As an attorney with numerous banking clients, Charles M. Horn is paid to wade through the conflicting court cases that overshadow the commercial banking industry's efforts to sell insurance products.
In this article, Mr. Horn, a partner in the Washington office of Chicago-based Mayer, Brown & Platt, explains how two recent federal appeals courts rendered diametrically opposed conclusions on whether federal law giving banks leeway to sell insurance products should supersede state law.
A second installment, to appear Monday, will describe where Mr. Horn sees legislation on this matter heading.
Since a U.S. Supreme Court decision in January, the long-running battle between the banking and insurance agencies has taken a new twist.
Now, instead of claiming that federal law prohibits banks from engaging in the sales of annuities and other investment-related insurance products, the insurance industry is depending on state law to slow down the incursion of banks into the insurance agency business.
Two U.S. appellate courts have taken opposing positions on the authority of states to regulate national bank insurance activities, and the losing bank party in one case has just asked the Supreme Court to review the lower-court decision.
But what exactly will the high court decide?
The banking industry understands the basic controversy, which is whether states are allowed to regulate bank insurance agency activities that are permitted under federal banking laws. Not everyone has a clear sense as to the precise issues or stakes involved in the resolution of this issue.
What banks need to understand, however, is that unless the Supreme Court takes a detour to decide issues not raised by the current conflict in the lower courts, any high court decision on the controversy at issue, regardless of the outcome, could result in banks' being subject to state regulation of their insurance activities.
The January Supreme Court decision in what is known popularly as the Valic case was a major victory for the banking industry. It confirmed not only that national banks may sell fixed and variable annuities under national banking laws, but also gave the Office of the Comptroller of the Currency broad discretion to authorize national banks to sell, as agent, new products of a financial investment nature.
The Valic decision, however, dealt only with issues of federal law. It determined only that one provision of federal law did not limit the general authority of national banks to broker financial investment instruments, including annuity products.
Putting it plainly, Valic did not address the applicability of state law to bank-related insurance activities in general.
In the aftermath of Valic, the issue of conflicting federal and state law now has risen to the forefront, and the federal courts have been asked to decide whether the states have the substantive authority to prohibit or regulate bank insurance activities that are authorized by federal law.
In two recent U.S. circuit court of appeals cases, the courts were asked to decide whether state law that prohibits national banks from conducting insurance agency activities is overridden by federal law specifically authorizing national banks to act as general insurance agents in communities of fewer than 5,000 people.
The cases framed the issues in a virtually identical fashion, but reached precisely the opposite conclusion on the same issues of law.
Both cases considered the legal relationship between a federal statute permitting national banks to act as insurance agents in small towns, and state "anti-affiliation" statutes essentially barring banking organizations from engaging in insurance agency activities.
Both cases addressed whether a state anti-affiliation statute was enacted for the purpose of "regulating" the "business of insurance," and whether the insurance provisions of the National Bank Act "specifically related" to the business of insurance.
The decisions in these two cases, and the reasoning relied on by the two courts, provide considerable insight into the likely outcome of this ongoing argument over the relationship between contradictory federal and state statutory provisions in the realm of insurance.
In what is known as the Owensboro case, the Court of Appeals for the 11th Circuit determined that a Kentucky statute which prohibited bank holding companies from entering the general insurance agency business was preempted by section 92, a federal law authorizing national banks to act as general insurance agents in small towns.
By contrast, the decision in other case, involving Barnett Bank, rejected the Owensboro conclusion, in the process upholding a Florida statute prohibiting insurance agencies and agents from being affiliated with banking organizations.
A recent Louisiana state court decision - in First Advantage Insurance v. Green - recently has sided with the Barnett Bank decision.