Banks and insurers clashed before the Supreme Court on Tuesday in a case that could decide if states can bar national banks from selling insurance.
Barnett Banks Inc. told the court that the National Bank Act permits it to sell insurance from small-town branches, even in states that ban bank insurance sales.
Responding, Florida argued that a different federal law lets states regulate the insurance business. The law is sufficiently broad to permit states to bar bank insurance sales if they choose, Florida's lawyers argued.
The closely watched case could determine how far banks can go in exploiting the $500 billion market for life, property and casualty insurance.
Banking lawyers predicted victory after the argument, saying that justices Stephen Breyer, Antonin Scalia and David Souter appeared to lean heavily in the industry's favor.
"It went real well," said Michael Crotty, deputy general counsel of the American Bankers Association. "Just from the tenor of the questions and the probing analysis, it is apparent the justices saw immense holes in the insurance industry's argument that it was unsuccessful in patching up."
The insurance industry tried to show that the Florida law is intended to protect consumers rather than restrict the power of national banks.
Lawyer Ann M. Kappler told the justices that Florida barred banks owned by holding companies from selling insurance so loan applicants would not feel pressure to buy insurance from their bank.
The McCarran-Ferguson Act allows states to regulate insurance, except when Congress passes a law that "specifically relates" to insurance, said Ms. Kappler, a Jenner & Block partner who represents three insurance groups in the case.
The National Bank Act doesn't qualify for the exception, she argued, because Congress passed the law to provide small-town banks with a new source of revenue.
Lawyers representing Barnett Banks and the Office of the Comptroller of the Currency said the law isn't a consumer protection measure. Rather, it regulates the authority of a national bank, a power reserved for Congress and the Comptroller.
Nathan Lewin, a partner at Miller, Cassidy, Larroca & Lewin, who represented Barnett, also said the law doesn't help consumers because it excludes credit life insurance, the one product banks have an incentive to sell because it protects the institution from a loss in case of an early death. It also doesn't protect consumers from banks that are not part of a holding company.
Mr. Lewin also said the National Bank Act specifically relates to insurance because it mentions the word "insurance" five times.
During oral arguments in Barnett Banks Inc. v. Nelson, at least three justices appeared to agree with the banking industry's argument that the National Bank Act gives it the right to sell insurance in small towns.
Justice Breyer said Florida will "lose the case" if it can't prove that the intent of the law was to protect consumers, rather than limit competition. "The purpose here is to keep big banks out," Justice Breyer said of the Florida statute.
Keeping with the consumer regulation theme, Justice Breyer also said Florida can't rely on consumer regulations to overturn federal laws. Such a decision would allow states to exempt insurance agents from federal income taxes if it could benefit consumers, he said.
Justice Scalia said he can't understand why Florida would allow any bank to sell insurance if it was worried about lenders coercing consumers. "Little banks can't coerce?" he asked. "I don't understand."
Julie Williams, chief counsel at the Comptroller's office, said the justices latched onto the key point. "What we are saying here is this is not regulation of the business of insurance," she said. "It is the regulation of the powers of the entity. That is what Florida is trying to do and that is not protected by McCarran-Ferguson."
Washington lawyer Melanie Fein, a partner at Arnold & Porter, said she sees a six-three split in the industry's favor. "Banks have every reason to be hopeful, but it is not quite a slam-dunk," she said.
Also predicting a split between the justices was Richard Whiting, general counsel at the Bankers Roundtable. "There were a few justices who signaled that they were supportive of the banking industry's arguments and there were several who didn't tip their hands," he said.
The insurance industry wasn't ready to concede defeat. Bill Anderson, associate general counsel at the National Association of Life Underwriters, said he was optimistic because he believes their legal arguments are so strong.
David Roderer, a partner at Winston & Strawn, who represented several banking groups in the case, said it appears from the questions that the justices will not try to skirt the broader question of whether states can block bank insurance sales. "If they simply knock the Florida law out, Florida could come right around and develop the next standard," he said. "Then we are right back where we were before."
That could be in store anyhow. Florida insurance commissioner Bill Nelson, speaking to reporters after the argument, said he may propose new legislation if the state loses. The measure would prevent insurers from selling policies to anyone indebted to them.
He said his goal is to keep banks out. "If we allow banks to sell insurance, we are allowing the bank fox to guard the insurance hen house," he said. "The coercion is there. The economic peril is there."
Barnett bought a Belleview, Fla., insurance agency in 1993, a move clearly contrary to state law but endorsed by the Comptroller's office. It sued to overturn the state law, arguing that the National Bank Act gave it the right to sell insurance in small towns.
The suit didn't deter state officials, who ordered the bank to stop selling. The trial court sided with Florida, ruling that the McCarran- Ferguson gives states the right to ban bank insurance sales. The federal appeals court in Atlanta upheld the decision last year.
At the same time Barnett was fighting Florida, Owensboro National Bank was taking on Kentucky, and winning. It convinced the federal appeals court in Cincinnati that the National Bank Act overrode the McCarran-Ferguson Act and gave national banks the right to sell insurance in towns with fewer than 5,000 residents.
The decision in Barnett, which is expected this spring, also will determine the outcome in the Owensboro case.