The Eleventh Circuit Gives the Banking Industry a Lesson About Reverse Preemption in Barnett Bank of Marion County, N.a. v. Gallagher - Jess Pinkerton

• Publication year: 1996

The Eleventh Circuit Gives the Banking

Industry a Lesson About Reverse Preemption in Bamett Bank of Marion County, N.A. v. Gallagher

Recently, in Barnett Bank of Marion County, N.A. v. Gallagher,¹ the United States Court of Appeals for the Eleventh Circuit was presented with the question of whether Florida's prohibition against affiliations between banks and insurance agents was protected from preemption by the McCarran-Ferguson Act.² The appellant, Barnett Marion, is a subsidiary of Barnett Banks, Inc., the largest bank holding company centered in Florida.³ Barnett Marion maintains its principal place of business in Ocala, Florida; however, it owns and operates a branch in Belleview, Florida, a locality where the population is less than five thousand.⁴ On October 18, 1993, Barnett Marion purchased Linda Clifford Insurance, Inc. from Linda K. Clifford in Belleview.⁵ That same day, Barnett Marion sought a declaration asking that they be allowed to market insurance to customers throughout the State of Florida from the branch office.⁶ Barnett requested the declaration due to two conflicting statutes. Florida maintains a statute which precludes bank subsidiaries from engaging in insurance activities.⁷ However, 12 U.S.C. Sec. 92 permits national banks to act as insurance agents in towns having a population of fewer than five thousand people.⁸ Barnett contended that the federal statute preempted the state statute, and therefore they should be allowed to act as an insurance agent for any authorized insurance company in Florida.⁹ On October 22, 1993, the Florida Department of Insurance issued an Immediate Final Order mandating that Clifford and her agents discontinue all insurance activities other than selling credit disability and credit life insurance.¹⁰ In response, Barnett Marion filed motions seeking either a temporary restraining order or a preliminary injunction.¹¹ The United States District Court for the Middle District of Florida denied both motions and the case went to trial.¹² The district court looked to the McCarran-Ferguson Act,¹³ which was enacted in 1945 to ensure that states, and not the federal government, regulate the insurance industry.¹⁴ The statute creates a reverse preemption doctrine in the insurance arena whereby a state law which regulates the business of insurance is presumed to invalidate a federal law "unless the federal law specifically relates to the business of insurance."¹⁵ The district court held that the Florida anti-affiliate statute is a law regulating the business of insurance and that section 92 is not a law which specifically relates to the business of insurance, and therefore the state statute does not yield to the federal statute.¹⁶ The United States Court of Appeals for the Eleventh Circuit affirmed the district court's decision and declared that the district court had correctly interpreted and applied the conflicting statutes.¹⁷

In 1869, in Paul v. Virginia,¹⁸ the United States Supreme Court held that issuing an insurance policy was not a transaction which fell under Congress's Commerce Clause powers pursuant to Article I, section 8 of the United States Constitution.¹⁹ For approximately seventy-five years following this decision, Congress believed that insurance regulation was beyond the scope of its power.²⁰ However, the Supreme Court started enlarging the powers of Congress under the Commerce Clause in response to the emergence of an interconnected national economy, and in 1944 the Supreme Court, in United States v. South-Eastern Underwriters Ass'n,²¹ held that regulation of interstate insurance activity was not beyond Congress's Commerce Clause power.²² Congress responded adversely to the decision in South-Eastern Underwriters and within a year passed the McCarran-Ferguson Act to return the supremacy of insurance regulation to the states.²³ The Act's policy statement provided that "Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest."²⁴ Section 1012 of the Act proclaimed that "[n]o 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 a tax upon such business, unless such Act specifically relates to the business of insurance."²⁵ The result was the foundation of a reverse-preemption doctrine for regulating the insurance industry.²⁶ A state statute regulating the business of insurance would now be deemed to presumptively preempt a conflicting federal law unless the federal statute specifically related to insurance.²⁷ A few years later in Prudential Insurance Co. v. Benjamin,²⁸ the Supreme Court examined the McCarran-Ferguson Act for the first time. The Court stated that "[ojbviously Congress' purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance."²⁹ Over the next twenty-three years, the states were given almost full authority to regulate and tax the insurance industry. However, in 1969 the Court began to permit greater federal regulation over the insurance industry. Most of the important cases focused on the language in section 1012(b) of the Act—the debates centered on determining what constitutes the "business of insurance." In SEC v. National Securities, Inc.,³⁰ the Court dealt with the issue of whether the SEC was prohibited by the McCarran-Ferguson Act from bringing an action under the Securities Exchange Act against a shareholder of an insurance company.³¹ The Court held that the McCarran-Ferguson Act did not prevent the SEC from bringing the action because the state statute that was involved actually dealt with securities regulation and not insurance regulation.³² In reaching this decision, the Court observed that statutes which were directed at protecting the relationship between the insurance company and the policyholder were laws regulating the business of insurance.³³ Later, in Group Life & Health Insurance Co. v. Royal Drug Co.,³⁴ the Court attempted to clarify the meaning of the phrase business of insurance. The Supreme Court stated that one of the main factors to consider is the risk to the policyholders.³⁵ In United Labor Life Insurance Co. v. Pireno,³⁶ the Supreme Court actually established specific elements to consider when construing the phrase "business of insurance."³⁷ The case dealt with whether the use of a peer review committee by a chiropractic association to advise insurers as to whether charges for chiropractic services were necessary and reasonable constituted the business of insurance.³⁸ In reaching its decision that this practice was not part of the business of insurance, the Court set out three basic criteria: "[FJirst, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry."³⁹ More recently, the Supreme Court in United States Department of Treasury v. Fabe,⁴⁰ explained the relationship of these criteria to the McCarran-Ferguson Act. In Fabe, the Court was asked to...