WASHINGTON - Connecticut as become the latest, and perhaps most significant, battleground in the fight between the banking and insurance industries.

The skirmish there features Shawmut Bank, which asked a federal judge for permission to sell insurance from a branch in Chester, Conn.

Shawmut, in a Nov. 15 court filing, argued that the National Bank Act explicitly allows federally chartered banks to sell insurance statewide from operations headquartered in towns with fewer than 5,000 residents.

"We view the ability to sell a full array of insurance products as an important part of our product mix," Shawmut spokesman Vincent Loporchio said. "That is the basic crux of why we are pursuing this case."

Connecticut officials argued that state law prohibits banks from owning insurance agencies. In court documents, the state's lawyers contend that this law takes precedence over the federal statute.

"Our state law is at stake, a law that protects consumers from banks using their predominate position to pressure consumers into buying insurance from them as a condition for getting other services, like mortgages," state Attorney General Richard Blumenthal said.

The court is expected to schedule oral arguments this winter, although no date has been set yet.

The case mirrors disputes in three other states. So far, victories are split between the two industries, with banks winning, in Kentucky and losing in Florida. The parties appealed those cases. An Indiana judge is still weighing the third case.

Michael Crotty, deputy general counsel for litigation at the American Bankers Association. said the Shawmut matter could hold particular importance because Connecticut cases go to the Second U.S. Circuit Court of Appeals in New York.

Judges across the country often look there for guidance because of its reputation in financial law, Mr. Crotty said.

The case began in November 1993, after Shawmut purchased Insurance Associates of New Haven with the Comptroller of the Currency's approval.

Shawmut transferred the agency to its Chester branch, and then sued the state of Connecticut, asking the court to void state laws prohibiting banks from running insurance agencies.

The state replied that the federal McCarran-Ferguson Act gives states power over insurance sales and, even if it doesn't, the bank act's 5,000-population rule limits Shawmut's insurance-selling to small town residents.

Finally, the state argued that banks might sell policies to support their lending business, regardless of the risk involved. That could needlessly expose insurance companies, which are underwriting the policies, to losses.

Shawmut, in the Nov. 15 filing, contended that the McCarran-Ferguson law applies only to how agencies conduct business, not who can own agencies.

The ABA said in its brief that Congress had enacted just one requirement for banks intending to sell insurance, the 5,000-residents rule. "As in the case of other powers granted to national banks, these statutory limitations say nothing about the location of the customers or prospective customers of the particular banking service," the ABA wrote.

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