Ceasefire Possible In Court Battles WithBanks

Federal court ruling striking down Massachusettsrestrictions might be last skirmish

The recent decision of Massachusetts bank and insuranceregulators not to appeal a federal court ruling striking down staterestrictions on the sale of insurance in banks can be seen as thefinal cease-fire in the decades-long struggle between the twofinancial service cousins for their customers dollars.

Daniel Forte, president and CEO of the plaintiffs in the casetheMassachusetts Bankers Associationkept his reaction regional.“Todays decision brings Massachusetts in line with most statesthroughout the nation,” he said, following the courts Jan. 12decision.

However, Beth Climo, executive director of the American BankersInsurance Association, saw the decision from a nationalperspective.

“This important decision is in keeping with other rulings thathave applied the Barnett preemption standard to overturn similartypes of anti-competitive laws in West Virginia and Ohio,” shesaid. “The legal history strongly supports preemption of state lawsthat hinder banks from selling insurance or forces them to sellinsurance inefficiently.”

Ms. Climo also noted there are still many states with the kindof restrictive laws that go beyond what is permitted in federalstatute, but that banks and insurance regulators have managed tofinesse the situation to keep it below the boiling point thatresults in costly legal battles.

“We arent finding the banks in those states putting this high onthe agenda, which makes us think that they have learned to livewith it, or in some cases they have gotten around to modifying orworking through some of these provisions,” according to Ms.Climo.

For decades, state insurance regulators and the industry havefought encroachment by banks on their turf. The banks won asignificant victory in the spring of 1996 when the U.S. SupremeCourt ruled in Barnett Bank vs. Florida InsuranceCommissioner that state “anti-affiliation” laws that prohibitnational banks from selling insurance in small towns are preemptedby the National Bank Act.

The case stemmed from efforts of the Barnett Bank to establish abranch insurance agency in a small town in Florida. The FloridaInsurance Department attempted to stop insurance sales by the bank,based on the Florida statute that prohibits financial institutionsor their employees from being licensed as agents.

However, the Supreme Court did not clearly address the extent towhich state insurance departments could regulate national bankinsurance activities. For the next three years that issue would behashed out in Congress in the context of the repeal of the 1933Glass-Steagall Act that prohibited bankers, insurers and securitiesbrokers from getting into each others businesses.

The 1999 Gramm-Leach-Bliley Act contained 13 so-called “safeharbors” in which state insurance regulators could restrict bankinsurance sales in the name of consumer protection.

However, some state insurance regulatorsat least in the opinionof the U.S. Office of the Comptroller of the Currencyventured intodangerous waters in their regulation of bank insurance sales withrules that went beyond GLB exceptions. As a result, the OCC issuedopinions regarding insurance regulatory actions in both WestVirginia and Massachusetts that ended in solid victories forbanks.

In 2002, both the National Association of InsuranceCommissioners and the Independent Insurance Agents of America (whohave since added “Brokers” to their name) challenged the OCCspreemption of the West Virginia laws, while the banks themselveswent on the offensive in Massachusetts, challenging the states bankand insurance regulators on their right to restrict bank insurancesales beyond the GLBs safe harbors.

The IIABA lost its case when the Supreme Court refused to takeup the Appeals courts unfavorable ruling.

The provisions at issue in Massachusetts prohibited bankemployees from both referring customers to a banks insurance agencyunless asked and also from giving them a fee for such a referral.In addition, banks could not discuss insurance with loan applicantsuntil after the loan had been approved and also were forced to keeploan and deposit activities separated from insuranceactivities.

At stake in the fight is the ability for banks to profitablycross-sell with the insurance agencies they have been buying astheir entry into the insurance field following GLB passage. Banks,for the most part, have been content to leave the risky andROE-draining business of underwriting to insurance carriers, whilethey focus on distribution. (See related story, page 12.)

Wells Fargo, Wachovia and BB&T are among the major banksthat have built up significant insurance agency business, accordingto Standard & Poors.

Bank and insurance industry observers will continue to debatethe efficacy of such cross-selling opportunities once insuranceagencies are acquired. However, Ms. Climo said statistics in theMassachusetts case proved that insurance profits, when compared toother bank-owned services, fell far short of the mark.

“The difference was just off the chart, and the reason was therestrictions in Massachusetts law that significantly interfered,according to the Barnett standard, with bank sales ofinsurance,” she said.

“The legal history strongly supports preemption of state lawsthat hinder banks from selling insurance or forces them to sellinsurance inefficiently.”

Beth Climo, Executive Director

American Bankers Insurance Association

Reproduced from National Underwriter Edition, March 10, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.