WASHINGTON -- In a setback for the industry's push to gain insurance powers, a federal magistrate judge in Indiana said banks must limit insurance sales to residents of small towns where they operate branches.
The decision contradicts a clear industry victory in July 1993, when the U.S. Court of Appeals for the District of Columbia ruled that banks may sell insurance anywhere from a branch in a small town.
U.S. Magistrate Judge V. Sue Shields, in NBD Bank v. Bennett, said Congress never intended to give national banks the ability to sell insurance to residents of an entire state.
Rather, she said, the National Bank Act allowed banks to sell insurance from branches in towns with fewer than 5,000 residents because Congress wanted to give national banks an incentive to maintain their small-town branches.
To let a bank sell insurance to residents outside the small town, as NBD proposed, defeats the purpose of the law because banks would only need to maintain a single branch in a single small town to reap the benefits of statewide insurance sales, she said. The decision was handed down Tuesday but did not become widely known until late Thursday.
NBD Bank spokesman Richard Johnson declined to comment, saying he had not yet seen the decision.
Magistrate judges, the lowest-level federal jurist, do not normally try cases. But in this instance, both sides agreed in writing to allow the magistrate judge to proceed. The parties can appeal to U.S. District Court, but most litigants in magistrate judge trials take their appeals straight to the federal circuit court.
"If this is going to be the law, and it isn't by any means yet, then it takes all the value out of the town-of-5,000 authorization," said Michael Crotty, deputy general counsel at the American Bankers Association.
Julie Williams, general counsel in the Comptroller of the Currency's Office, said the ruling "creates uncertainties.
"It's really hard to know what the impact of this is, given that there's another case that goes exactly the opposite decision by a higher court," she said.
Allen L. Raiken, Washington counsel to the Financial Institutions Insurance Association, said the case would hurt consumers in Indiana by limiting the number of insurance providers.
"It is a case that goes in the opposite direction," Mr. Raiken said. "It goes against the 22 states that are recognized as having broad powers that go in favor of banks selling insurance products."
But Dan Fitzmaurice, a partner at Day, Berry & Howard who represents Shawmut Bank in a similar case in Connecticut, said bankers should not overstate the importance of a magistrate judge decision.
"The opinion by the Court of Appeals for the District of Columbia Circuit, which is a very well-regarded circuit, carries a lot of weight, more weight than any magistrate judge," Mr. Fitzmaurice said.
