WASHINGTON - A federal appeals court has cleared away another hurdle from the banking industry's path to unfettered sales of insurance products.

The U.S. Court of Appeals for the Sixth Circuit ruled Dec. 29 that state insurance commissioners cannot prevent banks in towns with fewer than 5,000 residents from selling insurance.

The decision, in Owensboro National Bank v. Stephens, affects banks in Kentucky, Ohio, Michigan, and Tennessee. Similar cases are pending in Florida, Louisiana, and Connecticut.

"It (the ruling) is definitely good for banks," said Richard Whiting, general counsel to the Bankers Roundtable. "It means that national banks can take advantage of the authority that's been granted by the Comptroller without unnecessary state burdens."

Owensboro, after receiving permission from the Comptroller's office, applied to the Kentucky Department of Insurance in 1990 to sell insurance. When the bid was rejected, the bank filed suit in federal court.

Two other Kentucky banks, First National Bank of Louisa and Citizens National Bank of Paintsville, later joined the suit.

The insurance department argued that Congress intended for states to decide if banks could sell insurance. It also argued that a separate federal law - the McCarran-Ferguson Act - leaves all insurance questions to states to decide.

The appeals court, in a two-to-one decision, rejected those arguments, ruling that the National Bank Act gives banks a clear right to sell insurance in small towns where they operate branches.

In addition, the appellate panel said the McCarran-Ferguson Act allows states to regulate only how insurance is sold. It does not allow states to decide who sells the product, the court said.

Kentucky insurance department attorney Stephen Cox was on vacation and could not be reached for comment. Ann M. Kappler, a partner at Jenner & Block who represents several insurance trade groups in the case, was out of town and could not be reached for comment.

Charles S. Bullock, Owensboro's chief executive, said he has not been told whether the state will appeal.

"We are obviously very pleased with the decision," Mr. Bullock said. "We see the insurance area as a place where we need to be involved for the fee income. It is a very important area."

Kentucky Bankers Association executive vice president Ballard Cassady said he expects a "fair number" of banks in the state will take advantage of the decision and create insurance firms.

But, he said the eventual number of banks that create insurance firms is immaterial. "The main thing is that they have the right to do that," Mr. Cassady said.

The decision benefits consumers, which now will have more outlets to choose from, said Michael Crotty, deputy general counsel at the American Bankers Association.

"Competition is a good thing," he said. "Competition lowers prices."

This is not the first time the courts have examined insurance sales in small towns, Mr. Crotty said.

In a 1993 case, the U.S. Supreme Court ruled that Congress had not inadvertently repealed the small-town exemption in a 1918 law.

Once the high court affirmed the law's existence, the banking and insurance industries began resumed their battle over what the law means.

The federal appeals court, in this case, tackled one of those outstanding issues, ruling that the federal law preempts the state insurance commissioner's authority.

The court, unlike a decision last week by a federal magistrate judge in Indiana, did not address whether banks can sell insurance to residents outside of the small town.

Allen L. Raiken, general counsel to the Financial Institutions Insurance Association, said the Owensboro case is part of a growing recognition that banks should sell insurance.

"It certainly goes in the direction of the trend," he said.

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