Petition — Fidelity Union Life Insurance v. Perry

Supreme Court brief1980

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IN THE |

Supreme Cowt of the United States

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OctToreR TERM, 1979 &

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Fineviry Unton LIFE INSURANCE COMPANY, am ..

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Petitioner, #3 4:

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° ee fol Fee

an ree.

Sytvia Perry, Individually and on Behalf ; ct

of All Others Similarly Situated,

Respondents. — = |

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS ~ * &

FOR THE FIFTH CIRCUIT

yf , ee ta as

Ra.pH H. Forp

Ford, Caldwell, Ford

& Payne

P.O. Drawer 527

Huntsville, Alabama 35804

WILuraAM H. ALLEN

Virainta G. WaTKIN

Covington & Burling

888 Sixteenth Street, N.W.

Washington, D.C. 20006

Attorneys for Petitioner

February 1980

TABLE OF CONTENTS

Page

eS 1

eo 2

Qumstion PRESENTED ............. cc ccccccccccccccs 2

te 2

ee cc ccnccccccs 3

Reasons FoR GRANTING THE WRIT .............00055. 5

Ne oc ecuceceues 12

Appenpix A—Opinion of the United States District

Court for the Northern District of Alabama,

ae la

Appenpix B—Opinions of the United States Court of

Appeals for the Fifth Circuit .................. 27a

Apprenpix C—Judgment of the United States Court of

Appeals for the Fifth Circuit .................. 95a

Appenpix D—Order of the United States Court of Ap-

peals for the Fifth Circuit Denying Petition for

EE ESS SEES SES a 97a

Appenpix EK—Alabama Insurance Department Guide-

lines to be Followed by Companies Offering Life

Insurance Plans to College Students Under a

Premium Financing Arrangement .............. 99a

il TABLE OF AUTHORITIES

CasEs: Page

Addrisi v. Equitable Life Assurance Soc’y, 503 F.2d

725 (9th Cir. 1974), cert. denied, 420 U.S. 929

a ee pate aceUs cans’ iba Care hoe bee Becks 9

Ben v. General Motors Acceptance Cerp., 374 F. Supp.

SO AE ME OEE cv iin bdka'e enn e rk bokkk ca

Cochran v. Paco Inc., 606 F.2d 460 (5th Cir. 1979) ...5,6,7

Cody v. Community Loan Corp., 606 F.2d 499 (5th

Ge UN Mick naccs s ooe ec cede esl eudanes Coke, 5

Dexter v. Equitable Life Assurance Soc’y, 527 F.2d

Oe Oy ig er ce chy ean. 9,10

FTC v. National Casualty Co., 357 U.S. 560 (1958) .. .8, 10

Gerlach v. Allstate Ins. Co., 338 F. Supp. 642 (S.D.

PE ao CEs Ustad ee 7

Group Life & Health Ins. Co. v. Royal Drug Co., 440

Sh I EE 6a cba ln eee cone eats 11

Lowe v. Aarco-American, Inc., 536 F.2d 1160 (7th Cir.

WOOD eae wUNG Cacao R kos cada ee N vba dees ene 6, 7

Paul v. Virginia, 8 Wall. 168 (1869) ................ 8

Robertson v. California, 328 U.S. 440 (1946) ........ 8

SEC v. National Securities Inc., 393 U.S. 453 (1969) .7, 8,9

United States v. South-Eastern Underwriters, 322 U.S.

WE GENE ie cedar di uh vel ceux be 8

STATUTES:

Alabama Code § 27-14-8(a) ............cccccceee ee, 3

McCarran-Ferguson Act, 59 Stat. 34 § 2(b), 15 U.S.C.

DIUM ibaa 1k else eon eedi evened ck. passim

Truth in Lending Act, 15 U.S.C. § 1601 et ree passim

We MO, WOMENS oo obs ba viv bck ovis debendiices.. 2

MISCELLANEOUS:

Alabama Insurance Department Guidelines to be Fol-

lowed by Companies Offering Life Insurance Plans

to College Students Under a Premium Financing

Arrangement, January 1971 ................... 3

Federal Reserve Board Regulation Z, 12 C.F.R. § 226.1

ate MR Ey Ee ee Oe a ee 4

—,

IN THE

Supreme Court of the United States

OcToBER TERM, 1979

Fipetity UNION Lire INsuRANCE COMPANY,

Petitioner,

SyLviA Perry, Individually and on Behalf

of All Others Similarly Situated,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Petitioner Fidelity Union Life Insurance Company

prays that a writ of certiorari issue to review the

judgment of the Court of Appeals for the Fifth Circuit

in this case.

OPINIONS BELOW

The opinion of the district court 1s not reported and

is printed as Appendix A to this Petition, pp. la-25a,

infra. The majority opinion of the court of appeals

and the dissenting opinion of Chief Judge Brown are

reported at 606 F.2d 468, 471, and reprinted as Appen-

dix B hereto, pp. 27a-32a, 33a-93a, infra.

JURISDICTION

The judgment of the court of appeals (App. C, p. 95a,

infra) was entered on January 2, 1979. Petitioner

was granted an extension of 30 days from the filing

date of Chief Judge Brown’s dissenting opinion within

which to file a petition for rehearing and suggestion

of rehearing en banc. The dissenting opinion was filed

on October 26, 1979. A timely petition for rehearing

and suggestion of rehearing en bane was thereafter

filed and was denied on December 11, 1979 (App. D,

p. 96a, infra). The jurisdiction of the Court is invoked

under 28 U.S.C. § 1254(1).

QUESTION PRESENTED

Whether, when an insurance company finances an

insurance policy premium as an inducement to the

purchase of the policy, it is engaged in the business

of insurance within the meaning of the McCarran-

Ferguson Act so as to foreclose the application of the

Truth in Lending Act to the premium financing trans-

action where the company’s premium financing activ-

ity is regulated by a state insurance regulatory agency

under a state law enacted for the purpose of regulating

the business of insurance.

STATUTES INVOLVED

Section 2(b) of the MecCarran-Ferguson Act, 59

Stat. 34, 15 U.S.C. § 1012(b), provides:

‘‘No Act of Congress shall be construed to invali-

date, impair or supersede any law enacted by any

State for the purpose of regulating the business

of insurance, or which imposes a fee or tax upon

such business, unless such Act specifically relates

to the business of insurance: . . .’’

Code of Alabama § 27-14-8(a) provides in part:

‘*(a) No basic insurance policy or annuity con-

tract form or application form where written ap-

plication is required and is to be made a part of

the policy, or contract, or printed rider, or en-

dorsement form or form of renewal certificate

shall be delivered or issued for delivery. in this

state unless the form has been filed with, and

approved by, the commissioner. .. .’’

Alabama Insurance Department Guidelines To Be

Followed by Companies Offering Life Insurance Plans

To College Students Under a Premium Financing

Arrangement, issued January 1, 1971, are reprinted

as Appendix E, pp. 97a-100a, infra.

STATEMENT

Petitioner Fidelity Union Life Insurance Company

regularly engages in the business of providing life

insurance to college students. As an inducement to

students to purchase its insurance, it offers to finance

the first year’s premium. A student signs a promissory

note, due in five years, for the amount of the first year’s

premium plus interest. The student is responsible

for the timely payment of all succeeding premiums.

The student’s ability to pay the note for the first year’s

premium is enhanced by a provision in the policy for

a single cash payment, termed the fifth-anniversary

benefit or payment, which is payable to the holder of

the promissory note on the fifth anniversary of the

policy if all subsequent premiums have been paid at

that time and the insured is living. The named plain-

tiff in this case, as an example, owed $419.61 for the

first year’s premium and interest at the end of five

years, and her fifth-anniversary payment would have

amounted to $350.55. (See p. 28a, n.2, infra.)

Fidelity’s policy form and all forms used in the

financing of the premiums such as a disclosure state-

ment and the promissory note, both of which are a

part of the policy, were approved by Alabama’s Com-

missioner of Insurance pursuant to the provisions of

Alabama law for the regulation of the business of

insurance. (P. 3, supra; pp. 97a-100a, infra.)

Sylvia Perry, a college student who had purchased

one of Fidelity’s policies and had executed a note for

the first year’s premium, brought a class action in

the United States District Court for the Northern

District of Alabama against Fidelity alleging that the

disclosures it made in connection with the premium

financing did not comply with the Truth in Lending

Act, 15 U.S.C. § 1601 et seg., and the Federal Reserve

Board’s Regulation Z, 12 C.F.R. § 226.1 et seq., issued

pursuant thereto. The district court held that under

Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C.

§1012(b), the application of the Truth in Lending

Act and Regulation Z was foreclosed and granted

summary judgment for Fidelity. (Pp. la-25a, infra.)

The court ruled that premium financing by the

insurance company issuing the policy is the business

of insurance within the meaning of Section 2(b), that

there is effective law in Alabama ‘‘enacted for the

purpose’”’ of regulating that aspect of the business of

insurance and that the Truth in Lending Act does not

specifically relate to the business of insurance.

The court of appeals reversed. (Pp. 27a-32a, infra.)

A panel of the court decided Fidelity’s case on the

same day it decided two other related cases, all concern-

ing the application of the Truth in Lending Act to in-

surance premium financing. Its principal opinion was

in Cochran v. Paco, Inc., 606 F.2d 460 (5th Cir. 1979),

which involved a non-insurance company that financed

the premiums on an automobile insurance policy. The

panel held there that the Truth in Lending Act does

not specifically relate to the business of insurance

within the meaning of the McCarran-Ferguson Act.

But it ruled that the financing of insurance premiums

by an independent company was not ‘‘the business of

insurance’ for McCarran-Ferguson Act purposes.

Chief Judge Brown concurred in the result in that

case but dissented in Fidelity’s case (pp. 33a-98a,

infra), in which the other members of the panel ex-

tended the rule of the Cochran case to the case of an

insurance company doing its own premium financing.’

REASONS FOR GRANTING THE WRIT

The court below has decided a narrow but important

question of federal statutory law in a way that con-

flicts with the decision of another court of appeals.

This Court should grant review here in order to resolve

the conflict.

