Two federal circuit courts of appeals recently issued troublesome decisions for banks seeking to exercise insurance powers. Together, the decisions cast doubt on the powers of national banks under existing federal law.
The issue may have to be resolved by Congress of by the Supreme Court, which last week was asked to review the cases.
The first opinion, rendered by the U.S. Court of Appeals for the District of Columbia Circuit, struck down a ruling by the Office of the Comptroller of the Currency.
Section 92 of the National Bank Act would have permitted any national bank in a community of not more than 5,000 inhabitants to sell insurance to customers outside the community. The D.C. circuit ruled that section 92 had been repealed by Congress and could not be seen as authorizing the Comptroller's decision.
Role for Chase Manhattan
The second cases involved a decision of the Comptroller's office to permit Chase Manhattan Bank to engage in title insurance. The office had determined that the sale of title insurance was incidental to a national bank's express power to make loans secured by real property, and thus was authorized by the National Bank Act's grant of incidental powers to national banks.
But the U.S. Court of Appeals for the Second Circuit specifically disagreed with the District of Columbia Circuit. It determined that Section 92 of the National Bank Act had not been repealed and that it in fact prohibited national banks from selling title insurance except in communities with a population of not more than 5,000.
The Second Circuit court also seemed to question a prior decision of the D.C. Circuit court that allowed national banks to sell credit life insurance in a town with more than 5,000 inhabitants.
Section 92 of the National Bank Act was enacted in 1916 as an amendment to section 5202 of the Revised Statutes of the United States.
Section 92 provided that in addition to the powers then vested by law in national banking associations, "any such association located and doing business in any place the population of which does now exceed 5,000 inhabitants" may act as the agent "for any fire, life, or other insurance company."
Two years later, Congress revised section 5202 of the Revised Statutes - and section 92 was omitted.
In 1986, the Comptroller ruled that under section 92, "a national bank or its branch which is located in a place of 5,000 or under population may sell insurance to existing and potential customers located anywhere." Two trade associations representing insurance agencies and underwriters challenged that ruling.
The Appellate Decision
They contended that section 92 placed a geographical limit on insurance sales and they sought to have the ruling of the Comptroller's office set aside. The district court for the District of Columbia ruled that the office's interpretation of section 92 was "rational and consistent with the statute" and granted his motion for summary judgment.
After the trade associations appealed, the District of Columbia appellate court on its own motion asked that the parties to address whether section 92 remained valid.
Both the Comptroller's office and the trade associations agreed that it was valid, that Congress had not intended to repeal section 92 in 1918, and that its technical deletion was an accident and should be ignored.
The District of Columbia Circuit Court ruled, though, that section 92 had been repealed - in fact, it had "ceased to exist." Because the Comptroller cited no authority other than section 92 for his ruling, the appellate court remanded the case to the district court with instructions to enter judgment for the insurance trade associations.
The Second Circuit's ruling dealt with Chase's March 3, 1989, notification to the Comptroller of its intent to establish two operating subsidiaries to sell title insurance for mortgages secured by residential and commercial real estate.
Both operating subsidiaries were to sell title policies to lenders and to borrowers.
Chase's notification said it would limit sale of title insurance to properties securing its own loans or loans originated by affiliates that were purchased by Chase.
Under the proposal, borrowers would not be obligated to buy title insurance through the subsidiaries, and a borrower's failure to use the subsidiaries would not affect Chase's other dealings with the borrower.
On June 20, 1989, the Comptroller authorized Chase's subsidiaries to act as title insurance agents in connection with real estate mortgage loans originated by Chase or its affiliates.
Based on '86 Interpretation
The Company Comptroller's approval was in accordance with a 1986 interpretive ruling in which he concluded that, under the National Bank Act, the sale of title insurance was incidental to a national bank's express power to make loans secured by real property. Thus, it was authorized by the National Bank Act's grant of incidental powers to national banks.
The Comptroller relied on 12 United States Code section 24 (seventh), which authorizes national banks to exercise not only those powers that are expressly enumerated in the National Bank Act but also those "incidental powers ... necessary to carry on the business of banking."
Two title insurance trade associations filed suit against the Comptroller in the United States District Court for the Southern District of New York. The District court rejected their argument that section 92 prohibited national banks from acting as title insurance agents.
The court found that "it is neither arbitrary nor capricious to view section 92 as a supplemental powers provision" rather than a limitation on national bank's incidental powers under section 24 (seventh).
Further, the district court held that even if section 92 were such a limitation, the Comptroller's determination that title insurance was so significantly different from the broad forms of insurance addressed in section 92 as to remove title insurance from the scope of section 92 "was rational" under the National Bank Act.
