OCC Upheld On Bank Insurance Sales Preemption

By Trevor Thomas, NU Life-Health Associate Editor

NU Online News Service, Nov. 21, 4:25 p.m.EST?A three-judge panel in Virginia has become the firstfederal court to uphold the right of the Office of the Comptrollerof the Currency to preempt state law governing the sale ofinsurance in banks.

In a 2-1 ruling on Nov. 19, the 4^th U.S. CircuitCourt of Appeals in Richmond, Va., found that the OCC could preemptpart of a West Virginia law limiting bank sales of insurance.

The case is the first of two state challenges of OCC action tolimit state regulation of bank insurance sales. A case involvingMassachusetts is pending.

The 4^th Circuit dismissed a petition from WestVirginia Insurance Commissioner Jane L. Cline to strike down theOCC's preemption of part of a state law that forbids banks fromselling insurance to a loan customer until after the loan isapproved, and stops banks from sharing customer information withtheir insurance affiliates.

The ruling also lifted a state requirement that banks isolateinsurance sales from other bank functions.

The OCC cited provisions of the Gramm-Leach-Bliley Act of 1999that authorized it to preempt state statutes it believessubstantially limit national banks' ability to sell insurance.

The National Association of Insurance Commissioners, theIndependent Insurance Agents & Brokers of America, and theNational Association of Professional Insurance Agents supportedWest Virginia in the case.

On the other side, the American Bankers Association inWashington and its affiliate, the American Bankers InsuranceAssociation, and the West Virginia Bankers Association supportedthe OCC.

The court's ruling may not be the last word on the issue,however. One state regulator said the split decision was "muddy"and held out the prospect of continued legal action.

West Virginia Deputy Insurance Commissioner Bill Kenny said thedecision "doesn't mean too much, because we have no case [involvinga bank's sale of insurance] in front of us. If there's somethingpresented to us with respect to banks in the future, we will try toenforce [the state law]. But by no means are we looking to pick afight."

Speaking for bankers, Mike Crotty, deputy general counsel forlitigation for the ABIA, took issue with Mr. Kenny'scontention.

"The decision says the [state's] law is preempted," Mr. Crottyobserved flatly.

However, the decision is unpublished, meaning it is not abinding precedent within the Fourth Circuit.

Meanwhile the Massachusetts preemption case is awaiting adecision from the First Circuit Court of Appeals.

"If the First Circuit upholds the OCC and the soundness of itsreasoning, the handwriting will be on the wall" against statechallenges to OCC preemption, Mr. Crotty said.

The OCC has reserved decision on another case, involving a RhodeIsland law.