Section 2(b) of the McCarran-Ferguson Act pro-

vides that no federal statute ‘‘shall be construed to

invalidate, impair or supersede any law enacted by

any State for the purpose of regulating the business

of insurance ... .’’ Under laws of Alabama enacted

for the purpose mentioned in Section 2(b), the financ-

*In the third case, Cody v. Community Loan Corp., 606 F.2d

499, 503 (5th Cir. 1979), involving a loan company’s credit sales

of cancer insurance, the majority acknowledged that its selling of

the cancer insurance policies constituted the business of insurance

but held that its financing of them on a credit basis did not. Chief

Judge Brown also dissented in that case. Jd. at 508.

ing of premiums by insurance companies is closely

regulated, including the prescription of disclosures

that must be made to purchaser/borrowers as well as

other matters. The court below nevertheless concluded

that premium financing is not ‘‘the business of insur-

ance’? and that therefore the possibly conflicting

disclosure requirements of the federal Truth in Lend-

ing Act are properly construed to supersede the

Alabama law and govern Fidelity when it undertakes

to finance the first year’s premiums on its life insur-

ance policies.

In so ruling, the court relied on its own decision,

entered the same day, in Cochran v. Paco, Inc., 606

F.2d 460 (5th Cir. 1979). There it held that the financ-

ing of automobile insurance premiums, in that case by

a company other than an insurance company, was not

the business of insurance. In the Cochran case the

court specifically declined to follow Lowe v. Aarco-

American, Inc., 536 F.2d 1160 (7th Cir. 1976), where,

in the court’s words, the Seventh Circuit ‘‘held that

the credit sale of insurance policies by an insurance

broker and a premium finance company was part of

the business of insurance and that the transaction was

thus outside the purview of” the Truth in Lending

Act. 606 F.2d at 466.

In the Lowe case, the Seventh Circuit recognized

but rejected an argument based on the fact that neither

company involved in the financing of the automobile

insurance premium was an insurance company. It said

that this fact “does not take the disputed transaction

outside the scope of the ‘business of insurance.’ ’’ 536

F.2d at 1162. Its holding therefore necessarily en-

compassed a case such as Fidelity’s, in which the

argument based on the separation of premium financ-

ing from the issuance of the insurance policy is not

even available. Logically, the instant case is an a

fortiori case for the invocation of the MeCarran-

Ferguson protection of state jurisdiction over the busi-

ness of insurance. (See also note 2, infra.) For its part,

the court below, having recognized the square conflict

between Lowe and its Cochran opinion, said in this

ease only that it would be ‘‘anomalous to hold that

Fidelity’s premium financing activities are the ‘busi-

ness of insurance’ but that the identical activities of

the finance company in Cochran are not.’”’ (P. 31a,

infra.)

Unable to distinguish Lowe, the court below dis-

paraged it and a district court opinion that reached

the same result, Gerlach v. Allstate Insurance Co., 338

F’. Supp. 642 (S.D. Fla. 1972) ; see also Ben v. General

Motors Acceptance Corp., 374 F. Supp. 1199 (D. Colo.

1974), as misconstruing the test for what is the ‘‘busi-

ness of insurance” that was indicated by this Court in

SEC v. National Securities Inc., 393 U.S. 453 (1969).

606 F.2d at 466. The court is mistaken. Premium fi-

nancing very plainly satisfies the National Securities

criteria. Certainly it satisfies those criteria when it is

engaged in by the insurance company responsible for

the policy that is being financed, as Chief Judge

Brown’s long, careful and closely reasoned dissenting

opinion below demonstrates. (Pp. 33a-48a, infra.)?

* The fact that Chief Judge Brown concurred in the result in

the Cochran case and dissented in Fidelity’s case shows that it is

possible rationally to regard premium financing by an insurance

company but not by some other company as ‘‘the business of in-

surance.’’ It is not logically consistent, however, to treat premium

financing by a third party as the business of insurance, as the

Seventh Circuit did in Lowe, and at the same time treat Fidelity’s

own premium financing as not the business of insurance. Thus, the

conflict of decisions is as square as it would be if this Petition were

addressed to the judgment in the Cochran case.

EEE EEE OO

te ¢

In the key passage of the National Securities opinion

Mr. Justice Marshall, expressing the view of eight

members of the Court, explicated the phrase ‘‘ business

of insurance”’ as used in the McCarran-Ferguson Act

thus:

‘Certainly the fixing of rates is part of this busi-

ness; that is what [United States v.] South-East-

ern Underwriters[, 322 U.S. 533 (1944),] was all

. about. The selling and advertising of policies,

FTC v. National Casualty Company, 357 U.S. 560

(1958), and the licensing of companies and their

agents, cf. Robertson v. California, 328 U.S. 440

(1946), are also within the scope of the statute.

Congress was concerned with the type of state

regulation that centers around the contract of in-

surance, the transaction which Paul v. Virginia

[8 Wall. 168 (1869),] held was not commerce. The

relationship between insurer and insured, the type

of policy which could be issued, its reliability,

interpretation, and enforcement—these were the

core of the ‘business of insurance.’ Undoubtedly,

other activities of insurance companies relate so

closely to their status as reliable insurers that they

too must be placed in the same class. But what-

ever the exact scope of the statutory term, it is

clear where the focus was—it was on the relation-

ship between the insurance company and _ the

policyholder. Statutes aimed at protecting or regu-

lating this relationship directly or indirectly are

laws regulating the ‘business of insurance.’ ”’ 393

U.S. at 460.

It is obvious that Fidelity is engaged in the business

of insurance when it sells life insurance to students

such as Perry with the inducement to them to begin

a life insurance program while deferring premium

payment through Fidelity’s financing program. Fidel-

ity is merchandising its product in a market where

buyers without premium financing would not be able

to afford an insurance policy. Premium loan proce-

dures are merely arrangements designed to allow

Fidelity to sell on credit policies to young people

whose immediate cash resources are slim but whose

future financial prospects are bright. Moreover, as

required by Alabama’s premium financing regulations,

the documents that effect and describe the extension

of credit—the promissory note, the assignment of

policy benefits and the disclosure statement—are ap-

proved by the Insurance Commissioner of Alabama

and are attached to and become an essential part of

each of Fidelity’s premium-financed policies. (Pp. 13a-

14a, 98a, infra.) The fifth-anniversary payment, which

mav be used to pay all or part of the financed premium,

is described on the face of the policy and is a part of

the promissory note. The relationship between the ex-

tension of credit and the insurance policy is so close

that what we have is ‘‘the sale of an insurance poliey,”’

which the court below itself said ‘‘is squarely within

the business of insuranc>.’’ (P. 30a, infra.)

Selling policies, as the Court said in National Secu-

rities, is of course within the scope of the MeCarran-

Ferguson exemption, and the sale creates that relation-

ship between insurer and insured that the Court in

National Securities termed the “‘core of the ‘business

of insurance.’”’ The principle that a company’s in-

surance sales activities, whatever form they take, are

the “business of insurance” has been recognized in

other cases. In both Addrisi v. Equitable Life Assur-

ance Soc’y, 503 F.2d 725 (9th Cir. 1974), cert. denied,

420 U.S. 929 (1975), and Dezter v. Equitable Life

Assurance Soc’y, 527 F.2d 233 (2d Cir. 1975), policy-

holders complained of Equitable’s requirement that

life insurance be purchased before a mortgage loan

would be granted. The court in the Dezter opinion ex-

plained why both courts held that the tying of insur-

ance policies to mortgage loans constituted the busi-

ness of insurance:

‘‘An insurance company’s methods of inducing

people to become policyholders pertain to the

company-policyholder relationship, and thus con-

stitute an integral part of ‘the business of insur-

ance.’ ’’ 527 F.2d at 235.

Another way of increasing sales of insurance policies

is advertising. FTC v. National Casualty Co., 357 U.S.

960 (1958), involved orders of the Federal Trade Com-

mission prohibiting respondent insurance companies

from engaging in advertising practices found by the

Commission to be false, misleading and deceptive. In a

per curiam decision, this Court affirmed judgments of

two courts of appeals setting these orders aside. It

held that the MeCarran-Ferguson Act

‘‘withdrew from the Federal Trade Commission

the authority to regulate respondents’ advertising

practices in those States which are regulating

those practices under their own laws.” Id. at 563.

When a company advertises its insurance, it is try-

ing to induce people to buy its policies. As Chief Judge

Brown noted in his dissent ( p. 45a, infra), premium

financing by the selling insurance company is certainly

as much an effort to induce people to buy insurance

as is advertising, the regulation of which this Court

has held is reserved to the states by the McCarran-

Ferguson Act.

In his dissent Chief Judge Brown referred to the

question here presented as “esoteric.” (P. 33a, infra.)

We are not sure what he meant. Most McCarran-

Ferguson questions arise from attempted application

of the antitrust laws to insurance company activities.

But questions of the applicability of the Truth in

Lending Act to insurance transactions are no more

‘understood by or meant for only the select few who

have special knowledge or interest’’—the dictionary

definition of ‘‘esoteric’’—than are questions of the

applicability of the antitrust laws. Truth in Lending

Act cases are being filed in the district courts at the

rate of better than 2,000 a year, according to the an-

nual reports of the director of the Administrative

Office of the United States Courts. Just as surely as

night follows day, Truth in Lending Act suits alleging

violations in connection with premium financing will

follow the decision below, now that the precedent is

established.

The conflict among the circuits is not going to dis-

appear any more than the conflict that moved the

Court to take up last term the question whether Blue

Shield’s pharmacy agreements were ‘‘the business of

insurance.” Group Life & Health Insurance Co. v.

foyal Drug Co., 440 U.S. 205, 208 ( 1979). The ques-

tion presented here is an important one that this Court

will have to resolve. It is important to the prospective

litigants in the lawsuits that the decision below will

foster. Even more, it is important to petitioner and

other insurance companies in the conduct of their

business; they deserve to know by which legal regime

their premium financing activities are governed. The

Court may as well resolve the question now on this

record, where the question is posed unambiguously

and without any complicating extraneous consider-

ations.

CONCLUSION

The petition for a writ of certiorari should be

granted in oider to resolve the conflict of decisions

described in this Petition.

