In January, the U.S. Supreme Court heard oral arguments in Barnett Bank of Marion County vs. Gallager.
The following series of questions and answers are designed to explain a court case that could give national banks greater opportunities to sell traditional insurance products, such as life, automobile, and property and casualty polices.
The high court is expected to issue a decision in the case by June.
Why is the Supreme Court hearing the Barnett case? Didn't it already find in favor of national banks selling insurance last year in its Valic decision?
Not really. In Valic, the Supreme Court held that national banks could sell annuities as part of the general "business of banking" authorized to them under National Bank Act. That case did not deal with the ability of national banks to offer traditional insurance products.
What is the background of the Barnett case?
One of Barnett Banks bank subsidiaries, Barnett Bank of Marion County, bought an insurance agency in Bellview, Fla., where the bank also has a branch office. Barnett then immediately sued the Florida Insurance Commissioner, asking the courts to allow it to operate the insurance agency notwithstanding state law to the contrary.
Two other similar cases are pending - the Owensboro case in Kentucky and the First Advantage case in Louisiana. The high court's ruling in Barnett will presumably settle the issue for all three cases.
What is the Supreme Court being asked to decide?
About 15 or so states have laws on their books that prohibit banks from selling insurance or affiliating with insurance agencies. Florida and a number of the other states are claiming that these so-called "anti- affiliation" laws apply to national banks and should prevent them from establishing insurance agencies in towns with populations of less than 5,000. The national banks, obviously, think otherwise. That's the dispute that the court is being asked to resolve.
But isn't it true that federal law prevails in cases where it conflicts with state law?
Normally, yes. But in the case of insurance, that's not the way it works. There is a 1945 federal statute that basically gives the states the authority to regulate insurance and turns the preemption doctrine that would otherwise apply on its head.
Under the Act, state laws that have been enacted "for the purpose of regulating insurance" will be controlling unless the conflicting federal statute specifically relates to insurance.
How have the lower courts ruled so far on the issue?
The two federal appellate courts that have considered the issue so far have split. In Barnett, the 11th Circuit Court of Appeals ruled against the bank, holding that the state anti-affiliate law did regulate insurance, and that the small-town provision of the National Bank Act did not specifically relate to traditional insurance.
In Owensboro, the Sixth Circuit took an entirely different approach. Deciding in favor of the national banks, the court said that a state law that prohibits a bank from getting into the insurance business does not regulate how insurance activities are conducted. Since the Kennedy Insurance Commissioner lost on this issue, the court didn't even need to consider whether section 92 specifically relates to insurance.
How will the Supreme Court rule in Barnett?
Obviously, nobody knows for sure. But many observers are predicting that the court will rule in favor of Barnett. There are three reasons why they think so.
First, the fact that the Supreme Court even agreed to hear the case is significant. If the members had agreed with the 11th Circuit's decision, so the argument goes, there would have been little reason for them to take the case, except to resolve the split in the circuit courts.
Second, national banks and the Office of the Comptroller of the Currency are on a roll when it comes to the Supreme Court and insurance cases. Underlying these decisions seems to be a rather "pro-competitive" bent by the high court. The justices seem to have been suggesting by their actions that they want banks to go head-to-head with other providers of financial services, letting the marketplace decide the winners and losers.
Third, plain and simple, the banks have a strong case. As a practical matter, it is hard to see how the small-town insurance provision in federal law could not "specifically relate" to insurance.
Also, the court is inclined to go along with the OCC unless its position is clearly wrong, and in the Barnett case the Comptroller's Office has strongly weighed in on the bank's side.
If the Supreme Court rules in Barnett's favor, what will national banks do in response?
More and more national banks with small-town offices will be encouraged to set up or acquire insurance agencies to better serve their customers and to provide an additional source of fee income to their revenues.
Mr. Buchman is a partner in the Washington office of Alston & Bird.