Although title insurance is certainly a form of insurance, the district court concluded that the Comptroller was entitled to look "beyond a label given a certain activity to determine whether or not it is permissible."
It said the Comptroller was not precluded from determining that title insurance fell outside of the scope of activities discussed in section 92 even though it also was called insurance. The insurance associations appealed.
Omission Ruled Inadvertent
The Second Circuit noted early in its decision that there was some question as to the validity of section 92, although it said that the Comptroller and the title insurance associations were not troubled by the tissue and assumed the section valid.
The court determined, however, that section 92's omission in the 1918 act was inadvertent. It noted that the legislative history of the 1918 law indicated that the sole stated purpose of the revision was irrelevant to the insurance powers of national banks. The court concluded, therefore, that section 92 remained valid.
The trade associations contended that section 92 implicitly prohibited national banks from selling insurance - including title insurance - in towns with more than 5,000 inhabitants.
The Second Circuit agreed. The text of section 92 led it to the conclusion that Congress had intended to prohibit national banks located and doing business in towns with more than 5,000 inhabitants from engaging in the insurance agency business.
It said that if Congress had intended to grant national banks located in towns with large populations the authority to sell insurance, it never would have limited the grant authority in section 92 to national banks in locations with under 5,000 inhabitants.
Support for Restrictions
"And if at the time of enactment Congress believed that all national banks - regardless of location - already possessed the authority to sell insurance," the court said, "this provision would have been superfluous."
When Congress enacted section 92, the court stated, it did so in the belief that under existing banking law - specifically, section 24 (seventh) - national banks had no authority to engage in insurance agency activities.
The court found further support from a fifth Circuit decision that relied on section 92 to declare the unlawful the Comptroller's ruling that permitted a national bank to sell its borrowers "broad forms of automobile, home, casualty, and liability insurance."
The Fifth Circuit found that under section 92, "national banks have no power to act as insurance agents in cities of over 5,000 population."
Similarities and Differences
Even if section 92 implicitly barred national banks in towns with more than 5,000 people from engaging in insurance agency activities in general, though, the Comptroller contended that it should not be applied to title insurance.
Section 92, he stated, was limited to the kinds of insurance similar to fire and life, such as other general casualty policies against future, unknown risks.
Title insurance, on the other hand, protects against incomplete or erroneous information about legal rights to a property that are already fixed at the time the contract is written (such as undetected title defects or encumbrances).
For this reason it is considered a distinct type of coverage that does not fall within any of the three basic classes of insurance: fire and marine, life and accident, and casualty.
|Scant Analysis' Claimed
As a result, the Comptroller argued, section 92 did not speak to the power of a national bank to sell specialized, banking-related insurance products that were distinct from the general life and casualty policies that section 92 addressed.
The Comptroller therefore urged the Second Circuit of follow the District of Columbia Circuit's decision holding that section 92 did not bar a national bank from selling credit life insurance in a town with more than 5,000 inhabitants.
He said that title insurance was quite similar to credit life and quite different from general fire or life. But the Second Circuit was not persuaded by the District of Columbia court's decision in that case.
The decision only had a "scant analysis of section 92" and failed to discuss the section's legislative history. The Second Circuit concluded that Congress intended section 92 to apply to "any ... insurance company." Thus, it determined, section 92 implicitly barred national banks from the title insurance agency business.
The Comptroller also contended that a bank's sale of title insurance, as agent, was "incidental" to the banking business within the meaning of section 24 (seventh) of the National Bank Act.
He argued that section 92 was irrelevant because it granted additional powers to national banks to sell fire, life, and other insurance but did not negate the authority already existing in section 24 (seventh) permitting banks to engage in activities incidental to banking.
The Comptroller pointed out that the District of Columbia Circuit Court had stated, in the credit life insurance case, that section 92 did "not address the authority of national banks in larger towns or cities to act as agents for life insurance companies."
Yielding to Section 92
But the Second Circuit said that, based on its interpretation of section 92, it saw no need to determine the scope of section 24 (seventh). Even if the general grant of power contained in section 24 were sufficiently broad to encompass the title insurance agency business, the statute would have to yield to the specific limits on insurance activity contained in section 92.
"For this reason, we do not decide whether the title insurance agency business is |incidental' to banking within the meaning of section 24 (seventh)," the court concluded.
National banks that sell title insurance should be concerned about the two principal decisions discussed in this article.
These two principal decisions suggest that even should section 92 be deemed valid, certain rulings of the Comptroller under that section may not be upheld.
The incidental banking powers section of the National Bank Act may not provide any room for banking activities in the insurance sphere. Certainly in this area may not be possible until the Supreme Court rules, or Congress acts, to clarify the law.