Respectfully submitted,

Ra.pH H. Forp

Ford, Caldwell, Ford

& Payne

P.O. Drawer 527

Huntsville, Alabama 35804 A

WituiaM H. ALLEN Pp P E N D I X

VirGINIA G. WATKIN

Covington & Burling

888 Sixteenth Street, N.W.

Washington, D.C. 20006

Attorneys for Petitioner

February 1980

APPENDIX A

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN

DISTRICT OF ALABAMA, NORTHEASTERN DIVISION

Civil Action No. 75-L-0808-N E

Sytvia Perry, et al., Plaintiffs

VS.

Fipverity Union Lire Insurance Company, Defendant

ORDER

(Filed Jan 27, 1976)

This cause, coming on to be heard, was submitted upon

the motion for summary judgment filed in behalf of defen-

dant, together with the pleadings and the affidavits.

In conformity with the attached excellent and exhaustive

memorandum prepared for the Court by Jerry W. Powell,

Law Clerk, in which the Court fully concurs,

It is OrpERED, ApJupGED and Dercreep by the Court that

summary judgment be and the same is hereby entered in

favor of defendant, and that this action be and the same

is hereby dismissed.

Dons this 26th day of January, 1976.

/s/ Seypourn H. Lynne

Senior Judge

MEMORANDUM

To: Seybourn H. Lynne

From: Jerry W. Powell, Law Clerk

Re: Sylvia Perry v. Fidelity Union Life Insurance

Company, Civil Action No. 75-L-0808-NE

I. Background.

On June 24, 1975, Sylvia Perry, on behalf of herself

and all persons similarly situated, instituted this action

against defendant, Fidelity Union Life Insurance Com-

pany, alleging that defendant violated various provisions

of the Federal Truth-in-Lending Act, 15 U.S.C. $1601

et seg., and Regulation Z, 12 C.F.R. part 226, promulgated

thereunder. The plaintiff contends that on June 24, 1974,

she entered into contractual relations with defendant in

the nature of a consumer credit sale transaction consisting

of the sale of a life insurance policy wherein defendant

financed the first annual premium of said policy, and fur-

ther contends that the disclosure forms utilized by de-

fendant in connection with the above transaction violate

the Truth-in-Lending Act and Regulation Z in the follow-

ing particulars:

(a) By failing to disclose the Finance Charge as

an accurate Annual Percentage Rate computed in

accordance with the provisions of Sections 107 and

128(a)(7) of the Act, 15 U.S.C. §§ 1606 and 1638(a)

(7), and Sections 226.5(b) and 226.8(b)(2) of Regula-

tion Z.

(b) By failing to furnish plaintiff with a completed,

duplicate copy of the disclosure statement containing

all the required disclosures prior to the consummation

of the consumer credit transaction between the parties,

as required by Section 226.8(a) of Regulation Z.

as required by Section 226.8(c)(2) of Regulation Z.

(d) By using the term “Cash price of policy (An-

nual Premium)” instead of “Cash Price” as required

by Sections 226.6(a) and 226.8(c)(1) of Regulation Z.

(e) By using the term “Total Finance Charge (in-

terest)” instead of “Finance Charge” as required by

Sections 226.6(a) and 226.8(c)(7).

[Complaint at p. 3].

This cause is presently before the Court on defendant’s

motion for summary judgment filed October 9, 1975, which

raises the McCarran Act, 15 U.S.C. §1012(b) (1970), as

a defense to this action.’ This cause was taken under sub-

mission at the regular pretrial conference of this case on

October 10, 1975, and each party has extensively briefed

the issues raised by this motion. Relying upon the plead-

ings filed herein, the affidavit of Robert L. Taylor, Jr.,

exhibits attaclied thereto, answers to interrogatories and

responses to requests for admissions and the briefs in

support of the motion, the defendant contends that no

genuine issue as to any material fact exists and that it is

entitled to judgment as a matter of law.

II. Issue Presented.

Does the McCarran Act present a good defense to

plaintiff’s claim based upon violations of the disclosure

requirements of the Truth-in-Lending Act?

* The defendant also presents two additional grounds in support

of its motion for summary judgment:

(a) The transaction entered into by the parties was a consumer

loan rather than a credit sale, subject to different provisions of

the Truth-in-Lending Act and Regulation Z, of which defendant

is in full compliance.

(b) The forms at issue in this case have been approved by the

Federal Trade Commission, the regulatory body charged with en-

forcing the Truth-in-Lending Act under these circumstances.

Neither of these issues will be considered in this memorandum.

III. Discussion.

The defendant contends that the claims for relief based

upon the Truth-in-Lending Act should be dismissed because

this action is barred by the McCarran Act, 15 U.S.C. § 1011

et seq. Sections 1011 and 1012 of the McCarran Act provide

in pertinent part:

Congress declares that the continued regulation and

taxation by the several States of the business of in-

surance is in the public interest, and that silence on

the part of the Congress shall not be construed to im-

pose any barrier to the regulation or taxation of such

business by the several States.

No Act of Congress shall be construed to invalidate,

impair, or supersede any law enacted by any State

for the purpose of regulating the business of insur-

ance, or which imposes a fee or tax upon such business,

unless such Act specifically relates to the business of

insurance,

For the exemption of insurance business from the opera-

tion of the Federal Truth-in-Lending legislation to come

into play, it must be shown that the allegedly exempted ac-

tivity is (1) part of the business of insurance, and (2)

regulated by state law. See Schwartz v. Commonwealth

Land Title Co., 374 F. Supp. 564 (E.D. Pa. 1974). There-

fore, the first issue to be resolved is whether the dis-

closure of credit information in a premium financing ar-

rangement is a part of the business of insurance.

A. While the McCarran Act does not define the “busi-

ness of insurance,” the Supreme Court has directly ad-

dressed the scope of this phrase in the case of S.E.C. v.

National Securities, Inc., 393 U.S. 453 (1969). In that case

the Court was confronted with the question whether an

Arizona statute requiring all proposed mergers of in-

surance companies to be filed with the director of insurance

and approved in writing by him was a “law enacted by

[the] State for the purpose of regulating the business of

insurance” within the meaning of the McCarran Act. The

merger approved by the Arizona director of insurance

was sought to be enjoined by the S.E.C. because the pro-

cedure used allegedly violated the anti-fraud provisions

of Rule 10b-5. The Supreme Court held that “a state statute

aimed at protecting the interests of those who own stock

in insurance companies [does not come] within the Sweep

of the McCarran-Ferguson Act. Such a statute is not a

state attempt to regulate ‘the business of insurance,’ as

that phrase was used in the Act.” (393 U.S. at 457).

Justice Marshall, writing for eight members of the Court,

then went on to carefully analyze the meaning of the

phrase “the business of insurance” as used in the Me-

Carran Act:

The McCarran-Ferguson Act was passed in reac-

tion to this Court’s decision in United States v. South-

Eastern Underwriters Assn., 322 U.S. 533 (1944).

Prior to that decision, it had been assumed, in the

language of the leading case, that “Tijssuing a policy

of insurance is not a transaction of commerce.” Paul

v. Virginia, 8 Wall. 168, 183 (1869). Consequently,

regulation of insurance transactions was thought to

rest exclusively with the States. In South-Eastern

Underwriters, this Court held that insurance trans-

actions were subject to federal regulation under the

Commerce Clause, and that the antitrust laws, in par-

ticular, were applicable to them. Congress reacted

quickly. Even before the opinion was announced, the

House had passed a bill exempting the insurance in-

dustry from the antitrust laws. 90 Cong. Ree. 6565

(1944). Objection in the Senate killed the bill, 90 Cong.

Rec. 8054 (1944), but Congress clearly remained con-

cerned about the inroads the Court’s decision might

make on the tradition of state regulation of insurance.

The McCarran-Ferguson Act was the product of this

concern. Its purpose was stated quite clearly in its

first section; Congress declared that “the continued

regulation and taxation by the several States of the

business of insurance is in the public interest.” 59

Stat. 33 (1945), 15 U.S.C. § 1011. As this Court said

shortly afterward, “[o]bviously Congress’ purpose was

broadly to give support to the existing and future

state systems for regulating and taxing the business

of insurance.” Prudential Insurance Co. v. Benjamin,

328 U.S. 408, 429 (1946).

The question here is whether state laws aimed at

protecting the interests of those who own securities

in insurance companies are the type of laws referred

to in the 1945 enactment. The legislative history of

the McCarran-Ferguson Act offers no real assistance.

Congress was mainly concerned with the relationship

between insurance ratemaking and the antitrust laws,

and with the power of the States to tax insurance

companies. See, e.g., 91 Cong. Rec. 1087-1088 (re-

marks of Congressmen Hancock and Celler). The

debates centered on these issues, and the Committee

reports shed little light on the meaning of the words

“business of insurance.” See S. Rep. No. 20, 79th

Cong., Ist Sess. (1945) ; H.R. Rep. No. 143, 79th Cong.,

Ist Sess. (1945). In context, however, it is relatively

clear what problems Congress was dealing with. Under

the regime of Paul v. Virginia, supra, States had a

free hand in regulating the dealings between insurers

and their policyholders. Their negotiations, and the

contract which resulted, were not considered commerce

and were, therefore, left to state regulation. The

South-Eastern Underwriters decision threatened the

continued supremacy of the States in this area. The

McCarran-Ferguson Act was an attempt to turn back

the clock, to assure that the activities of insurance

companies in dealing with their policyholders would

remain subject to state regulation. As the House Re-

port makes clear, “ijt [was] not the intention of

Congress in the enactment of this legislation to clothe

the States with any power to regulate or tax the

business of insurance beyond that which they had

been held to possess prior to the decision of the

United States Supreme Court in the Southeastern

Underwriters Association case.” H.R. Rep. No. 143,

79th Cong., Ist Sess., 3 (1945).

