The U.S. Supreme Court on Monday revived the hopes of some banks to sell insurance nationwide under existing laws.
The high court unanimously ruled that an apparent punctuation error in an obscure 1918 law did not revoke the right of banks to sell insurance in towns with fewer than 5,000 residents.
The decision overturned an unexpected and controversial ruling by the U.S. court of appeals for the District of Columbia.
The reversal lifts a cloud of uncertainty from more than 100 financial institutions -- mostly community banks -- that have long sold insurance in small towns.
Bid to Market Insurance
But more significantly, it will enable the industry to renew its argument that a legal loophole enables banks to market insurance nationwide from offices in small towns.
The Office of the Comptroller of the Currency in 1986 approved an application by U.S. Bancorp to sell insurance products nationally from a unit in the Oregon town of Banks, which had a population of 489.
Insurance industry lobbyists have since tied up the matter in court. But if Portland-based U.S. Bancorp prevails, it would open the door for other banks to sell insurance products nationwide through their small-town units.
Battle in Congress
The banking industry has fought hard in Congress to win broader insurance powers, but with little success. Under current laws, some state-chartered banks can sell insurance, but national banks and bank holding companies generally are not permitted to do so.
There are two notable exceptions: the small-town exemption, and a Delaware law that permits banks with units in the state, such as Citicorp and Chase Manhattan Corp., to sell insurance nationwide.
In opposing the Comptroller's ruling on U.S. Bancorp, insurance agents argued that the 1916 law that permitted insurance sales by banks was aimed at providing service to small communities that might not have brokers, not an avenue for broad sales.
Ruling Backed U.S. Bancorp
But a federal district court ruled in U.S. Bancorp's favor, saying the law concerns the location of the sellers, not the buyers.
The insurance agents appealed the ruling and won a victory beyond their expectations when the appellate court ruled that the 1916 law had been deleted by a punctuation error in a law passed two years later. That law was aimed at deleting another portion of the 1916 act.
"Here, although the deployment of quotation marks points in one direction, all of the other evidence points the other way," said Justice David Souter, writing for the court.
The opinion noted that the law granting the limited insurance authority to banks has been accepted in practice over the years and that Congress even amended it in the 1983 Garn-St Germain Act.
By returning the question of U.S. Bancorp's application for national powers to the circuit court, the court made broader powers more likely, said Richard M. Whiting, general counsel at the Association of Bank Holding Companies.
"They're not ruling on a blank slate," Mr. Whiting said, noting the district court ruling in favor of banks.
Although the Supreme Court ruling buoyed the banks' position, an insurance lobbyist pointed out that its appeal is still alive.
"This ruling can be viewed as a mixed blessing for insurance agents," said Robert Rusbuldt of the Independent Insurance Agents of America. "What this does is maintain the status quo" until the appeals court rules on the facts.
Community bankers hailed the decision, saying it would preserve an important source of revenue. "It will maintain this fee center for the banks, and equally importantly keep open [insurance outlets in towns] that are not that well served financially," said Kenneth Guenther, executive vice president of the Independent Bankers Association of America.
A spokeswoman for the Comptroller's office, whose appeal to the Supreme Court was handled by the Justice Department, called the ruling "a step in the right direction" that will result in "a real benefit to consumers because it makes it clear that the Comptroller's authority to authorize banks to sell insurance in towns of less than 5,000 was not repealed.
"We think consumers will benefit from the competition in the sale of insurance."