UPDATE 1-US appeals court to rehear insurance race bias case

* Court to rehear Farmers Group case en banc

* Homeowners alleged racial bias in setting premiums (Adds Farmers statement)

By Jonathan Stempel

NEW YORK, Oct 26 (Reuters) - A federal appeals court will reconsider its decision to let African-American homeowners sue Farmers Group Inc for racial discrimination based on alleged overcharges on property and casualty insurance policies.

The U.S. Ninth Circuit Court of Appeals in San Francisco on Monday said it will rehear the class-action case "en banc," which it typically does with 11 judges, and said a May 12 ruling by a three-judge panel should not be cited as precedent.

Farmers said it is wholly-owned by Zurich Financial Services AG (ZURN.VX). In a statement, Farmers said it has not engaged in any discriminatory practices and is pleased that the Ninth Circuit will review the case further. A lawyer representing the plaintiffs was not available for comment.

In the lawsuit, Houston resident Patrick Ojo accused Farmers of charging minorities higher premiums than Caucasians for homeowners' property and casualty insurance.

The lawsuit contended that Farmers used "undisclosed factors" to compute credit scores and set prices for policies, resulting in millions of dollars of overcharges and violating the federal Fair Housing Act.

A district court judge dismissed the lawsuit, but a divided Ninth Circuit panel reinstated the claim.

The panel said the lower court judge erred in concluding that the Fair Housing Act claim should not apply because it conflicted with states' authority to enact their own insurance laws.

It also said it would be "difficult to imagine" that Texas' 2003 credit scoring law was intended to allow insurers to engage in "disparate impact" race discrimination.

Judge Carlos Bea dissented, saying Ojo's complaint did not allege that Farmers used race in its credit scoring to compute insurance premiums, an essential element of an Fair Housing Act disparate treatment claim. "The district court got it precisely right," wrote the judge, an appointee of President George W. Bush.

Federal appeals courts rarely use the en banc procedure, usually reserving it for significant or difficult cases. Usually an entire court sits to hear cases en banc, but the Ninth Circuit, because of its large size, typically does not.

The case is Ojo v. Farmers Group Inc et al, U.S. Court of Appeals for the Ninth Circuit, No. 06-55522. (Reporting by Jonathan Stempel; editing by John Wallace and Andre Grenon)