Given this history, the language of the statute takes

on a different coloration. The statute did not purport

to make the States supreme in regulating all the ac-

tivities of insurance companies; its language refers

not to the persons or companies who are subject to

state regulation, but to laws “regulating the business

of msurance.” Insurance companies may do many

things which are subject to paramount federal regu.

lation; only when they are engaged in the “business

of imsurance” does the statute apply. Certainly the

fixing of rates is part of this business; that is what

South-Eastern Underwriters was all about. The selling

and advertising of policies, FTC v. National Casualty

Co., 357 U.S. 560 (1958), and the licensing of com-

panies and their agents, cf. Robertson v. California,

328 U.S. 440 (15946), are also within the scope of the

statute. Congress was concerned with the type of

' state regulation that centers around the contract of

insurance, the transaction which Paul v. Virginia held

was not “commerce.” The relationship between insurer

and insured, the type of policy which could be issued,

its reliability, interpretation, and enforcement—these

were the core of the “business of insurance.” Un-

doubtedly, other activities of insurance companies re-

late so closely to their status as reliable insurers that

they too must be placed in the same class. But what-

ever the exact scope of the statutory term, it is clear

where the focus was—tt was on the relationship be-

tween the imsurance company and the policyholder.

Statutes aimed at protecting or regulating this rela-

tionship, directly or indirectly, are laws regulating the

“business of insurance.”

393 U.S. at 458-460

[emphasis supplied].

The Supreme Court specifically concluded that statutes

aimed at protecting or regulating the relationship between

the insurance company and the policyholder, directly or

indirectly, are laws regulating the business of insurance.

Consequently, activities of insurance companies such as

the sale of stock,? the merger of insurance companies,’

the infringement of another company’s trademark,* and

the crime of mail fraud® are without the scope of the

McCarran Act because they do not relate to the “business

of insurance.” On the other hand, the McCarran Act with-

draws from federal regulating agencies the authority to

regulate or supervise the selling and advertising practices

of insurance companies in those states which regulate those

practices under their own laws, because such activities are

part of the company-policyhclder relationship.°

The availability of premium financing is a part of the

sale of an insurance policy, and the disclosure of the terms

and conditions of such an arrangement directly pertains to

2 Zachman v. Erwin, 186 F. Supp. 691 (S.D. Tex. 1960) (Securi-

ties Act of 1933).

3 §.E.C. v. National Securities, Inc., 393 U.S. 453 (1969) (Securi-

ties Exchange Act of 1934 and Rule 10b-5).

4 Sears, Roebuck & Company v. All States Life Ins. Co., 246

F.2d 161, 172 (5th Cir.'1957) (Lanham Trade-Mark Act, 15 U.S.C.

§ 1114(a) (1970)).

5 U.S. v. Sylvanus, 192 F.2d 96, 160 (7th Cir. 1951), cert. denied

342 U.S. 943 (1952) (Mail Fraud Act, 18 U.S.C. §§ 371, 1341

(1970) ).

6 See FTC v. National Casualty Co., 359 U.S. 560 (1958).

“(t]he relationship between insurer and insured, the type

of policy which [can] be issued, its reliability, interpreta-

tion, and enforcement;” all the things which the Supreme

Court said comprised “the core of the ‘business of in-

surance.’”’ Consequently, there can be no doubt that the

extension of credit to a certain class of policyholders is

part and parcel of the business of insurance, subject to

paramount state regulation. It could, of course, be argued

that the extension of credit in the sale of a life insurance

policy involves the business of lending and not the business

of insurance. However, the debtor-creditor relationship

created by the financing arrangement does not destroy the

underlying and supreme insurer-insured relationship. The

focus of the statutory term, “the business of insurance,”

was clearly “on the relationship between the insurance

company and the policyholder” and statutes “aimed at pro-

tecting or regulating this relationship, directly or indi-

rectly, are laws regulating the ‘business of insurance.’ ”

(393 U.S. at 460; see American General Ins. Co. v. F.T.C.,

309 F. Supp. 887 (S.D. Tex.), aff’d 496 F.2d 197 (5th Cir.

1973)).

The plaintiff contends the McCarran Act by its own

terms does not apply to the Federal Truth-in-Lending

Act, in that through its purpose, definitions and exemp-

tions, it specifically relates to the business of insurance.’

This argument, while innovative, lacks real merit in light

of the Congressional purpose in enacting the McCarran

Act. That purpose fully appears in section 1011 of the

Act:

Congress hereby declares that the continued regula-

tion and taxation by the several States of the busi-

***No Act of Congress shall be construed to invalidate, impair,

or supersede any law enacted by any State for the purpose of

regulating the business of insurance, . . . unless such Act spe-

cifically relates to the business of insurance.’’ 15 U.S.C. § 1012(b)

(emphasis supplied).

e 10a

ness of insurance is in the public interest, and that

silence on the part of the Congress shall not be con-

strued to impose any barrier to the regulation or taxa-

tion of suck business by the several States. (emphasis

supplied).

The Congress fully recognized its power to regulate in-

surance transactions under the commerce clause after

the Supreme Court’s decision in United States v. South-

Eastern Underwriters Assn., 322 U.S. 533 (1944); never-

theless it chose to “give support to the existing and future

state systems for regulating and taxing the business of

insurance” and “to throw the whole weight of its power

behind the state systems.” Prudential Ins. Co. v. Benjamin,

328 U.S. 408, 429-30 (1946) ; Alistate Ins. Co. v. Lanier, 361

F.2d 870, 873 (4th Cir.), cert. denied 385 U.S. 930 (1966).

Congress did not repudiate all jurisdiction over the regu-

lation of the business of insurance, but it did restrict its

exercise of jurisdiction to specific and explicit enactments

relating to the business of insurance. See 15 U.S.C. § 1012

(b); Hamilton Life Ins. Co. v. Republic Nat'l Life Ins. Co.,

291 F. Supp. 225, 231 (S.D. N.Y. 1968), aff’d 408 F.2d 606

(2d Cir. 1969).

Congress did not choose to exercise its power to regulate

the business of insurance in the Federal Truth-in-Lending

Act. It did not make the Act specifically applicable to the

business of insurance. The plaintiff in making this argu-

ment is attempting to reverse the legislative presumption

expressed in the McCarran Act. However, in light of the

legislative purpose and express language of the Act the

requirement that any act of Congress must specifically

relate to the business of insurance makes it clear that

“state regulatory schemes would not be impaired and over-

riden except by specific and explicit Congressional enact-

ment.” Hamilton Life Insurance Co. v. Republic National

Life Insurance Co., 408 F.2d 606 (2d Cir. 1969).

lla

B. The second issue to be resolved is whether this aspect

of the business of insurance has been regulated by the

State of Alabama. The plaintiffs contend that the specific

conduct alleged in this case has not been regulated by

Alabama.

In 1957, Alabama enacted the Insurance Trade Practices

Law, now Title 28A, § 227 et seq., Code of Alabama (1971

Supp.) That statute was enacted expressly in response to

the McCarran Act (as stated in its preamble, Title 28A,

§ 227). It specifically prohibits “all unfair methods of com-

petition” in the business of insurance, and grants specific

administrative and supervisory powers to the Insurance

Commissioner pursuant to the prohibition. One such grant

of administrative and supervisory powers to the Insurance

Commissioner is found at Title 28A, §§ 321 and 322, con-

cerning the filing of forms for approval by the Commis-

sioner and the grounds for disapproval of forms submitted.

Section 321 provides in pertinent part:

(1) No basic insurance policy or annuity contract

form, or application form where written application

is required and is to be made a part of the policy

or contract . .. shall be delivered, or issued for de-

livery in this state, unless the form has been filed

with and approved by the Commissioner.

and Section 322 provides that:

[T|he commissioner may disapprove any form filed

under section 321, or withdraw any previous approval

thereof, only if the form:

(1) Is in any respect in violation of or does not

comply with this title, or

(3) Has any title, heading, or other indication of

its provisions which is misleading; or

12a

(5) Contains provisions which are unfair or inequi-

table or contrary to the public policy of this state,

or which would because such provisions are unclear

or deceptively worded, encourage misrepresenta-

tion.

Section 28 of the Insurance Code also gives the commis-

sioner power to “make reasonable rules and regulations

necessary for the effectuation of any provision” of the Act.

Pursuant to section 28 and its predecessor laws the com-

missioner has promulgated regulations concerning the

filing of life insurance forms,’ prohibitions against the

use of certain deceptive and misleading words and phrases

by life insurance companies and their agents,’ and guide-

lines to be followed by companies offering life insurance

plans to college students under a premium financing ar-

rangement."°

The guidelines mentioned above, attached to the affi-

davit of Robert L. Taylor, Jr., as Exhibit “F”, and filed

* Departmental Regulation No. 24, November 18, 1957, requiring

every company licensed to do business in the State to submit to

the Department of Insurance for its approval all life insurance

policy forms, certificates, binders, statements of insurance, appli-

cations, endorsements, riders and other similar forms, prior to

delivery in the State.

* Departmental Regulation No. 47, April 20, 1967. The preamble

of this regulation states its purpose.

The purpose of these rules is to identify, clarify and pro-

hibit certain acts and practices which are considered to be

unsound methods of transacting the life insurance business in

Alabama or unfair and deceptive acts and practices in the

transaction of the business of life insurance in Alabama as

provided by law and to establish certain requirements in the

solicitation and sale of life insurance in Alabama to the end

that policyholders and the insurance buying public shall not

be misinformed or misled concerning contracts of life insur-

ance or annuities purchased by them.

*° Departmental Guidelines, January 1, 1971.

13a

in support of defendant’s motion for summary judgment,

specifically relate to the practice of offering life insurance

to college students under a premium financing arrange-

ment, and are applicable to the forms at issue in this

action." The stated purpose of these guidelines is as

follows:

Proceeding under the assurance that a Life In-

surance Plan seld to a College Student is:

(a) A good source of business for life insurance

companies.

(b) A good plan on which young people can estab-

lish a sound financial insurance program.

It is felt, nevertheless, that this type of program

presents certain areas of concern, particularly in the

presentation of the policy when a premium financing

arrangement is offered in connection with the sale of

it.

In hope of strengthening this type of marketing pro-

cedure and at the same time offering additional safe-

guards for the protection of this segment of the in-

surance buying public, the following guidelines and

procedures will be adopted by all companies and their

agents offering this type policy in this state.

Pursuant to this stated purpose the guidelines require,

among other things, a copy of the note to be attached to the

policy, or in lieu thereof, a provision or endorsement de-

scribing the financial arrangement to be included in the

policy; the execution upon delivery of a policy receipt or

acceptance form reciting that the policy has been issued as

represented and that the insured acknowledges and under-

stands the provisions and obligations of the financial in-

* See plaintiff’s, Sylvia Perry, application for insurance at-

tached as Exhibit ‘‘A’’ to the affidavit of Robert L. Taylor, Jr.,

which shows plaintiff to be a student at the University of Alabama.

l4a

debtedness that he has incurred, and the filing and approval

by the department of insurance of all sales material, notes,

and other forms used in the sale of such programs.”

