THE COMPTROLLER has determined that a national bank's small-town subsidiary may solicit and serve insurance customers without geographic limitation.

Following a Jun 7 decision by the U.S. Supreme Court on a rather unusual legal question, the U.S. Court of Appeals for the District of Columbia circuit has upheld a determination by the Comptroller of the Currency that a national bank's small-town subsidiary could solicit and serve insurance customers without geographic limitation.

The District of Columbia circuti court's decision is in direct conflict with a 1992 decision by the U.S. Court of Appeals for the Second Circuit.

The Supreme Court thus would seem to have little choice in its upcoming term but to review and settle, perhaps once and for all, the issue of banks' insurance powers.

|Section 92'

The Supreme Court's June 7 decision had its genesis in a 1984 application to the Comptroller from the Portland-based United States National Bank of Oregon to sell a full range of insurance through a wholly owned subsidiary located in Banks, Ore., a town with a population of 489.

In a 1986 ruling on the Oregon bank's application, the Comptroller relied on a provision of law that is commonly referred to as "section 92."

Enacted by Congress in 1916, section 92 authorizes any national bank "doing business in any place the population of which does not exceed 5,000 inhabitants ... [to] act as the agent for any fire, life, or other insurance company."

No Limitation for Insurance

The Comptroller noted that as originally enacted, section 92 imposed "a geographic limitation in the statute with regard to [a national] bank's brokerage of real estate loans" but that it contained no such limitation with respect to the sale of insurance.

The Comptroller said that permitting a national bank to sell insurance outside the town where its selling office was located was consistent with the original purpose of the law -- to provide additional income to banks in small towns that were having problems deriving a reasonable profit from their banking business.

The Comptroller therefore determined that, under section 92, the Oregon bank's subsidiary could sell insurance products to existing and potential customers in Oregon, as well as in those states in which the bank's insurance subsidiary was authorized to do business.

Agencies Return Fire

A number of insurance agency trade associations filed suit in U.S. District Court for the District of Columbia, challenging the Comptroller's ruling. They argued that section 92 placed geographic restrictions on sales of insurance by banks and that the Oregon bank's subsidiary therefore should be limited to sales of insurance in its community.

The court concluded that the Comptroller's interpretation of section 92 was "rational and consistent with the statute" and accordingly upheld the Comptroller's ruling.

The District of Columbia Court of Appeals reversed that decision. The appeals court found that section 92 had been repealed in 1918, and noted that the Comptroller had cited no other authority for its ruling. The appeals court ordered the district court to enter judgment for the insurance agents.

Comptroller Upheld

On June 7, however, the Supreme Court ruled that section 92 had not been repealed by Congress in 1918, accidentally or otherwise. Justice David H. Souter, writing a unanimous opinion for the court, said that section 92 remains in effect.

The Supreme Court sent the case back to the district of Columbia circuit court of appeals for consideration of the main issue -- whether to uphold the Comptroller's 1986 decision.

On July 16, the appeals court issued its ruling in the Bank of Oregon case on remand from the Supreme Court.

The appeals court upheld the Comptroller's determination. Examining the words of the statute and its legislative history, the court first found "no specific congressional intent to restrict the geographical reach of the insurance sales authorized by section 92."

It then gave deference to the Comptroller's interpretation of the law and said that it constituted a "permissible construction" that the courts should not overturn because it was not so inconsistent with a "sufficiently clear" statutory policy as to demonstrate that Congress' clear intent had been violated.

Conflicting Interpretations

The District of Columbia circuit court's decision clearly conflicts with the 1992 decision by the U.S. Court of Appeals for the Second Circuit.

There, the second circuit court issued a decision on review of a 1989 decision by the Comptroller to allow two operating subsidiaries of the Chase Manhattan Bank to sell title insurance to lenders and borrowers. The second circuit court first found that section 92 had not been repealed.

It then ruled that section 92, by authorizing insurance agency activities only by those national banks located and doing business in places with 5,000 or fewer inhabitants, barred by implication national banks located and doing business in larger places from engaging in the title insurance agency business.

It said it did not have to decide whether the section of the National Bank Act that authorizes national banks to engage in activities "incidental" to the "business of banking" could support the Comptroller's decision, finding that "the specific limits on insurance activity contained in section 92 had to prevail over the more general grant of incidental powers" contained in the section.

In its decision, the second circuit court relied in the large measure on a 1986 opinion by the U.S. Court of Appeals for the Fifth Circuit, which struck down a ruling by the Comptroller permitting a national bank to sell to borrowers broad forms of automobile, home, casualty, and liability insurance.

The fifth circuit court had ruled that under section 92, national banks had no power to act as insurance agents in cities of over 5,000 population.

Further, the second circuit court criticized a 1979 decision by the District of Columbia circuit that section 92 did not bar national banks from selling credit life insurance in a town with a population greater than 5,000.

The second circuit court did not mention a 1988 decision by the District of Columbia circuit upholding he Comptroller's determination that a national bank may offer municipal bond insurance through a subsidiary by the use of its incidental powers.

Much at Stake

The interpretation to be afforded to section 92 is of great importance for banks and the insurance agents with whom banks would compete if the Comptrollers' 1986 decision is validated.

Today, nearly 200 national banks sell insurance on the basis of section 92 (and perhaps as many as 100 state banks indirectly rely on section 92 as a result of state parity laws that allow them to exercise the powers of national banks; a bank's ability to sell insurance beyond a state's borders under section 92 would certainly increase that total).

Review Is Likely

Given its decision to resolve the conflict among the circuits with respect to the asserted repeal of section 92, it would appear quite likely that the Supreme Court will agree to review the June 15, 1992, decision by the second circuit and the July 16 decision of the District of Columbia circuit.

Of course, it is impossible to predict how the Supreme Court will rule. What is clear, though, is that bankers and insurance agents soon will be focusing all their energies on the Supreme Court in an attempt to persuade the court to rule in their favor.

Mr. Brooks is a litigation partner with Milbank, Tweed, Hadley & McCloy in New York.

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