Boston University School of Law's Annual Review of Banking Law

X. INSURANCE AND ANNUITIES, 19 Ann. Rev. Banking L. 100 

19 Ann. Rev. Banking L. 100

Annual Review of Banking Law 2000

Developments In Banking Law: 1999

*100 X. INSURANCE AND ANNUITIES

David Constantino 61

Copyright (c) 2000 by Trustees of Boston University; David Constantino

A. Insurance

1. Gramm-Leach-Bliley Act

a. Overview

The most notable development in 1999 for insurance as it applies to the banking industry was the passage of the Gramm-LeachBliley Act on November 15, 1999. After failing to pass a similar act last year, Congress acknowledged that passing GrammLeach-Bliley was necessary to ensure that the domestic financial services industry remained competitive with foreign financial

services industries. 1 Accordingly, Gramm-Leach-Bliley purpose, as listed in its text, is “to enhance competition in the financial

services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and

other financial service providers ....” 2

b. What States Can't Prohibit

Pursuant to Gramm-Leach-Bliley, a bank holding company may engage in any activity or may acquire and retain the shares of

any company engaged in any activity that the Board of Governors of the Federal Reserve System determines to be financial

in nature or incidental to such financial activities. 3 Activities that are defined as being financial in nature for bank holding

company purposes include “insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death ...

and acting as principal, agent, or broker for purposes of the foregoing, in any state, in full compliance with the laws and

regulations of that state that apply to each type of insurance license or authorization in that state.” 4 As such, this significantly

modifies the effect that the McCarran-Ferguson Act has on states' authority to control the insurance industry. 5 Prior to the

GrammLeach-Bliley *101 Act, the McCarran-Ferguson Act essentially gave states the general authority to control and regulate

who could sell insurance. 6

Although, the McCarran-Ferguson Act remains good law, 7 the states have lost most of their control over the regulation of

the insurance industry relative to banking. 8 Pursuant to the Act “no state may, by statute, regulation, order, interpretation, or

other action, prevent or restrict the affiliations authorized or permitted by this Act and the amendments made by this Act.” 9

In addition, the Gramm-Leach-Bliley Act adds that “no state may, by statute, regulation, order, interpretation or other action,

prevent or restrict an insured depository institution or subsidiary or affiliate thereof from engaging directly or indirectly, either

by itself or in conjunction with a subsidiary, affiliate, or any other entity or person, in any activity authorized or permitted under

this act and the amendments made by this Act.” 10

Finally, the Gramm-Leach-Bliley Act reaffirms the holding in Barnett Bank of Marion County N.A. v Nelson. 11 Specifically,

the Act states that “no state may, by statute, regulation, order, interpretation, or other action, prevent or significantly interfere,

with the ability of an insured depository institution or an affiliate thereof, to engage, directly or indirectly, either by itself or in

conjunction with a subsidiary, affiliate, or any other party, in any insurance sales, solicitation, or cross-marketing activity.” 12

c. What States Can Prohibit

The Gramm-Leach-Bliley Act also preserves many state laws. Specifically, Gramm-Leach-Bliley allows states to retain control

of licensing of insurers. 13 In order to provide insurance in a state as either principal or agent, a license must be obtained in

conformity with that state's insurance regulation and in accordance with the insurance laws of that state. 14 In addition, states

may collect, review and take actions on relevant applications and other documents concerning any acquisition of, or change, or

continuation of control of an insured engaged in the business of insurance domiciled in that state. Gramm-Leach-Bliley states,

however, that the *102 aforementioned actions may not have the effect of discriminating intentionally or unintentionally

against a depository institution. 15

The following is a cursory summary of some of the other state laws preserved by Gramm-Leach-Bliley:

• Restrictions prohibiting the rejection of an insurance policy when such insurance is required in connection with a loan or

extension of credit 16 ;

• Restrictions prohibiting a requirement for a debtor, insurer, or insurance agent, or broker to pay a separate charge 17 ;

• Prohibitions on the use of certain advertisements 18 ;

• Certain prohibitions on receiving a commission, brokerage fee, or other compensation without a valid state license 19 ;

• Prohibitions on the release of customer information, including the customer's Health information 20 ;

• Prohibitions on the extension of credit and the lease or sale of property on the condition that the customer obtain insurance 21 ;

• Restrictions requiring certain written disclosures 22 ; and requiring a separation of an insurance and credit transactions. 23

Other state statutes and regulations are not preempted if they are activities other than sales, solicitation, or cross marketing

activities and they relate to the business of insurance in accordance with the McCarran-Ferguson Act. 24

d. Insurance Underwriting by National Banks

Pursuant to Section 302, a national bank may provide insurance in a state as principal, provided it is an authorized product. 25