The McCarran Act does not define the term “regulation”

and no satisfactory definition is to be derived from its

legislative history. However, the most widely accepted test

is that stated by the District Court for the Northern Dis-

trict of California in California League of Independent

Insurance Producers v. Aetna Casualty & Surety Com-

pany,'* i.e., the state regulates the business of insurance

when it has “generally authorized or permitted certain

standards of conduct.” See generally Ohio AFL-CIO v.

The Insurance Rating Board, 451 F.2d 1178 (6th Cir.

1971); Schwartz v. Commonwealth Land Title Insurance

Co., 374 F. Supp. 564 (E.D. Pa. 1974); Fleming v. Travel-

er’s Indemnity Co., 324 F. Supp. 1404 (D. Mass. 1971);

Holly Springs Funeral Home, Inc. v. United Funeral Serv-

ice, Inc., 303 F. Supp. 128 (N.D. Miss. 1969). To satisfy

the requirements of the McCarran Act, state standards

and procedure need not be what the plaintiff, or the courts,

think is wisest or the most effective type of regulation,

Allstate Insurance Co. v. Lanier, 361 F.2d 870 (4th Cir.

1966); cases cited above, rather, it is sufficient that the

state’s regulatory scheme is comprehensive and meaning-

fully administered. See Schwartz, supra; cf. FTC v. Na-

tional Casualty Co., 357 U.S. 560 (1958).

It is therefore obvious that under the foregoing stand-

ard the State of Alabama has undertaken to regulate the

statements and disclosures made in insurance policies and

other forms to which the insurance buying public would be

exposed to by insurance companies and their employees.

All forms at issue in this action are subject to the com-

missioner’s approval under sections 321 and 322 of the

12 See Exhibit ‘‘F'’’, supra, Jf] 5, 6, and 15.

13175 F. Supp. 857 (1959).

15a

Insurance Code, which generally prescribes certain con-

duct on the part of insurance companies, and more par-

ticularly, said forms are subject to the commissioner’s

approval under the aforementioned guidelines which estab-

lish specific standards of conduct for companies offering

life insurance under a premium financing arrangement.

Consequently, it must be concluded that the State of Ala-

bama regulates the premium financing aspect of the busi-

ness of insurance within the meaning of section 1012(b)

of the McCarran Act.

C. Having established that the exemption embodied in

the McCarran Act comes into play in this litigation, it

must be determined whether the application of the Federal

Truth-in-Lending Act to the facts of this case would, ac-

cording to the terms of the statute, “invalidate, impair,

or supersede any law enacted by [the State of Alabama]

for the purpose of regulating the business of insurance.”

The plaintiffs in their brief in opposition to defendant’s

motion for summary judgment correctly siate that “in

the absence of state law regulating the business of insur-

ance which will be invalidated, impaired, or superseded

by the Truth-in-Lending Act, the McCarran Act is not

triggered,” and makes a number of attractive arguments

as to why the McCarran Act defense does not apply in this

case.

First, the plaintiffs contend that the applicable pro-

visions of the Insurance Code and the regulations pro-

mulgated thereunder do not in any manner approach the

comprehensive safeguards contained in the Truth-in-Lend-

ing Act. While the express purpose of the state regula-

tions is not co-extensive with that of the Truth-in-Lending

Act, 2.e., “to assure a meaningful disclosure of credit terms

so that the consumer will be able to compare more readily

1* All of the defendant’s forms have been submitted to and ap-

proved by the commissioner, Exhibits ‘‘G’’ and ‘‘H’’ to Robert

L. Taylor, Jr’s, affidavit in support of the motion for summary

judgment.

16a

the various credit terms available to him and avoid the

uninformed use of credit,” * the McCarran Act does not

appear to require the states to regulate the business of in-

surance generally, or this aspect of the business of insur-

ance particularly, in any specific manner. As long as the

State of Alabama’s regulatory scheme for the disclosure

of credit information in a premium financing arrangement

is comprehensive and meaningfully administered, even

though motivated by a different purpose, the requirements

of the McCarran Act are satisfied. See Ohio AFL-CIO v.

The Insurance Rating Board, 451 F.2d 1178 (6th Cir.

1971). Whether the state’s scheme of regulation is the ~

wisest or most effective type of regulation is not for the

plaintiffs or the Court to determine. See id., Allstate Ins.

Co. v. Lanier, 361 F.2d 870 (4th Cir. 1966). Consequently

the fact that the Federal Truth-in-Lending Act and Regu-

lation Z are more comprehensive than the state laws and

regulations governing the business of insurance does not

mean that the McCarran Act is inapplicable in this case.

See Gerlach v. Allstate Ins. Co., 338 F. Supp. 642 (S.D.

Fla. 1972).

Second, relying upon a staff opinion letter of the Federal

Reserve Board,” plaintiffs argue that the credit sale of

615 U.S.C. § 1601 (1970).

16 The Federal Reserve Board letter provides:

This responds to your letter of August 7, 1969, and to ***’s

of September 8, 1969, both of which inquired as to what type

of disclosures an insurance broker or agent who handles the

insurance and finances the premium could make. In our opin-

ion, an insurance agent is selling insurance. Consequently,

when he also provides consumer credit for premium financing,

he is making a credit sale under Sec. 226.2(n) (P. 3510) and

disclosures under Sec. 226.8(b) (P. 3566) and (c) (P3587)

would be required.

CCH Consumer Credit Guide P. 30, 257 (transfer binder)

(excerpts from F.R.B. Letter of January 5, 1970, No. 225, by

Frederic Solomon, Director).

At first glance this staff opinion letter seems to be directly in

point, however a careful reading of this letter reveals that Mr.

17a

insurance has been found to be governed by the Truth-in-

Lending Act, and that section i111(a)"’ of the Act prevents

it from being construed to invalidate, impair, or supersede

Alabama’s insurance law. Section 111(a) provides that:

This subchapter does not annul, alter, or affect,

or exempt any creditor from complying with, the laws

of any state relating to the disclosure of information

in connection with credit transactions, except to the

extent that those laws are inconsistent with the pro-

visions of this subchapter or regulations thereunder,

and then only to the extent of the inconsistency.

However, plaintiffs’ contention that section 111(a) does

not require this Court to construe the Truth-in-Lending

Solomon was apparently addressing himself to a different factual

situation than that involved in this action. Since the letters re-

questing the opinion are not reproduced, it can only be speculated

that Mr. Solomon is addressing a question concerning the type of

disclosures required under the Truth-in-Lending Act when the

agent or broker himself advances money to the insured for the

purpose of insurance. See Cody v. Community Loan Corp. (C.A.

No. 1863, N.D. Ga., Feb. 28, 1975). In such a factual setting, the

agent or broker is involved in the consumer loan business separate

and distinct from the business of insurance. See Stefanski v. Main-

way Budget Plan, Inc., 326 F. Supp. (S.D. Fla. 1971) (referring

to the above staff opinion letter) the Court observed that:

While such correspondence releases by the Federal Reserve

Board are persuasive to this Court, they are not binding au-

thority as to questions of interpretations of federal law. This

Court does not agree with that interpretation because (1) it

cannot determine whether the agreement interpreted in that

letter was identical, or even similar, to the agreement executed

and sued upon in this matter and (2) the letter does not pro-

vide any information as to state law which may or may not

affect the factual determination of the status of the agreement.

Stefanski was reversed and remanded by the Fifth Circuit, 456

F.2d 211 (5th Cir. 1972), on the grounds that dismissal of the

ease was improper without affording plaintiff every opportunity

to state a claim upon which relief might be granted.

715 U.S.C. § 1610(a) (1970).

18a

Act to “invalidate, impair or supersede” state law is with-

out merit. Since this section specifically provides that to

the extent that state laws relating to the disclosure of

information in connection with a credit transaction are

inconsistent with the provisions of the Act and Regula-

tion Z, they are annulled, altered and affected by the

Truth-in-Lending Act, Congress has attempted to make

this Act superior to state regulation of this field. Yet

with respect to the regulation of the business of insurance

Congress has opted “to throw the whole weight of its

power behind the states’ systems” of regulation and

through the McCarran Act to make state regulation su-

preme in this area. Because section 111(a) of the Truth-in-

Lending Act operates to alter, amend or affect regulation

of the business of insurance by the State of Alabama to the

extent that those regulations are inconsistent with the

Truth-in-Lending Act, that Act falls within the ambit of

the McCarran Act. Unquestionably, the application of the

Truth-in-Lending Act to disclosure forms and statements

which have been submitted to and approved by the Com-

missioner of Insurance for the State of Alabama would

allow the Federal Act to supersede state regulation of this

aspect of the business of insurance, and invalidate those

state regulations which might be inconsistent with the

Federal Act, e.g., paragraphs 2, 5, and 6 of the guidelines,

supra. Furthermore, as concluded earlier the Truth-in-

Lending Act does not specifically relate to the business of

insurance, and therefore must give way to applicable state

regulation of the field.

Finally, the plaintiffs argue that the defendant’s re-

liance upon the cases of Gerlach v. Allstate Insurance Com-

pany, 338 F. Supp. 642 (S.D. Fla. 1972), and Ben v.

General Motors Acceptance Corporation, 374 F. Supp. 1199

(D. Colo. 1974), is misplaced, and that the case of Cody v.

Community Loan Corporation (No. 1863, N.D. Ga., Feb.

28, 1975), controls the issues presented in this case. How-

19a

ever, as will be fully developed below, none of these cases

are dispositive of the issues presented in this action.

In Gerlach the Court was presented with a question of

whether the Federal Truth-in-Lending Act was applicable

to the defendant insurance company’s system of offering

the insured the opportunity to pay off her annual premium

for automobile liability insurance on an installment basis.

