This alert specifically addresses the impact of the order on certain state insurance laws grounded in disparate impact theory, like Colorado's pioneering artificial intelligence legislation SB21-169, which holds insurers accountable for using artificial intelligence (AI) in a nondiscriminatory manner, and the Colorado AI Act, SB24-205, which applies across industries and broadly addresses the use of high-risk AI systems. While the order does not have the force of legislation and cannot impact the status or enforceability of such state laws, insurers must remain vigilant and monitor both state and federal developments to ensure continued compliance and mitigate future risk.
State-Level Regulatory Oversight of AI in Insurance
As previously reported, several states, including Colorado and New York, have enacted laws or issued guidance aimed at regulating insurers' use of AI to prevent unfair discrimination against protected groups. Colorado's Senate Bill 21-169 (SB21-169) is landmark legislation that prohibits insurers from using external consumer data and information sources (ECDIS), algorithms, and predictive models that result in unfair discrimination based on race, color, national or ethnic origin, religion, sex, sexual orientation, disability, gender identity, or gender expression. The law applies to life, health, and auto insurance and requires carriers to implement a governance framework, conduct outcome-based testing, and file compliance reports with the Colorado Division of Insurance. Regulations implementing portions of SB21-169 are already in effect for life insurance and are in development for other lines. Building on this framework, Colorado also passed a comprehensive AI bill, SB 24-205, regulating high-risk AI systems across industries, including insurance.
Similarly, on July 11, 2024, the New York Department of Financial Services (NYDFS) adopted Insurance Circular Letter 7 on the "Use of Artificial Intelligence and External Consumer Data and Information Sources in Insurance Underwriting and Pricing" (Circular Letter). The Circular Letter outlines NYDFS’ expectations for New York-authorized insurers who develop and/or use external consumer data and information sources (ECDIS), and/or artificial intelligence systems (AIS). The NYDFS emphasizes the importance of fairness principles, board oversight, policies, procedures, and internal controls to ensure that AI systems do not disproportionately impact protected groups. The Circular Letter is similar in structure to the Colorado AI Regulations in that both require life insurers to establish a governance and risk management framework and testing program to ensure the insurer is not engaging in unfair discrimination when using ECDIS and/or AIS to underwrite insurance.
In addition to Colorado and New York, other states, such as Connecticut, Alabama, Illinois, and Vermont, have introduced or passed bills or guidance regulating the use of AI systems.
These statutes, regulations and guidance necessarily employ a disparate impact framework to assess the discriminatory impact of the use of AI and ECDIS. The disparate impact framework is currently the principal test used by courts in evaluating whether a policy or practice is discriminatory. Disparate impact discrimination is defined as unintentional discrimination resulting from a practice that is facially neutral but has a disproportionate adverse impact on a protected class. The disparate impact is unlawful only if it cannot be justified by legitimate business reasons (also referred to as business necessity) and such business reasons cannot be achieved by other practices that have a less discriminatory effect.
Impact of Trump's Executive Order
President Trump’s April 23 order seeks to eliminate the use of disparate-impact liability in all contexts on the basis that it violates the equal protection clause of the US Constitution and federal civil rights laws. Specifically, the order states that disparate-impact liability creates a “near insurmountable presumption of unlawful discrimination … where there are any differences in outcomes in certain circumstances among different races, sexes, or similar groups, even if there is no facially discriminatory policy or practice or discriminatory intent involved, and even if everyone has an equal opportunity to succeed.” (Section 1).
As detailed above, the order provides for a series of actions in service of these objectives, including federal deprioritization of matters relying on disparate impact theory and review of current matters, repeal or modification of certain elements of Title VI regulations1, and revocation of related executive branch approvals. Explicitly relevant to state law, however, is the directive that the US attorney general and other federal agencies “determine whether any Federal authorities preempt State laws, regulations, policies, or practices that impose disparate-impact liability based on a federally protected characteristics such as race, sex, or age, or whether such laws, regulations, policies, or practices have constitutional infirmities that warrant Federal action” and take actions consistent with the order. (Section 7(a)).
While the order conveys a meaningful ideological and policy shift by the executive branch, it does not alter the current legal status of Federal antidiscrimination laws2 or enforceability of state laws such as Colorado's SB21-169. Colorado's SB21-169 and similar state laws remain fully enforceable despite this federal policy shift.
While the Order has no direct legal effect on SB21-169, it could inform litigation strategy or be cited in future constitutional challenges brought by private parties or industry groups. Whether such challenges will succeed remains to be seen.
Insurers operating in states regulating AI, whether through legislation or guidance, must continue to adhere to and comply with state-specific requirements, including governance frameworks, outcome-based testing, and regular compliance reporting. Insurers operating in states where such laws and guidance are in effect should also closely monitor further regulatory developments.
Eversheds is closely following developments related to SB21-169, SB24-205 and other laws and regulations nationwide affecting insurers using algorithms, predictive models, autonomous decision-making systems and artificial intelligence, including how such laws may be impacted by federal and state policy and state and federal litigation.
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1 Title VI of the Civil Rights Act of 1964 prohibits discrimination based on “race, color, or national origin …under any program or activity receiving Federal financial assistance.” 42 U.S.C. § 2000d. As such, modification, amendment or repeal of said regulations are not directly relevant to insurance.
2 Disparate impact theory originates in the U.S. Supreme Court interpretations of Federal antidiscrimination laws, which it determined cover the discriminatory effects of a practice as well as the motivation behind the practice and must be interpreted to allow disparate-impact claims in order to advance their anti-discrimination purposes. Griggs v. Duke Power Co., 401 U.S. 424 (1971) (Civil Rights Act Title VII); Smith v. City of Jackson, 544 U.S. 228 (2005) (Age Discrimination in Employment Act of 1967); Texas Dep’t of Housing and Community Affairs v. Inclusive Communities Project, Inc, 576 U.S. 519 (2014)(Fair Housing Act).
