Greenberg Traurig Alert

A Recent U.S. Supreme Court Ruling Allows Nationally-Chartered Banks to Sell Insurance From Small Towns Even When State Law Purports to Prohibit It

April 5, 1996

The lawful interaction between the banking industry and the insurance industry continues to increase. In a unanimous ruling written by Justice Breyer in Barnett Bank of Marion County v. Nelson, 1996 WL 130728 (January 16, 1996), the United States Supreme Court overturned two lower court decisions and ruled that nationally-chartered banks may sell insurance services from offices in small towns, even when state law purports to prohibit it.

The case began in Florida, when Barnett Bank of Marion County bought an insurance agency in the town of Belleview, a town of approximately 2,066 people. When Barnett began selling insurance through that agency, the state Insurance Commissioner ordered it to stop. He relied on a Florida statute prohibiting banks from selling insurance. The bank responded by filing suit in federal district court. It relied on a conflicting federal law allowing national banks with offices in towns with populations of less than 5,000 to sell insurance.

In 1916, in response to a large number of small-town bank failures, Congress passed a law allowing national banks to sell insurance in towns with fewer than 5,000 people. That law is commonly referred to as "Section 92" of the National Bank Act. Section 92 was dormant for most of its existence until the Comptroller of the Currency, in 1986, breathed new life into the law when he held that Section 92 authorized national banks' small-town branches to sell insurance from those towns to persons outside of those towns. Since 1986, approximately 200 national banks have been selling insurance in reliance on this law. Section 92 reads in part:

"In addition to the powers now vested by law in national [banks] organized under the laws of the United States any such [bank] located and doing business in any place [with a population] . . . [of not more than] five thousand . . . may, under such rules and regulations as may be prescribed by the Comptroller of the Currency, act as the agent for any fire, life, or other insurance company authorized by the authorities of the State . . to do business [there], . . . by soliciting and selling insurance." Act of Sept. 7, 1916 (Federal Statute), 39 Stat. 753, 12 U.S.C. ¤ 92.

Florida's statute at issue reads:

"No [Florida licensed] insurance agent . . . who is associated with, . . . owned or controlled by . . . a financial institution shall engage in insurance agency activities. . . " Fla. Stat. Ann. ¤ 626.988(2) (Supp. 1996).

Under ordinary federal pre-emption doctrines, Section 92 should have preempted Florida's statute. However, another federal statute, the McCarran-Ferguson Act, complicated the picture. McCarran-Ferguson was passed in 1945 and limits the federal government's power to regulate insurance, leaving most regulation of that industry to the states. An exemption in the McCarran-Ferguson Act reserves to the federal government the power to pre-empt state law when the federal law involved "specifically relates to the business of insurance." The section at issue reads in pertinent part:

"No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such act specifically relates to the business of insurance. . . . " McCarran-Ferguson Act, ¤ 2(b), 59 Stat. 34, 15 U.S.C. ¤ 1012(b).

Barnett Bank argued that Section 92 relates specifically to the business of insurance. However, because Section 92 forms part of the National Bank Act, the Florida Insurance Commissioner argued that it relates to the banking business, and not to the business of insurance. Therefore, the argument ran, by virtue of McCarran-Ferguson Section 92 should not supersede Florida's prohibition on banks engaging in "insurance agency" activities.

The trial court and the Eleventh Circuit accepted this reasoning, but the U.S. Supreme Court found defendants' argument unpersuasive, stating that Section 92 could relate to both/either banking or insurance, "[j]ust as an ordinance forbidding dogs in city parks specifically relates to dogs and to parks." As a result, the Supreme Court held that Section 92 prevailed over Florida's restrictive statute.

Banks are reporting that they will approach the market cautiously -- first by selling life insurance, which is widely perceived to be more profitable -- and eventually moving into other markets such as health insurance, automobile insurance and homeowners' policies. The ruling will dovetail with recent efforts by major financial institutions to offer one-stop financial shopping for consumers. Yet, many regulatory issues remain to be resolved. For instance, it is unclear who will be responsible for regulating the banks' insurance business. In the case of annuities in Florida, the Comptroller of the Currency has regulated national banks concerning issues such as the physical location of insurance agent services on the premises and the use of confidential information of banking customers for marketing purposes, and the Florida Insurance Commissioner has regulated the agents and their activities, e.g., licensing, premium collection, compensation, commission sharing and advertising.

While the ruling on its face applies only to national banks, it is difficult to imagine how state banks can be left behind without eventually causing an outflow from the state and into the national banking system.

A result of the ruling is that Florida will shortly see banks purchasing small-town insurance agencies. Another likely result is that some independent insurance agents will lose business, and hence, their jobs. But yet another likely consequence will be that the same industry that will be responsible for their termination will rehire them to manage the insurance end of the banking business. In any event, independent insurance agents are separately lobbying Congress to impose more legislative restrictions on banks' sales of insurance in an effort to hold on to their business.

This is the second Supreme Court ruling within a year to step on the insurance industry's toes. In August, the Supreme Court held that banks could also sell annuities directly to customers. Annuities are tax-deferred investments, traditionally sold by insurance companies, which pay out benefits in installments at some point in the future. They are commonly used for financing retirement. Insurance agents had argued in that case that annuities were a form of insurance, and, hence banks were prohibited from selling them. Since that ruling, banks have cornered approximately 20% of the annuities market. Insurers who have been signing contracts with banks for the sale of annuities are likely to read Barnett with favor. But the independent agents are likely to view the ruling as another major intrusion into their turf.

Banks still are not generally allowed to underwrite insurance, and Barnett did not change that law. However, in light of Barnett and the August Supreme Court decision regarding annuities, we can expect to see a change in the traditional distinction between banking and insurance over a relatively short period of time, unless Congress enacts restrictive legislation.