The insurance industry's most potent legal weapon for keeping banks out of the business appears headed for its first review by the Supreme Court.

For bankers, the case will decide how many roadblocks states can erect to prevent bank insurance sales.

The justices, if they hear the case as expected, will determine if the 51-year-old McCarran-Ferguson Act allows states to block bank insurance sales completely. That's what a federal appeals court in Atlanta concluded in January in the Barnett Banks case.

However, a different federal appeals court, this one in Cincinnati, rejected the same argument last December in the Owensboro National Bank case.

It's somewhat ironic that the high court is being called on to resolve the dispute. It was a 1944 Supreme Court decision that prompted Congress to write the McCarran-Ferguson Act in the first place.

The court found that insurance constituted interstate commerce and should be covered by antitrust laws. The law forced courts to let most state insurance laws supersede federal ones.

In essence, McCarran-Ferguson reversed the relationship between federal and state laws on interstate commerce. Normally, Washington takes precedence.

Bank insurance sales would have been completely banned by McCarran- Ferguson if Congress had not written in a loophole. Protecting its right to override the states, it exempted any federal law that specifically pertains to insurance.

Advocates of the banking industry have seized on that loophole, arguing that section 92 of the National Bank Act explicitly permits bank insurance sales in towns of 5,000 or fewer citizens.

But that argument goes too far, says Ann Kappler, a partner at Jenner & Block who represents a number of insurance trade groups.

"What McCarran is about is trying to avoid unintentional repeals" of state insurance laws, she says. In her view, the exemption would apply only if Congress had said explicitly in section 92 that it intended to regulate an insurance activity; the mere mention of insurance is not enough.

This interpretation "comes straight from the legislative history" of McCarran, Ms. Kappler said.

One reason section 92 does not explicitly claim power to regulate insurance, Ms. Kappler said, has to do with year it was enacted - 1916. At the time, she said, lawmakers were abiding by Supreme Court opinions that the federal government had no such reach. "Our point is that they couldn't have been saying that in 1916," Mr. Kappler said.

But banking advocates claim the loophole applies to any federal law, no matter when it was enacted. "Section 92 uses the word 'insurance' five times," says Michael Crotty, deputy general counsel at the American Bankers Association. "How else would one go about specifically relating to the business of insurance?"

Only the Supreme Court can decide who is right.

Bankers and insurance commissioners are expected to appeal the Barnett and Owensboro decisions within two months. If the Supreme Court takes the cases, which most observers expect, arguments would come late this year or in early 1996. A decision would follow several months later.

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