The McCarran-Ferguson Act (1945)
Prof. Bill Long 2/2/05
Parsing Some Obscure Language
Brief federal statutes are often notoriously difficult to understand. I am reminded of the difficulties attendant on construing ERISA, for example, relating to the issue of "ERISA preemption." Difficulties abound, also, in construing brief words of the ADA relating to "major life activities." So it is with the McCarran-Ferguson Act ("MF"). MF is the most important federal statute relating to the business of insurance. This and the next mini-essay will speak of the background to the Act, its central provisions and the five steps you need to go through in construing the Act.
The first American insurance company was chartered in 1794 (INA). In those days an insurance company had authority to act based on a charter issued by the state legislature specifically tailored for this particular company. As the nineteenth century wore on, however, debate began to emerge about whether insurance companies should be, like banks, increasingly regulated by the federal government or should continue to be state-created and regulated entities. The insurance company plaintiffs in the Paul case before the US Sup Ct (1869) actually wanted to invalidate state regulation of insurance companies under the Privileges and Immunities clause of the US Constitution. Their argument was that having differing licensing requirements for agents in NY and VA (in VA an agent had to post a considerable bond) violated this constitutional provision. However, the Court held that "issuing a policy of insurance is not a transaction in commerce," and that therefore Congress had no authority over the regulation of insurance. Thus when the Sherman Anti-trust Act was passed in 1890, relating only to combinations in restraint of trade, the Sherman Act also didn't reach the business of insurance.
These decisions or statutes led to the creation of state departments of insurance which had the primary responsibility of assuring consumers that insurance companies remained solvent. The express consumer protection role of state insurance departments only emerged in the last 30 or so years. By WWII, then, as Jerry says, "state insruance regulation was relatively comprehensive in all areas but ratemaking." That is, the insurers were permitted to have a rather free hand in setting its rates for various kinds of coverage.
The Origin of the M-F Act
Frustrated with the ineffectiveness of state ratemaking regulation in the insurance context, the AG of Missouri in the early 1940s sought a determination in federal court that in fact the business of insurance constituted interstate commerce that would then subject insurance companies to the Sherman Act. By using this strategy the AG was going directly against the Paul precedent, of course, but this didn't deter him. The lower courts dismissed his case, but in a 4-3 decision the US Sup Ct reversed Paul and held (in US v. South-Eastern Underwriters Association, 322 US 533, (1944)) that insurance transactions were subject to federal regulation under the Commerce Clause of the federal constitution. This dramatic decision not only opened insurance regulation to Congressional scrutiny and approval, but potentially would allow the dismantling of the entire state insurance regulatory structure.
The National Association of Insurance Commissioners (NAIC) was determined not to let this occur. They were concerned that if the practices of state insurance regulation would come under Congressional scrutiny that they would be found to violate the Sherman Act. After all, insurers set rates based on pooled data. All the insurers have access to the data and, at thne time, set rates in conference with others based on this data. Surely the courts could find a Sherman Act violation here.
Thus, they drafted the MF Act. The Act is interesting because it tries to do two almost contradictory things in very few words. First, it attempts to recognize Congressional power to regulate insurance, but second, it stresses that in the normal situation Congress will not exercise this authority but will allow the states to regulate the insurance industry. That is, the M-F Act was intended to try to say that it was "business as usual" in the state regulation of insurance while, at the same time, recognizing that Congress could come in and change things if they wanted to do so. These dual goals make the law rather difficult to understand.
The next mini-essay will briefly consider the statute and a road map to understanding it.
Copyright © 2004-2007 William R. Long