Maryland customers in urban areas with large minority populations. The regulator found that Erie unfairly penalized the Baltimore Insurance Network, an insurance agency that served some of the poorest areas of Baltimore.

The investigation into Erie began when the Baltimore Insurance Network and two other insurance agencies that had previously worked with Erie filed complaints in early 2021. Insurers are allowed to establish underwriting eligibility guidelines and set rates based on their appetite for risk. Those guidelines are subject to regulations and cannot be unfairly discriminatory.

Maryland law allows insurers to set different rates based on geographic location because claims occur far more frequently in urban areas than in suburban or rural areas. Once an insurer has set its eligibility guidelines and rates, it is not allowed to reject plans based on “adverse loss ratio,” which is essentially a measure of profitability.

The MIA found that Erie established a “secondary layer” of criteria in place of loss ratio to justify penalizing agencies that issued policies Erie did not want, even when those policies were otherwise eligible.

Dorsey said he’s concerned that should a hearing prevail in the case, it will have “a chilling effect” regarding how the MIA operates.

One example of this, Dorsey said, is if the MIA finds that a health insurer is denying claims to someone for something that is medically necessary and needed on an emergency basis, under Erie’s theory, the MIA would be precluded from using those documents and proceeding with an order against the insurer to correct a medical determination.

However, Brown said, there could be a different chilling effect for insurers.

“If we lose this case, insurance companies are not going to give anything to the administration under a market conduct exam,” Brown said.

If the hearing proceeds, Brown said, the insurer’s source market conduct materials will be transferred from investigators — where the information is privileged and confidential — to the hearing officer, where the information would then become public.

“That’s a bell that cannot be unrung,” Brown said. “The only place in the world where we can litigate our due process objections and not have the source conduct materials be stripped of their (statutory) protections is federal court.”