As a lawyer with numerous banking clients, Charles M. Horn has more than a passing interest in how federal and state law affecting the ability of banks to get into the insurance business will play out. In this, the second and final installment on an article he has written on recent court interpretations of bank-related insurance law, Mr. Horn a partner in the Washington office of Chicago-based Mayer, Platt & Brown, suggests where he thinks the law is heading on this issue.
Two recent federal appeals court cases - Owensboro and Barnett Bank - take diametrically opposing positions on the issue of whether federal law giving leeway to banks to sell insurance products should supersede state law.
In the Owensboro case, the court decided that a state insurance statute prohibiting bank holding companies from engaging in the insurance agency business did not supersede federal law allowing banks to market insurance in limited circumstances.
In the Barnett Bank case, the court upheld a Florida law that prohibits insurance agencies from being affiliated with banks.
The losing bank in Barnett Bank has asked the Supreme Court to review the decision.
While many observers believe that this intercircuit conflict will cause the Supreme Court to hear these cases, there is no requirement that it do so.
If the court does decide the matter, however, what will it decide and what will be the consequences for banks in the insurance business?
Clearly, if the Barnett Bank decision and reasoning prevail in the Supreme Court, all banks, including national banks, will find themselves subject to the full array of state insurance regulatory and prohibitory provisions.
That should restrict the ability of national banks to conduct these activities, particularly in "anti-affiliation" states, which largely prohibit banks from engaging in insurance agency activities.
The banking industry, however, should not necessarily think that the other approach, namely the Owensboro approach, would represent a complete victory for the industry.
Conspicuously, the Owensboro case did not decide what the result would have been had a Kentucky statute merely regulated, but not prohibit, bank insurance agency activities.
The banking industry has a fair amount at stake in the current court controversies.
If the federal courts ultimately decide that McCarran-Ferguson protects state anti-affiliation laws from federal preemption, this result would have a disruptive impact on national and other bank insurance agency activities in a variety of jurisdictions.
But if the Owensboro view prevails, state anti-affiliation statutes may be overridden by federal law, but not state insurance regulatory statutes.
In turn, national banks may not necessarily be free from state insurance regulatory requirements, and may still be required to be licensed and regulated as insurance agencies, and their employees licensed as insurance agents, under state law.
While this is perhaps not an ideal outcome for the banking industry, it certainly is better than the alternative result possible under the Barnett Bank decision.
An Owensboro-type decision by the Supreme Court may not be an altogether bad result for the banking industry. Congress, after all, is considering whether to legislate bank insurance activities as part of its overall consideration of bank reform legislation and is apt to have fewer objections in principle to banks entering the insurance business if they are subject to the same state laws and regulations that apply to their nonbanking competitors.
Further, there is a strong fairness-based appeal in putting banks and nonbanking insurance providers on an equal competitive footing from the regulatory standpoint.
Banks should also bear in mind that many insurance companies are reluctant to allow the distribution of their products through unlicensed entities.
Therefore, a "complete" court victory on the issue of federal law-state law conflict ultimately may not do banks a great deal of good, because many insurance companies may not let banks sell their products without being licensed under state insurance law.
In sum, the trend in the continuing controversy over bank insurance activities - and the emerging lesson of the ongoing court battles over this issue - point to an ultimate scenario where banks will be permitted to engage in these activities, but subject to state insurance regulatory requirements.
Inconvenient, perhaps, but this result may be the banks' price of admission into the insurance business.