The Court found that the insurer was not a “creditor” *

of the insured when she elected to pay her annual premium

under the following plan: “10% of the full year’s premium

payable at the time of application, and 10% payable on

the same day of the month each month thereafter until a

total of such payments were made.” When an installment

plan was elected by the insured, a flat service charge was

payable with each installment payment. The Court’s finding

was based on the reasoning that no “consumer credit”

transaction was involved since the plaintiff was never in-

debted to the defendant insurer, and that it is essential to

the applicability of § 1640(a) that there be both a “cred-

itor” and a “consumer credit” transaction citing Mourning

v. Family Publications Service, Inc., 449 F.2d 235, 240

(Sth Cir. 1971).*° The Court carefully distinguished the case

** See 15 U.S.C. § 1602(f) (1970) and Regulation Z, 12 C.F.R.

§ 226.2(m) (1975).

*° 338 F. Supp. at 647. The court gave the following explanation

of this holding:

No Allstate insured is obligated by any agreement to make

any premium payment. At the inception of every policy for

which the insured policyholder elects to pay premium install-

ments, Allstate collects a premium payment; either 40% of a

year’s premium, or 10% of a year’s premium. Whichever of

the alternatives it may be, the payment pays for insurance

coverage for a period of time that extends beyond the next

installment premium date. Not only is this stipulated as a

fact—it is obvious from the fact that under the three-payment

plan, the full year’s premium has been paid at the end of

six months, and under the ten-payment pian it is paid at the

end of nine months and one day. If the insured fails to pay

20a

of Stefanski v. Mainway Budget Plan, Inc., 326 F. Supp.

138 (S.D. Fla. 1971), which involved the applicability of

the Truth-in-Lending Act to a premium financing transac-

tion, a transaction in which the insured becomes obligated

to a broker, bank, the issuing company or other creditor

to pay the premium, or an indebtedness for premiums, and

is contractually obligated to make payments. 338 F. Supp.

at 648. The court in Stefanski found the Truth-in-Lending

Act’s provisions concerning consumer loans” to be ap-

on a payment date, he is notified that unless he pays by a

date certain his insurance is terminated. The last mentioned

date is the date to which he has already paid for insurance

coverage in advance, unless the statutory ten days’ notice re-

quirement sets the termination date beyond the date for which

coverage has already been paid, in which latter event the

termination date is at the end of the statutory ten days. But

regardless of the time of cancellation by Allstate’s notice,

Allstate neither seeks to enforce nor makes any claim against

the insured for any earned premium for insurance coverage

provided by Allstate and not paid for by the insured. In short,

if the policy is cancelled there is no further obligation on the

part of the insured.

Thus, within the meaning of Sec. 1640(a) and the defini-

tions set forth in 15 U.S.C. Sec. 1602 as well as in Regula-

tion Z, 12 C.F.R. Sec. 226.2, the policyholder is not a debtor

of Allstate, Allstate is never in the position of being a ‘‘cred-

itor’’ of the insured, there is no ‘‘credit’’, and there is no

‘‘consumer credit’’;—not as the quoted terms are defined and

used in the Act, or in Regulation Z, and not as any of the

foregoing terms have any commonly accepted meaning.

*° The plaintiffs argued-that premium financing arrangements

were ‘‘credit sales’’ subject to the requirements of Regulation Z,

§ 226.8(c). 326 F. Supp. at 139-40. The court, however, found that

a consumer loan was involved and that all required disclosures (15

C.F.R. § 226.8(d)) had been made. The case was reversed on ap-

peal on the grounds that under the TIL Act the seller need not

actually extend the credit in order for a ‘‘credit sale’’ to occur ;

in some circumstances, a credit sale may exist where the seller

merely ‘‘arranges’’ for the extension of credit. 456 F.2d 211 (5th

Cir. 1972).

2la

plicable to the premium financing arrangement between

the insured and a non-insurance company lender; however,

the McCarran Act defense was not raised in that case.

The Gerlach court then addressed itself to the McCarran

Act as dicta,” stating that:

. .. Florida law, as a part of the Florida Insurance

Code, regulates insurance premium finance companies

and premium financing (Secs. 627.0900—627.1023), and

specifically sets forth, in See. 627.1003(3)(b), what

disclosures are required in a premium financing agree-

ment. Thus, although Allstate’s transaction is not

premium financing, this Florida regulatory legislation

on the same subject as Truth in Lending, namely, dis-

closure, would have precluded applicability of Truth

in Lending in insurance premium consumer credit

transactions in Florida. It is immaterial that the regu-

lation is not the same. What is controlling is that the

regulation exists. As pointed out in Transnational In-

surance Co. v. Rosenlund, D.C. Or. (1966), 261 F.

Supp. 12, 26:

“A verbatim duplication of the Federal legisla-

tion * * * is not required. * * * Where there is an

applicable state statute the federal legislation does

not apply.”

*t In introducing its discussion of the McCarran Act, the court

said at p. 649:

In view of the Court’s finding that Allstate is not a ‘“‘credi-

tor’’ of plaintiff in a ‘‘consumer credit’’ transaction, a dis-

cussion of the McCarran Act and its application would not

now be necessary for the determination of this suit. It will be

discussed, however, in the event that the appellate court should

find, contrary to this Court’s holding, that Allstate’s plan of

installment premium payment is not part of its rate structure

but is a ‘‘premium financing’’ arrangement, or in the event

that the Court of Appeals’ holding in Mourning v. Family

Publications Service, Inc. should be reversed by the Supreme

Court.

22a

337 F. Supp. at 650. The court’s reasoning was substan-

tially the same as that developed earlier in this memo-

randum.”

In Ben v. General Motors Acceptance Corporation, the

plaintiff claimed, among other things, that the defendant

violated the Truth-in-Lending Act by failing to make the

disclosure required by § 1640(a) of that Act in financing the

renewal premiums of physical damage insurance issued by

defendant’s subsidiary. The cause was heard on defend-

ant’s motion to dismiss which raised the McCarran Act

defense and the one-year statute of limitations. The court

dismissed plaintiff’s claim and made the following state-

ment concerning the propriety of the McCarran Act de-

fense:

[1,2] Since the State of Colorado has occupied the

field of regulating the activities of insurance com-

panies, in a comprehensive manner, (1963 C.R.S. 72-

12-1 et seq.; 1963 C.R.S. as amended, 73-4-101 et seq.

and 73-35-1 et seq.,) the Court is of the opinion that

the first and second statements of claim based on the

Truth-in-Lending Act do not state a claim upon which

relief can be granted. The Court agrees with Gerlach

v. Allstate Insurance Company, D.C., 338 F. Supp.

642 at 649-651, which holds that the Truth-in-Lending

Act does not specifically relate to the business of in-

surance and therefore does not apply to the business

of insurance when the state has exercised its rights

[374 F. Supp. at p. 1201].

This case is, of course, readily distinguishable on its facts

from the case at hand.”

*? See 338 F. Supp. at pp. 649-50.

83 Additionally, because the quoted paragraph appearing in the

text is the extent of the court’s consideration of the applicability

23a

Finally, the plaintiffs cite the case of Cody v. Community

Loan Corporation for the proposition that the McCarran

Act provides no defense to its Truth-in-Lending Act claim

in this case. In Cody the court was presented with the fol-

lowing factual background:

Defendants were corporations engaged in the busi-

ness of lending money in Richmond County, Georgia.

During 1973, defendants lent money to plaintiffs and

in making said loans, defendants complied with the

requirements of the Truth-in-Lending Act regarding

consumer loans. However, the plaintiff sued defendants

alleging that credit sale disclosures required under

the Act should have been made with respect to a por-

tion of the loan proceeds used to finance cancer in-

surance policies plaintiffs claim defendants sold them.

The policies in question were issued by American

Family Life Assurance Company of Columbus, Geor-

gia, and the applications for the same were taken by

defendants’ loan managers, as agents for American

Family Life. A portion of the money loaned plaintiffs

was paid back to the loan managers as the premium

payment to American Family and was submitted along

with the application.

On motions to dismiss and for summary judgment

defendants raised the McCarran Act as a defense,

contending that the sale of insurance was part of the

business of insurance and that the State of Georgia

had comprehensively regulated the field. However,

the defendants failed to cite state legislation specifi-

cally overriding the Truth-in-Lending Act or to demon-

strate how application of the Act would interfere with

state regulation of the business of insurance.

of the McCarran Act to the facts of this ease, it is difficult to

characterize the court’s statement as anything other than dicta

since plaintiff’s claim was found to be barred by the statute of

limitations.

24a

The Court’s own research revealed that the only Georgia

statute directed toward disclosures accompanying sales of

insurance (Ga. Code Ann. § 84-5309) exempts all domestic

companies and their local agents from coverage (Jd., § 84-

5302). Therefore, the court found that the Truth-in-Lend-

ing Act did not invalidate, impair or supersede applicable

state legislation regulating the business of insurance.

Cody v. Community Loan Corporation, at p. 7. The Cody

court read the Gerlach and Ben decisions discussed above

to stand for the proposition that “once a state undertakes

to regulate the insurance industry, no federal legislation

can apply unless it specifically relates tq the business of

insurance,” Id., at 6-7, and rejected them as persuasive

authority on that basis.

The plaintiffs herein claim that the Cody case is squarely

in point, but for at least two obvious reasons, their reliance

upon that case is misplaced. First, the defendants were

unable to show in Cody that any legislation or regulation

of the business of insurance by the State of Georgia would

be affected by the Truth-in-Lending Act. In contrast, in

the case at bar the defendant has brought to the attention

of the court various specific sections of Alabama law which

would be superseded or invalidated by the application of

the Federal Act. Second, in Cody, a lending institution as

opposed to an insurance company advanced the money in

the premium financing arrangement, and the business of

insurance was only indirectly involved. Cf. Stefanski v.

Mainway Budget Plan, Inc., 326 F. Supp. 138 (S.D. Fla.

1971), rev’d on other grounds, 456 F.2d 211 (5th Cir.

1972).

*4 See notes 17 and 20, infra.

25a

IV. Conclusion.?°

Summary judgment should be entered in favor of the

defendant, Fidelity Union Life Insurance Company, since

the State of Alabama has exercised its power to regulate

the premium financing aspect of the business of insurance

in such a manner as to bring the McCarran Act exemption

into play. The application of the Federal Truth-in-Lending

Act to the transaction in this case would require this Court

to construe that Act, which does not specifically relate to

the business of insurance, “to invalidate, impair, or super-

sede [a] law enacted by [the State of Alabama] for the

purpose of regulating the business of insurance .. .” 15

U.S.C. § 1012(b).

