Comment: Supreme Court Alert To Complexity, Stakes In Insurance Sales

The U.S. Supreme Court heard oral arguments last week in the widely watched Barnett Bank case as to the asserted authority of national banks to sell insurance.

The case, formally Barnett Bank of Marion County v. Nelson, provides an opportunity for the justices to delineate the respective roles of federal and state regulators over sales of insurance and related investment products by and through banks.

In late January last year, the three-judge panel of the U.S. Court of Appeals for the 11th Circuit ruled unanimously against the Marion County bank, a subsidiary of Barnett Banks Inc., that Florida's so-called antiaffiliation law does not yield to an apparently conflicting federal banking law.

The state law purports to preclude subsidiary banks of holding companies and affiliated entities from being licensed to sell insurance. Similarly restrictive statutes exist in at least 15 other states.

However, section 92 of the National Bank Act explicitly authorizes national banks located in small towns to offer broad forms of insurance. With the support of industrywide banking interests, Barnett petitioned for, and the Supreme Court granted, review of the erroneous appellate ruling.

The tenor of the questions from and comments by several justices at last week's proceeding encouraged bank observers to expect a favorable outcome. Justices Stephen Breyer and Antonin Scalia both voiced dissatisfaction with the apparently anticompetitive purpose of the Florida law.

The high court nevertheless seemed to share Justice Scalia's concern that it would be less inclined to adopt the bank's position regarding section 92 if it has "to worry" about the impact of a preemptive ruling on otherwise reasonable state regulation.

Significantly, both Barnett and the government conceded some supervisory role for the states to be appropriate.

The scattergun questioning by the justices left arguments on both sides in tatters. Little certainty as to the outcome of the case could thus be gleaned from the proceeding.

The panel nevertheless appeared to be extraordinarily attentive and aware of the intricacies on both sides of the dispute. Moreover, Justice Scalia expressed concern that a narrow ruling by the court, simply striking down Florida's antiaffiliation statute, would only precipitate enactment of state laws that would indirectly but still effectively preclude banks from offering insurance.

The panel demonstrated a nodding awareness of the need to define the parameters of the role, if any, of the states in the supervision of insurance activities by banks.

Tellingly, the justices also seemed to give short shrift to arguments by the agents that section 92 simply permits national banks to act as insurance agents, but does not require that states allow national banks to do so. Justice Ruth Bader Ginsburg alone expressed some support for such a view.

There appeared to be little sympathy among the justices for the convoluted rationale of the appellate court's ruling and a general recognition of the practical marketplace significance of the litigation.

The final disposition of the case will resound in other matters as well. In First Advantage Inc. v. Green, the Louisiana Supreme Court also denied review of a similar restrictive lower state court ruling that precludes the sale of insurance by national banks. That decision and the ruling in Barnett contrast markedly with that of the 6th Circuit Court of Appeals, which held that a Kentucky antiaffiliation statute must give way before federal banking law.

The demonstratively infectious reasoning of the 11th Circuit in the Barnett case, unless emphatically rejected by the Supreme Court, could severely curtail insurance and related investment product activities of national banks in many states.

The essential ability of banks to compete and provide outlets for innovative financial products, including annuities, in the rapidly changing financial marketplace is thus greatly endangered by the erroneous appeals court ruling and its progeny.

The most immediate ramifications of the pending Supreme Court case are, of course, felt in the congressional arena. The mere presence of the case before the court arguably relieves Congress of any asserted haste, or perceived need, to address the issue of the disputed overlapping jurisdictions between the federal banking regulators and state insurance regulators.

The final disposition of the case, which could be forthcoming shortly, will further shape the political debate over bank sales of insurance products.

Mr. Roderer is a partner at the law firm Winston & Strawn. He is based in Washington.

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