The insurance industry has ratcheted up its opposition to banks' attempts to use the Office of the Comptroller of the Currency to preempt state regulations, and the dispute could end up in the courts.
In a move that is testing the limits of federal and state regulation, banks in May petitioned the OCC to rule that portions of West Virginia's insurance regulatory laws can be preempted by Gramm-Leach-Bliley. The insurance industry responded that such an action "flies in the face of state regulation of insurance, and the intent of Gramm-Leach-Bliley," said Joyce Kraeger, an attorney from the Alliance of American Insurers in Downers Grove, Ill.
Ms. Kraeger said that if the OCC preempts the West Virginia laws "it's probably not going to be the last we hear of it." Some in the industry would consider filing lawsuits, she said. At issue are several sections of the West Virginia Insurance Sales Consumer Protection Act that regulate when and where banks can sell insurance.
The West Virginia Bankers Association's request to the OCC is similar to one presented in Rhode Island in 1997. The OCC did not issue a ruling in the Rhode Island matter, but industry watchers said that with Gramm-Leach-Bliley in place the agency might be more likely to act in the West Virginia case.
It's not clear when that would happen, however. A spokesman for the OCC confirmed that it has no particular deadline for issuing a ruling. He also said the OCC has received more than 50 comments to this preemption challenge - and continues to receive them even though the comment period closed last week.
"In West Virginia we have three areas of law that hinder banks in their ability to offer insurance products," said Doug Maddy, who runs the bank trade group. The regulations to which banks object forbid banks to offer insurance to a customer until after the loan transaction is completed; require banks to have separate people to handle banking and insurance; and require that insurance sales take place in a separate physical location in the bank from where banking transactions occur.
"All those things are, in our estimation, artificial barriers," Mr. Maddy said. "Gramm-Leach-Bliley's main intent was to tear down these artificial barriers."
Mr. Maddy said the West Virginia regulations are unfair to banks, because insurance companies that have formed thrifts, such as State Farm, do not have to follow the same rules. "Most legal minds are in agreement that these are preemptible now," Mr. Maddy said. "Gramm-Leach-Bliley changes the whole landscape."
State Banking Commissioner Sharon G. Bias has said that if the OCC preempts these laws for national banks she would grant parity to state-chartered banks as well.
However, insurance industry representatives said that the laws are not unfair, and that anyway the OCC has no right to preempt them.
"Insurance has been regulated at the state level, and Gramm-Leach-Bliley essentially preserves that functional state regulation of insurance," Ms. Kraeger said. "There are certain areas where there could be possibilities for preemption; we don't think this is one of them.
"I think the industry as a whole is pretty much united in its feeling that the OCC should just really stay out of this type of activity and let the states regulate insurance," Ms. Kraeger said.
The Alexandria, Va.-based Independent Insurance Agents of America also made that point in its comments to the OCC, adding that at least 30 states have insurance sales consumer protection provisions that are similar to those being challenged in West Virginia.
"This is especially troubling because - virtually without exception - those provisions were enacted with the support of consumer advocates as well as both the banking and insurance industries in each state," the comment states. The IIAA says this challenge is one of the first tests of the preemption provision in Gramm-Leach-Bliley that allows the federal law to preempt certain state regulations.
Robert A. Rusbuldt, executive vice president of the Alexandria-based IIAA and an industry lobbyist, said the heart of this dispute is ambiguity surrounding the Barnett Bank ruling. The ruling said states would regulate insurance but "could not prevent or significantly interfere with the ability of banks to sell insurance."
"There has never been a definition to this day of what constitutes significant interference," Mr. Rusbuldt said. "Congress doesn't know; the OCC doesn't know; nor do state regulators. It is an undefined term, and there lies the issue and the problem."
In essence, the bankers say the West Virginia laws are, in fact, significant interference; the insurance industry says they aren't. And both groups are waiting to see what the OCC does.
The insurance industry has various ideas about what should be done if the OCC rules against the laws.
Michael Koziol, senior director and counsel for the National Association of Independent Insurers, said the confusion over regulation in West Virginia should be a sign to state regulators that they need to get together and formulate a model regulation that mirrors Gramm-Leach-Bliley's existing provisions, to prevent such disputes. He said another challenge is in the works in Massachusetts.
"It certainly will spur, I think, the [National Association of Insurance Commissioners] to work to pass a model," he said. His group supports a model act that includes the 13 safe harbor provisions that are granted in Gramm-Leach-Bliley and considered indisputable. Though states could go beyond those safe harbors if they want, a uniform set of basic regulations would prevent some disputes, he said.
"We think the intentions of Congress were rather clear, and so do the members of Congress that I have talked to. It is the states' purview to regulate the business of insurance, and it doesn't matter who is selling the insurance. That is a state matter, not a federal matter," Mr. Rusbuldt said. "I'm not sure Congress is going to look to kindly on the OCC if they decide to issue some ruling."
However, he predicted that if the OCC does rule, lawsuits would put the final decision in the hands of the courts. He stressed that this dispute highlights the need for Congress to define what it means when it says "significant interference."
"At some point in time someone is going to have to define it," he said, adding that Congress, not state regulators or court rulings, should make this issue clear.