*°'The case of Lovinggood v. Fidelity Union Iife Insurance

Company, Civil Action No. 75-L-2149-NE, transferred to this

Court from the Middle District of Alabama, presents the exact

issue discussed herein and should be resolved in a like manner.

27a

APPENDIX B

UNITED STATES COURT OF APPEALS,

FIFTH CIRCUIT.

Jan. 2, 1979.

No. 76-2709.

Sytvia Perry, Individually and on behalf of all others

similarly situated, Plaintiff s-A ppellants,

Fivetity Union Lire Insurance Company,

Defendant-A ppellee.

Appeal from the United States District Court for the

Northern District of Alabama.

* * *

Before Brown, Chief Judge, THornperry and Morgan,

Circuit Judges.

THORNBERRY, Circuit Judge:

In Cochran v. Paco, Inc., 606 F.2d 460 (5th Cir. 1978),

we held today that the lending activities of a premium

finance company do not constitute the “business of insur-

ance” and that the McCarran-Ferguson Act (“McCarran

Act”), 15 U.S.C. §§ 1011 et seqg., does not preclude appli-

cation of the disclosure requirements of the Truth in

Lending Act (“TIL”), 15 U.S.C. §§ 1601 et seq., to the

transaction.

The instant case, the second in today’s triology,’ presents

a related question: whether the McCarran Act bars TIL’s

application when an insurance company provides premium

financing in connection with the sale of an insurance policy.

*The third case is Cody v. Community Loan Corp., 606 F.2d

499 (5th Cir. 1978).

28a

The district court held that the McCarran Act was a good

defense to plaintiff’s TIL action and granted summary

judgment for the defendant insurance company. We

reverse.

I, Factual Background

Sylvia Perry was a college student in Alabama when a

salesman from Fidelity Union Life Insurance Co. sold her

a life insurance policy in June, 1974. To obtain the policy,

which had annual premiums of $295, she made a $10 down

payment and executed a promissory note to Fidelity for

the remainder of the first year’s premium. Fidelity pro-

vided Perry a form entitled “Disclosure Statement and

Acceptance of Policy,”* which stated that she would be

paying $134 in interest over the five-year life of the note.

Perry made no further payments on the note, which was

ultimately assigned to a bank.

* This statement provides, in pertinent part :

(3) Cash Price of Policy (Annual Premium) ..... $295.58

(4) Cash Downpayment .....................05. $ 10.00

(5) Unpaid Balance of Cash Price .............. $285.58

(6) Unpaid Balance .................. (Same as Item 5)

(7) Amount Financed ................ (Same as Item 5)

(8) Total FINANCE CHARGE (interest) ...... $134.03

(9) Deferred Payment Price (3 + 8) ........... $429.61

(10) Total of Payments (5 + ee hac ak aniseawe es $419.61

(11) ANNUAL PERCENTAGE RATE ........... 8.00%

(OP Wee WO SN Cha wie bashed welt ascwsecasenas 6-13-74

(13) Finance Charge Accrues From .............. 6-13-74

Record at 46.

Had Perry paid later premiums, she would have received a cash

payment at the end of the fifth year (the policy’s fifth anniversary

endowment) that would have covered a substantial portion of the

first year’s premium.

29a

On June 24, 1975, Perry, on behalf of herself and all

persons similarly situated, filed this suit, alleging that she

had entered into contractual relations with Fidelity in the

nature of a consumer credit transaction and that Fidelity’s

disclosure forms violated TIL and Regulation Z, 12 C.F.R.

§ 226.1 et seq.* She sought the Statutory penalty for herself

and the class, costs, and attorneys’ fees.* Following dis-

covery, Fidelity successfully moved for summary judg-

ment on the ground that the McCarran Act barred appli-

cation of TIL to the Perry transaction.

The district court, in an unreported opinion, held that

(1) the disclosure of credit information of a premium

* Perry alleged the following violations of TIL:

(1) failure to disclose the finance charge as an accurate an-

nual percentage rate computed in accordance with the pro-

visions of 15 U.S.C. §§ 1606, 1638(a)(7), and 12 C.F.R. §§

226.5(b), 226.8(b) (2) ;

(2) failure to furnish a completed, duplicate copy of the dis-

closure statement containing all the required disclosures prior

to the consummation of the consumer credit transaction as

required by § 226.8(a);

(3) failure to disclose the ‘‘total down payment”’ as required

by § 226.8(¢) (2) ;

(4) use of the term ‘‘eash price of policy (annual premium) ”’

instead of ‘‘cash price,’’ as required by §§ 226.6(a), 226.8

(ce) (1) ; and

(5) use of the term ‘‘total finance charge (interest) ’’ instead

of ‘‘finance charge,’’ as required by §§ 226.6(a), 226.8(¢) (7).

Record at 3.

After discovery, Perry admitted that if the finance charge was

correctly reported, the annual percentage rate was accurately

computed. However, she sought to amend the complaint to allege

that the finance charge was too low and the cash price too high.

The record is silent as to whether this amendment was allowed.

*15 U.S.C. § 1640(a). Count II of the complaint presented a

State law claim. At the pretrial conference the parties agreed to

submit the case on the sole issue of the McCarran Act defense, on

which Fidelity prevailed, and the state law claim is thus not be-

fore us.

30a

financing arrangement is part of the business of insurance;

(ii) the State of Alabama has exercised its power to

regulate the premium financing aspect of the business of

insurance; and (iii) application of TIL to this particular

transaction would require a construction of TIL that would

invalidate, impair or supersede Alabama law enacted for

the purpose of regulating the business of insurance. This

appeal followed.°

II. Discussion

Our opinion in Cochran v. Paco, Inc., supra, establishes

the analytical framework for determining the applicability

of the McCarran Act. Since we held in Cochran that TIL

does not specifically relate to the business of insurance,

606 F.2d at 464, we turn immediately to the next inquiry,

that is, whether Fidelity’s premium financing activities,

carried out in connection with its sale of an insurance

policy, constitute the “business of insurance.” We hold

that it does not and that the McCarran Act is no bar to

the application of TIL. Accordingly, we need not deter-

mine whether Alabama has “any law enacted ... for the

purpose of regulating” the financing activities or whether

TIL would “invalidate, impair, or supersede” such state

law. Cochran, supra, 606 F.2d at 467 n.15.

There is no doubt that the sale of an insurance policy

is squarely within the “business of insurance.” Securities &

Exchange Comm’n v. National Securities, Inc., 393 U.S.

453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). However,

the financing of such a sale is a different activity. As

we said in Cochran, premium financing “has little—if

any—effect on an insurance company’s ability to pay

claims or on the nature of [its] policies” and “has only

*The Board of Governors of the Federal Reserve System filed

in this appeal the same amicus curiae brief submitted in support

of appe!.it’s position in Cochran v. Paco, Inc., supra.

3la

a peripheral connection with the business of insurance,”

606 F.2d at 466-467. We do not think that the nature of

premium financing changes, in chameleon-like fashion,

simply because an insurance company rather than a loan

or finance company authors the promissory note. Not all

insurance company activities constitute the business of

insurance, and the McCarran Act does not insulate every

operation of every insurance company from federal regu-

lation. Cochran, supra, at 465 n.13.

It would be anomalous to hold that Fidelity’s premium

financing activities are the “business of insurance” but

that the identical activities of the finance company in

Cochran are not. The appropriate focus is thus thefiature

of the activity itself, not the type of business that is

conducting it.

In making available premium financing, an insurance

company is acting not as an fmsurer but as a creditor,

and the financing activity is purely ancillary to the in-

surance relationship between the insurance company and

the policyholder. Premium financing has virtually nothing

to do with a company’s reliability as an insurer, a factor

that stands at the center of the insurer-insured relation-

ship. National Securities, supra. When an insurance com-

pany offers premium financing as an inducement for per-

sons to purchase policies, it plays two distinct roles in

its relationship with the purchaser. On the one hand, the

company is an insurer, the purchaser an insured; but on

the other hand, the company is a creditor, the purchaser

a debtor. The former relationship constitutes the “business

of insurance,” while the latter does not.

We do not doubt that an insurance company can, by

offering a premium financing package, facilitate the sale

of insurance policies. But that alone cannot elevate the

activity to the “business of insurance,” for one can hardly

claim that the extension of credit is an integral part of

32a

the insurance business. As we have said in the antitrust

context, business activities of insurance companies not

peculiar to the insurance industry are outside the scope

of the “business of insurance.” Royal Drug Co. v. Group

Iife & Health Ins. Co., 556 F.2d 1375, 1386 (5 Cir. 1977),

see also Battle v. Liberty Natl. Life Ins. Co., 493 F.2d 39,

00 (5 Cir. 1974), cert. denied, 419 U.S. 1110, 95 S.Ct. 784,

42 L.Ed.2d 807 (1975).°

Accordingly, we hold that premium financing by an in-

surance company does not constitute the “business of in-

surance” within the meaning of the McCarran Act and

that the McCarran Act is thus no bar to the application

of TIL’s disclosure requirements. The judgment of the

district court is-reversed and the case remanded for fur-

ther proceedings consistent with this opinion.

REVERSED and REMANDED.

° We recognize that other courts, in other contexts, have held

that an insurance company’s inducing persons to become policy-

holders is part of the business of insurance. FE. g., Dexter v.

Equitable Life Assurance Soc’y, 527 F.2d 233 (2 Cir. 1975) (anti-

trust action challenging Equitable’s requirement that plaintiff pur-

chase life insurance as precondition to granting mortgage loans) ;

Addrisi v. Equitable Life Assurance Soc’y, 503 F.2d 725 (9 Cir.

1974), cert. denied, 421 U.S. 922, 95 S.Ct. 1590, 43 L.Ed.2d 790

(1975) (same). However, in these cases the inducement was ac-

tually a requirement, and forcing prospective policyholders to buy

insurance cannot be equated with making the purchase ‘‘easier’’

by offering premium financing. Moreover, if this ‘‘inducement’’

rationale were applied in the financing context, the activities of

any lender who engaged in premium financing would constitute

‘‘the business of insurance.’’ We have rejected such a result in

Cochran v. Paco, Inc., supra, and application of the ‘‘induce-

ment’’ theory in the instant case would make the McCarran Act’s

applicability turn on who is engaged in premium financing rather

than on the nature of that activity.

