A jumble of court decisions on bank insurance powers has created confusion for banks that want to sell annuities.

In recent months, three federal appeals courts -- for the fifth, second, and District of Columbia circuits -- have ruled on the authority of national banks to engage in insurance activities in small towns.

The cases centered on a provision of the National Banking Act that authorizes banks to sell insurance in towns with fewer than 5,000 residents.

The biggest blow to banks came last month, when the U.S. Court of Appeals for the Fifth Circuit ruled that banks lack authority to sell annuities in towns with more than 5,000 residents.

The case pitted the Office of the Comptroller of the Currency and a subsidiary of NationsBank against Variable Annuity Life Insurance Co.

A three-judge appellate panel noted that Congress allows banks in smaller towns to sell insurance. By carving out this clear exception, the court reasoned, Congress was signaling that it did not want banks in towns of more than 5,000 residents to offer these products.

The decision relied in part on a ruling handed down last summer by the U.S. Court of Appeals for the Second Circuit. In that ruling, the court held that if banks in small towns can sell title insurance, banks in larger towns can't.

The Supreme Court recently declined to review the Second Circuit decision, which involved Chase Manhattan Bank.

Small Towns as Springboards

While the second and fifth circuits considered the activities of banks in larger towns, they did not address the issue of whether banks can use branches in small towns as springboards to market annuities nationwide.

This issue was taken up by the U.S. Court of Appeals for the District of Columbia in a case involving U.S. National Bank.

In this instance, the court found no specific intent by Congress to limit who banks in small towns can sell to, even if those customers are in another state.

The decision, while favorable for banks, does not give them a clear course. Their path remains muddied by the ruling of the Fifth Circuit court. The plaintiff in that case, Variable Annuity Life, court seek to have the ruling applied nationwide, attorneys say.

This puts pressure on the Comptroller's office overturn the ruling through a hearing by the full Fifth Circuit court, or the Supreme Court.

Lawyers who are following the case say the bank agency does plan to appeal. The Comptroller's office hasn't decided how to proceed, a spokesman said.

Trade groups are expected to battle a powerful insurance-agents lobby that wants Congress to clamp down on insurance sales from small towns.

Certainly there is a lot at stake for banks. Annuities, which are tax-deferred products popular with older investors, supplied banks with $450 million in fee income last year, said Kenneth Kehrer, head of a Princeton, N.J., consulting firm bearing his name.

Banks do not want to see this big, and growing, revenue stream dry up. "Their sentiment is: We wish all this would get straightened out so we know what we are doing," said Michael Crotty, deputy general counsel with the American Bankers Association.

Marketing Firms Used

Some banks already take shelter from legal storms and state prohibitions by relying on outside marketing firms to deliver annuities. These companies act as middle-men, stationing their own people in branches to serve bank customers.

The trade-off is that banks have to share fee income. Still, it's better than nothing, many bankers feel.

Outside marketing firms could be big winners if legal twists and turns end up permanently barring bank employees from offering annuities.

"We're separate and distinct; we're not bank employees," said William Hughes, investment program manager with Invest Financial Corp., Tampa, a marketer of annuities and mutual funds through banks.

But marketing companies apparently aren't counting their blessing yet. Some fear that recent developments herald the beginning of the end for any kind of annuity sales in banks.

"I think people are scared that maybe they just won't allow the products to be distributed through banks, period," said R. Stuart Warner, national sales director for Primevest Financial Services, an investment products marketer in St. Cloud, Minn.

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