Appeals Case Illustrates Impact of McCarran-FergusonPosted 1/13/2005
By Robert L. Redding, Jr.
Despite the interest on Capitol Hill in the federal regulation of the insurance industry, the McCarran-Ferguson Act continues to skew the states' power over the business of insurance.
In a recent decision by the 11th Circuit Court of Appeals, Gilchrist, et al. v. State Farm Mutual Insurance Co., et al., the court overturned a U.S. District Court order for the northern district of Florida certifying a national class of automobile insurance policyholders. Insurers targeted in the lower court were State Farm, Allstate, Nationwide and GEICO. The plaintiffs argued that the insurers "conspired in violation of federal antitrust laws to limit insurance coverage for certain external auto body repairs to the cost of less expensive parts not made by an original equipment manufacturer."
The insurers sought to have the complaint dismissed, arguing that the McCarran-Ferguson Act bars the plaintiff because it involves the "business of insurance," thus it is not subject to federal antitrust laws. The district court denied the insurers' motion and held that "the Act does not bar Gilchrist's claim because her claim merely challenges the way in which insurers perform their policies, which is not the "business of insurance." The court then certified the class that included approximately 70 million policyholders.
The timing of this case coincides with a growing interest in the U.S. Congress in the federal regulation of the insurance industry. The House Financial Services Committee held several hearings on the issue in the 108th Congress. The Senate Commerce Committee also held a hearing in the 108th. The Senate Government Affairs Committee's Subcommittee on Financial Management, the Budget and International Security reviewed insurance brokerage practices, including potential conflicts of interest and the adequacy of the current regulatory framework in the 108th.
U.S. Rep. Richard Baker, R-La., returns in the 109th Congress as chairman of the Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. He has been the leader in reviewing insurance reform in the Congress.
It is the first serious attempt at insurance reform since the early 1990s. The 11th Circuit Court cited the importance of McCarran-Ferguson in developing their decision.
"In 1945, Congress passed the McCarran-Ferguson Act to allow insurers to share information relating risk underwriting and loss experience without exposure to federal antitrust liability and to preserve for the states the power to regulate the insurance industry. (Union Labor Life Ins. Co. v. Piereno, 458 U.S. 119, 133, 1982). The Act expressly exempts insurer activities from the reach of the Sherman Act when three elements are met:
1) The challenged activity is part of the "business of insurance;" 2) the challenged activity is regulated by state law and 3) the challenged activity does not constitute a boycott of unrelated transactions. Uniforce Temporary Personnel Inc. v. National Council on Compensation Ins., 87 F.3d 1296, 1299 (11th Cir. 1996). If the Act applies to Gilchrist's claim, we have no jurisdiction over it.
The plaintiffs argued that the Act did not apply to their claim. But the court pointed out that "an activity is part of the business of insurance if it has the effect of transferring or spreading a policyholder's risk, is an integral part of the policy relationship between the insurer and the insured and is limited to entities within the insurance industry."
The court re-characterized the question in the case as to which party has more accurately described the claim. The court posed this question: "Are insurers correct that the claim is clearly about rate-making and performance of the insurance contract? Or does Gilchrist correctly describe her claim as attacking a conspiracy, entirely outside the rate-making process, in which insurers agreed to avoid OEM parts and worked with third parties to disseminate false information about such parts to exclude competition from other insurers who would have provided OEM-quality repair policies?"
The court concluded that the allegations were challenges to the premium setting by insurers and contractual obligations owed to policyholders by insurers.
What was most striking in the opinion was the comment by the court that "Gilchrist's claim that insurers used 'inferior, imitation crash parts' in the repair of their policyholders' vehicles despite their contractual obligation to restore insured vehicles to their pre-loss condition and to use parts of like kind and quality" is an attack on how insurers perform their contractual obligations to their policyholders. Her claim that "the effect of the conspiracy has been to raise and maintain insurance prices or premiums paid by policyholders above competitive levels for the actual repairs provided" is an indirect allegation of price-fixing and, therefore a direct attack on the integrity of insurers' rate-making, according to the Court.
The Automotive Service Association (ASA) participated in a coalition in the 1990s of small business and consumer advocacy organizations to pass a McCarran-Ferguson reform bill, not an outright appeal. Although the legislation had some limited success in the U.S. House of Representatives, it did not become law. The small business support for insurance reform at the federal level has not been as vocal in the past 10 years as in previous years. Clearly the work of the House Financial Services Committee has been cause for small business organizations to take a second look at state versus federal regulation of the insurance industry.
The collision industry cannot rely on a legislative process, involving the regulation of the insurance industry, that will produce fortuitous benefits to collision repairers and vehicle owners. ASA is encouraging industry leaders to review the debate of the 108th Congress and consider how the industry will position itself as the issue progresses.
When the new 109th Congress convenes, ASA will track the insurance reform issue on its legislative Web site, www.TakingTheHill.com.
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