The insurance products are authorized for national banks if “as of January 1, 1999, the Comptroller of the Currency had

determined in writing that national banks may provide such product as principal, or national banks were in fact lawfully

providing such product as principal.” 26

*103

2. State Legislation

a. Texas

On June 20, 1999, Governor George W. Bush of Texas vetoed a bill (S.B.956) that would have enabled banks to sell insurance

anywhere in Texas. 27 This bill would have eliminated the restriction that limits banks to sell insurance in towns with a

population of 5,000 or fewer. 28

b. Florida

On June 18, 1999 the Florida legislature passed a law which allows insurance agents to sell products in association with financial

institutions. 29 This law, like the proposed Texas law, eliminates the restriction that limits banks to selling in towns with a

population of 5,000 or less. 30

This bill (H.B. 897) was passed partially in response to Barnett 31 which established that federal banking laws preempt state

laws. 32 The bill was modeled after Gramm-Leach-Bliley, which was still developing in Congress. 33 If the Florida insurance

industry “waited until after passage of the federal measure, bankers would have been less eager to seek repeal of anti-affiliation

laws and more ready to oppose any safe-harbor provisions. 34

c. New York

In New York, legislation was proposed in May 1999 that would allow insurance and securities companies to merge with

New York chartered banks. 35 This law would repeal New York's version of the Glass-Steagall Act 36 and “let banks conduct

insurance and securities underwriting through direct subsidiaries,” and insurance companies and securities firms could buy

*104 or invest in banks. 37 This bill is also tailored somewhat in response to the inception of the Gramm-Leach-Bliley Act. 38

3. State Litigation

a. Steele v. First Deposit National Bank

On February 5, 1999, the Alabama Court of Civil Appeals held in Steele v. First Deposit National Bank 39 that a credit protection

contract is not the business of insurance and therefore, federal law governs and preempts Alabama law. 40 In that case, Steele

had filed suit against First National Deposit Bank alleging that the bank was actually selling insurance without a license. 41

Selling insurance without a license violates Alabama law. 42 “Because credit protection does not constitute the business of

insurance, the McCarran-Ferguson act does not apply and does not preempt the National Bank Act.” 43

 

b. Association of Banks in Insurance Inc. v. Duryee

 

On June 18, 1999, in Association of Banks in Insurance Inc. v. Duryee 44 the U.S. District Court held that Section 92 of the

National Bank Act preempts several Ohio statutes. 45 In that case, representatives of national banks sought declaratory judgment

that the national banks' right to serve as insurance agents in small towns preempted ‘principal purpose’ and other provisions in

Ohio statutes which regulate the licensing of insurance agents. 46 The representatives argued that Barnett invalidated the state

restrictions in question. 47 The judge agreed, holding that federal law preempted the Ohio statutes. 48

*105 B. Annuities

1. Gramm-Leach-Bliley Act

a. Applicability to Annuities

Pursuant to the Gramm-Leach-Bliley Act, section 4 of the Bank Holding Company Act of 1956 (12 U.S.C 1843) has been

amended. 49 The Act states “a bank holding company may engage in any activity, and may acquire and retain the shares

of any company engaged in any activity, that the board in coordination with the Secretary of the Treasury, determines (by

regulation or order) to be financial in nature or incidental to such financial activities.” 50 In addition, the Gramm-Leach-Bliley

Act specifically states that annuities are activities that are financial in nature. 51 Consequently, Gramm-Leach-Bliley gives bank

holding companies the authority to sell annuities. 52

However, Section 302 of the Act states that certain annuities are specifically categorized as not being an “authorized insurance

product.” 53 In particular, the Act states that an annuity may be an authorized insurance product only if it is not “any annuity

contract, the income on which is subject to tax treatment under Section 72 of the Internal Revenue Code of 1986.” 54

2. State Litigation

a. Blackfeet National Bank v. Nelson

On April 5, 1999, in Blackfeet National Bank v. Nelson, the U.S. Court of Appeals held that the Office of the Comptroller of

the Currency erred in approving a banks issuance and marketing of an investment product known as the retirement CD. 55 The

court reasoned that issuance of the insurance-like product is not within the authorized powers of national banks. 56 Although

the CDs in question maintained annuity-like features, 57 the court held that allowing banks to sell the CDs would amount to

allowing *106 banks to underwrite insurance. 58 This holding can be viewed as a set back for banks trying to go through

operating subsidiaries provisions to offer conventional annuity products. 59 More importantly, this ruling appears to indicate

that banks cannot go to the OCC for permission to engage in annuity underwriting. 60

Footnotes

61

Student, Boston University School of Law (L.L.M. 2000).

1

David Snow, New Banking Laws Prompt Yawns and Cheers, BUYOUTS, Nov. 22, 1999

2

Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338, 1337 (1999).constantino, david 12/23/2015

For Educational Use Only

X. INSURANCE AND ANNUITIES, 19 Ann. Rev. Banking L. 100

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5

3

See id. at 1342.

4

Id. at 1343.

5

See McCarran-Ferguson Act, Ch.20, 59 Stat. 33 (1945) (codified as amended at 15 U.S.C. 101-1015 (1988)).

6

See id.

7

Gramm-Leach-Bliley Act at 1352.

8

See id.

9

Id at 1352.

10

See id.

11

See Barnett Bank of Marion County, N.A. v. Nelson, 519 U.S. 25 (1996)).

12

Gramm-Leach-Bliley Act at 1353.

13

See id at 1352.

14

See id.

15

See id at 1353.

16

See id.

17

See id.

18

See id.

19

See id at 1354.

20

See id.

21

See id.

22

See id.

23

See id.

24

See id at 1355.

25

See id at 1408.

26

Id.

27

See S.B. 956 (Texas) (1999).

28

See id.

29

See H.B. 897, Ch.99-388 (Florida) (1999).

30

See id.

31

See Barnett, 519 U.S. at 25.constantino, david 12/23/2015