Court Rules Citicorp Can Offer Insurance

In a major victory for banks seeking broader insurance powers, a federal appeals court ruled Monday that Citicorp could underwrite and sell insurance through a Delaware subsidiary.

The U.S. Court of Appeals for the Second Circuit in New York said that Citicorp may take advantage of a year-old Delaware law that grants state-chartered banks broad insurance powers.

A Blow to the Fed

The unanimous decision, a blow to the authority of the Federal Reserve System, paves the way for many of the nation's largest banking companies to offer insurance products nationwide through banks chartered in Delaware.

It also may spur other states - which had been uncertain of their authority to allow such activities - to pass similar legislation, said Michael F. Crotty, deputy general counsel for litigation for the American Bankers Association.

In its ruling, the three-judge panel overturned a September order by the Federal Reserve Board barring Citicorp from expanding its insurance activities. The Fed had stated that it was not opposed to banks in the insurance business, but that it reserved the right to regulate units of bank holding companies.

Citicorp countered with a lawsuit on Oct. 4. It asserted that the Fed had no jurisdiction because the insurance business would be conducted through a unit of its Delaware-chartered bank, which is regulated by state authorities.

Issue of Jurisdiction

Representatives of banking associations called the decision a resounding defeat for the Fed.

"The Fed has no jurisdiction over bank subs," said Mr. Crotty. "That's the big issue" that was resolved.

"There was a possibility that the court could have made the decision on fairly narrow grounds," Mr. Crotty said. Instead, it made a broad ruling.

Michael Bradfield, a partner with the law firm of Jones, Day, Reavis & Pogue and a former Fed general counsel, said, "It certainly sounds like a serious blow to the Fed's regulatory authority.

"One of the Fed's great concerns is about conducting risky activities within the bank itself or in the sub of a bank," Mr. Bradfield said.

Fed officials could not be reached for comment Monday afternoon. Industry sources said further legal action is likely.

A Citicorp spokeswoman said it was unclear whether the company would immediately resume the insurance activities through its Delaware unit, Family Guardian Life Insurance Co. "We're looking at the next step," said the spokeswoman, Susan Weeks.

Chase Champing at the Bit

Chase Manhattan Corp., another New York company that has been granted insurance approvals in Delaware, said it would start its insurance business as soon as possible.

Chase Manhattan (USA) will begin selling and underwriting insurance through two subsidiaries, Western Hempishere Life Insurance and Chase Agency Services, said bank spokesman Kenneth A. Mills.

Citibank and Chase are the only bank companies that have applied and obtained approval to take advantage of the Delaware law, said Keith H. Ellis, Delaware's banking commissioner.

Fed's Argument

The Fed had argued that the Bank Holding Company Act prohibits a subsidiary of a state-chartered bank from conducting activities not closely related to banking, including inurance.

In its decision, the court noted that it had previously determined that the Bank Holding Company Act in fact does not prevent a bank owned by a holding company from selling insurance. It concluded that if the holding company law could not prevent a bank from doing so, it could not prevent a bank subsidiary from doing so.

Disappointment from Insurers

Jonathan B. Sallet of the Washington office of the law firm of Jenner & Block and an attorney for insurance agents' associations, said he was disappointed with the ruling. But he said he had not yet seen it and could not comment on the likelihood of future legal action.

The American Council of Life Insurance said it would fight the decision. "We remain diametrically opposed to the idea of banks underwriting insurance," said Gene Brabowski, a spokesman for the group. "We expect the decision will be appealed."

"It sends a signal to states that they are now the regulators of the subs of state-chartered banks so banks can take advantage of this in Delaware and other states," said Mr. Richard M. Whiting, general counsel, Association of Bank Holding Companies.

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