Bank of Boston Corp. may sue Massachusetts regulators for denying the company's application to sell insurance from a small town. Then again, state officials may find a way to let the $60 billion-asset bank into the market.

Bank executives are itching to sell life, disability, and health insurance from Sheffield, a small town in western Massachusetts. But the Division of Insurance this month rejected the application.

"We need to get this clarified by a judicial process," said bank spokeswoman Karen Schwartzman. "There isn't anything substantially different about Massachusetts law and national law."

Bank of Boston filed its insurance application in May, two months after the U.S. Supreme Court said states may not bar national banks from operating insurance agencies in towns with fewer than 5,000 residents.

Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association, said Bank of Boston cannot lose. "If the bank's insurance activities are in a small town, I don't see any way the state can refuse to authorize its sale of insurance," he said.

There's a chance Bank of Boston may not have to go to court.

The Massachusetts attorney general is trying to find a way to give Insurance Commissioner Linda Ruthardt the power to override the state law.

"We want to help the bank, but there's a little concern about opening the floodgates for state agencies to ignore state laws," said Thomas Green, first assistant attorney general.

In addition, Gov. William F. Weld has set up a task force to explore changing the state's insurance laws. The group, including representatives from the banking and insurance industries as well as state legislators, has just begun meeting.

Besides Massachusetts, 19 states - including Louisiana, Pennsylvania, New Jersey, and Texas - have laws that prevent banks from selling insurance. Massachusetts does not have a wild card statute that allows state-chartered banks to offer whatever products and services national banks are permitted to sell.

Only Bank of Boston archrival, Fleet Financial Group Inc., New England's largest banking company, has permission to sell insurance in the state. Fleet inherited the right when it acquired Shawmut National Corp., which had obtained a license before the state law barring bank insurance sales was enacted in 1972.

In June, Bank of Boston got an insurance license in Rhode Island, where the bank's new director of insurance, Carmen Effron, is overseeing a direct marketing campaign of life, health, and disability products.

A law enacted last month preventing bank employees involved in lending or deposit gathering from selling insurance in Rhode Island is unlikely to affect Bank of Boston. That's because the bank employs insurance agents who sell from an agency over the telephone. The bank is hoping to operate in Massachusetts the same way.

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