JACKSONVILLE, Fla. - Barnett Bank of Marion County has asked federal court to rule that Florida insurance regulators lack authority to impede its acquisition of a small-town insurance agency.

The case centers on the bank's purchase last week of the Linda Clifford Insurance Agency in Belleview, Fla. While the agency, which generates $2 million in annual premiums, is relatively small, the case is strategically significant because it tests whether federal law or state law governs bank insurance activities.

The Marion County bank, a wholly owned subsidiary of Barnett Banks Inc., said it bought the agency under a federal law that allows national banks to own and operate insurance agencies from towns with fewer than 5,000 residents.

So far, the Florida Department of Insurance has not moved against the bank. But Barnett executives said that Insurance Commissioner Tom Gallagher told them in a meeting last week that he would try to stop the acquisition.

The bank's complaint, filed last Tuesday in U.S. district court in Ocala, Fla., asserts that the insurance regulator has "made clear its intention to use the Florida statute to attempt to block Barnett from selling insurance through licensed insurance employees," said Charles E. Rice, Barnett's chairman and chief executive officer.

Mr. Gallagher could not be reached for comment.

In defense of the acquisition, Barnett officials pointed to a court ruling last July in which the U.S. Court of Appeals for the District of Columbia Circuit affirmed that national banks in towns of fewer than 5,000 people may market insurance nationwide.

"Our action is totally based on federal law," said Martin Farmer, chief of government relations for Barnett Banks.

Federal-State Conflict

"The unit involved is a national bank," he said, and so federal law should apply. The branch that is suing is in a town with about 2,700 residents, Mr. Farmer said, and therefore qualifies to sell insurance under the federal ruling.

The lawsuit was filed just a day after Barnett announced that its Marion County subsidiary had bought the agency in a private transaction.

"On Monday we completed the purchase, and on Tuesday we filed the law suit," Mr. Farmer said.

Lawyers for the bank said that federal legislation should take precedence over state law. "The state law is contrary to this federal law and, as such, is unconstitutional," said David Wells of Mahoney, Adams & Criser, the attorney representing Barnett.

Many Banks Sell Insurance

Many banks in other state are already selling insurance products in an attempt to tap new revenue streams.

More than 2,000 commercial banks, for example, are now selling annuities, according to Ford Barnett, assistant director Comptroller of the Currency. However, at least 17 states prohibit bank employees offering annuities, according to Kenneth Kehrer, head of the Princeton, N.J.-based consulting firm which bears his name.

Annuities, which are tax-deferred insurance products that invest in underlying mutual funds, provided banks with $450 million in fee income last year, according to Mr. Kehrer.

By licensing their own employees to sell these products, banks hope to capture a bigger piece of the booming business.

Insurance Agents Bristle

While banks could benefit from the lucrative small-town loophole, many insurance agents say banks should stop infringing on their turf.

Earlier this month, David B. Malkin, on behalf of the Alliance for the Separation of Banking and Insurance, asked the Senate Banking Committee to "close the loopholes."

The alliance, which represents more than 500,000 agents and their employers, maintained that banks have an "unfair advantage over agents." It has called on Congress to restrict the Comptroller of the Currency's authority to expand bank insurance powers.

If Barnett's play is blocked, it would send a signal to other Florida-based banks that they may also face obstacles in getting into the insurance business.

"We're on a big win or lose in Florida," said Doyle C. Bartlett, general counsel for the Conference of State Bank Supervisors, a Washington-based trade group that opposes federal preemption of state authorities.

But Barnett is not expecting to lose this round. The bank is proceeding with plans to sell insurance products through its small town branch.

Barnett, which has $37 billion in assets and 632 offices in Florida and Georgia, bought the Clifford agency with the intention of marketing insurance through its branches statewide.

"If we thought that the state statue override the federal law, we wouldn't have done it," said Robert Stickler, a Barnett spokesman.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.