However, Beth Climo, executive director of the American Bankers Insurance Association, saw the decision from a national perspective.

“This important decision is in keeping with other rulings that have applied the Barnett preemption standard to overturn similar types of anti-competitive laws in West Virginia and Ohio,” she said. “The legal history strongly supports preemption of state laws that hinder banks from selling insurance or forces them to sell insurance inefficiently.”

Ms. Climo also noted there are still many states with the kind of restrictive laws that go beyond what is permitted in federal statute, but that banks and insurance regulators have managed to finesse the situation to keep it below the boiling point that results in costly legal battles.

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

For decades, state insurance regulators and the industry have fought encroachment by banks on their turf. The banks won a significant victory in the spring of 1996 when the U.S. Supreme Court ruled in Barnett Bank vs. Florida Insurance Commissioner that state “anti-affiliation” laws that prohibit national banks from selling insurance in small towns are preempted by the National Bank Act.

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

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

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

However, some state insurance regulatorsat least in the opinion of the U.S. Office of the Comptroller of the Currencyventured into dangerous waters in their regulation of bank insurance sales with rules that went beyond GLB exceptions. As a result, the OCC issued opinions regarding insurance regulatory actions in both West Virginia and Massachusetts that ended in solid victories for banks.

In 2002, both the National Association of Insurance Commissioners and the Independent Insurance Agents of America (who have since added “Brokers” to their name) challenged the OCCs preemption of the West Virginia laws, while the banks themselves went on the offensive in Massachusetts, challenging the states bank and insurance regulators on their right to restrict bank insurance sales beyond the GLBs safe harbors.

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

The provisions at issue in Massachusetts prohibited bank employees from both referring customers to a banks insurance agency unless asked and also from giving them a fee for such a referral. In addition, banks could not discuss insurance with loan applicants until after the loan had been approved and also were forced to keep loan and deposit activities separated from insurance activities.

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

Wells Fargo, Wachovia and BB&T are among the major banks that have built up significant insurance agency business, according to Standard & Poors.

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

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

“The legal history strongly supports preemption of state laws that hinder banks from selling insurance or forces them to sell insurance 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.