33a

Joun R. Brown, Chief Judge, dissenting:

This appeal presents the esoteric question whether

§ 2(b) of the McCarran-Ferguson Act (the McCarran Act),

15 U.S.C.A. §1012(b), bars the application of the dis-

closure requirements of the Truth-in-Lending Act, 15

U.S.C.A. §§ 1601 et seq. (TIL) when an insurance com-

pany provides premium financing in connection with the

sale of an insurance policy in Alabama, and the form used

in disclosing the credit terms to the policyholder has been

submitted to and approved by the Department of Insur-

ance as required by Alabama law. I agree with the District

Court that the McCarran Act is a good defense to the

action and dissent from the contrary holding of the

majority.

I. Prologue

Building on Cochran v. Paco’s? holding, in which I con-

curred that a non-insurance company premium financing

enterprise is not engaged in “the business of insurance,”

the Court makes a mighty leap to conclude that when the

premium financing is extended directly by the selling in-

surance company, this is likewise not the “business in-

surance.”

Its principal thesis is that (i) premium financing—by

whomsoever advanced—does not concern or affect the

“relationship between insurer and insured, the type of

policy which could be issued, its reliability, interpretation

and enforcement,” SEC v. National Securities, Inc., 1969,

393 U.S. 453, 460, 89 S.Ct. 564, 569, 21 L.Ed.2a 668, 676

(quoted in Cochran, ante, 606 F.2d at 465, and (ii) in

extending premium financing “an insurance company is

acting not as an insurer but as a creditor”? so that (iil)

*5 Cir., 1979, 606 F.2d 460.

* Majority opinion, ante, 606 F.2d at 470.

34a

“the financing activity is purely ancillary to the insurance

relationship between the”* insurer and policy holder.

There are a number of faults with this approach, some

of which warrant the later detailed discussion.

At the outset, I firmly believe that that which insurance

companies regularly and customarily do in the solicitation

and sale of policies of insurance is, and is to be considered

as, a part of the “business of insurance.” And yet here

there is not a single stitch of record evidence that premium

financing is or is not a regular, accepted part of the in-

surance business. On the contrary, all that we have is the

Court’s statement that this activity is merely ancillary—

a fact drawn presumably from the wisdom Article III

and life tenure generate.

In the next place, the very activity under scrutiny is

so much a part of the business of insurance that it is

precisely regulated by the Alabama Superintendent of

Insurance* pursuant to the Department’s authority to

regulate and superintend insurance companies, not lenders

of credit. And these regulations specifically relating to

the sale of life insurance to college students* reflect an

awareness by Alabama insurance authorities that sales

practices—including extension of liberal premium financ-

ing—go to the very heart and integrity of the selling

insurer.

For example, the regulations condemn the practice of

inducing the college student applicant to drop or replace

’ Majority opinion, ante, 606 F.2d at 470.

* See note 22, infra.

‘Regulation by the states has a dual function. First, as urged

here, it demonstrates that that which insurance authorities regu-

late must be a part of ‘‘the business of insurance.’’ Second, as

developed later on, it meets the subsidiary question outlined in

Cochran, 606 F.2d at 463 of regulation by the state and impair-

ment of state regulation.

35a

existing insurance (see note 22, infra, item 11) and recom-

mend that a financed program should not be sold to an

undergraduate on a basis where premiums would come

due prior to the anticipated date of graduation by the

insured (see note 22, infra, item 10). The guidelines are

enacted in the “* * * hope * * * of offering additional

safeguards for the protection of this segment of the in-

surance buying public.” (Note 22, infra, introduction).

Whatever this Court might think, it is plain that Ala-

bama believes that the method of selling insurance, in-

cluding the insurer’s extension of premium financing, goes

to “the type of policy which could be issued [and] its

reliability.” SEC v. National Securities, Inc., supra, 1969,

393 U.S. at 460, 89 S.Ct. at 568.

And the Court’s effort to camouflage the problem by

declaring that it “* * * would be anomalous to hold that

[the insurers’] premium financing activities are the ‘busi-

ness of insurance’ but that the identical activities of the

finance company in Cochran are not,”*® is not only bad

law. It is worse economics. The principal difference is

that with a premium financing company the insurer bears

none of the risk of late or non-payment. It is paid in full,

subject only to possible rebate of unearned premiums if

the financier has and exercises a right of cancellation in

the event of default by the policyholder-borrower. And

this distinction is not obliterated by the insurer’s dis-

counting of the premium note to, say, a third party bank.

The assignee would normally have recourse against the

insurer-assignor. So the risk—and the consequent diminu-

tion of the insurer’s assets—remains on the insurer.

Finally, it is an artificial oversimplification to speak

in terms, not of insurer-insured, but of debtor-creditor.

Life insurance is customarily sold with installment pre-

miums—semiannually, quarterly, monthly, or the like. And

° Perry, ante, 606 F.2d at 470.

36a

yet under regulations of the state insurance authorities,

the terms of the policy, or both, a grace period, usually of

thirty days is afforded. Clearly that is extension of credit,

but it is equally clear that this goes to the very heart of

the relationship between insurer and insured and to the

continued integrity of the policy.

Next, on failure to pay premiums, it is common for the

policy, pursuant to local state regulation, to provide for

paid up insurance of a specified amount or extended in-

surance for the policy limit for a specified period of time.

This is, albeit sophisticated, credit reflecting a debtor-

creditor relationship but indeed much more, a relationship

between insurer and insured.

Similarly, again pursuant to state regulation, life in-

surance policies generally provide for policy loans to the

extent of the paid up or cash loan surrender value. Once

such a loan is procured there is, to be sure, the debior-

creditor relationship, but it arises out of the continuing

insurer-insured relationship.

It must come as quite a surprise to the nation’s multi-

billion dollar insurance enterprises to learn that premium

financing is not an integral part of the “business of in-

surance” but is a mere incidental appendage of the debtor-

creditor relationship.

This, in my judgment, ignores the legislative history

and purposes of the McCarran Act. The activities here

are thus exempt from TIL as the District Court properly

held. I therefore respectfully dissent.

II. The Legislative History Of The McCarran Act

In Paul v. Virginia, 1869, 75 U.S. (8 Wall.) 168, 183,

19 L.Ed. 357, the Supreme Court held that the issuance

of an insurance policy was not a transaction of commerce.

For the three-quarters of a century following Paul, it was

assumed that the regulation of insurance transactions

37a

rested exclusively with the states. However, United States

v. South-Eastern Underwriters Assn., 1944, 322 U.S. 533,

64 §.Ct. 1162, 88 L.Ed. 1440, gave lie to that assumption,

the Court holding that insurance transactions stretching

across state lines were subject to federal regulation under

the Commerce Clause and that federal antitrust laws ap-

plied to them. Both Houses of Congress, characterizing

South-Eastern as “precedent-smashing,” H.R.Rep.No.143,

79th Cong., 2d Sess. (1945), reprinted in 1945 U.S.Code

Cong.Serv. 670, 671; S.Rep.No.20, 79th Cong., Ist Sess. 2

(1945), reacted quickly and legislative reversal of South-

Eastern was accomplished by the McCarran Act.’ (See

discussion of the McCarran Act in Cochran v. Paco, ante,

606 F.2d at 462-463.)

The House Report which accompanied the bill demon-

strates Congress’ intent to return matters to the status quo

ante:

It is not the intention of Congress in the enactment

of this legislation to cloth the States with any power

to regulate or tax the business of insurance beyond

that which they had been held to possess prior to the

decision of the United States Supreme Court in the

Southeastern Underwriters Association case. .. .

H.R.Rep.No.143, supra, 1945 Code Cong. Serv. at 671;

see SEC v. National Securities, Inc., 1969, 393 U.S. 453,

459, 89 S.Ct. 564, 568, 21 L.Ed.2d 668, 676. The proviso of

* Because Congressional debate principally focused on the ap-

plication of federal antitrust laws to the business of insurance—a

subject of only peripheral concern to us here—we believe it help-

ful to attach as an Appendix excerpts from the Congressional de-

bates on the McCarran Act which concerned state regulation of

insurance companies in non-antitrust areas. Some excerpts focus-

ing on antitrust are also included because of their implications in

other areas. These excerpts appear in chronological order and have

been numbered for easy reference.

38a

§2(b) served as an invitation to the states to legislate

in the antitrust field during the moratorium period.

Thus, it is clear that Congress returned to the states

the plenary power to regulate the business cf insurance

which they had previously enjoyed.’ Congressional “si-

lence” (see §1012(a) quoted in Cochran, ante, 606 F.2d

at 462) meant that states were free to occupy the insur-

ance business field subject to controlling Supreme Court

decisions prior to South-Eastern. See H.R.Rep.No.143,

supra, at 671-72. On the other hand, when Congress de-

sired to invoke its Commerce Clause powers to occupy

any part of the field then or in the future, it would

expressly say so.° Stated another way, Congress wanted

to ensure that no future federal legislation enacted under

the Commerce Clause, not specifically relating to insur-

ance, would be construed as an ‘mplied repeal of the

*This power was understood to be constitutionally limited by

the states’ inability to regulate outside its borders. See FTC v.

National Casualty Co., 1958, 357 U.S. 560, 78 S.Ct. 1260, 2 L.Ed.2d

1540; Atwell, The McCarran-Ferguson Act—A Deceptive Panacea ?,

5 The Forum 339, 340 (1970) ; Appendix, excerpts [9], [10], [12].

® The Supreme Court enumerated the two ways in which Con-

gress gave its support to existing and future state systems for

regulating and taxing the business of insurance:

One [way] was by removing obstructions which might be

thought to flow from its own power, whether dormant or ex-

ercised, except as otherwise expressly provided in the Act

itself or in future legislation. The other was by declaring ex-

pressly and affirmatively that continued state regulation and

taxation of this business is in the public interest and that the

business and all who engage in it ‘shall be subject to’ the

laws of the several states in these respects.

Prudential Ins. Co. v. Benjamin, 1946, 328 U.S. 408, 429-30, 66

S.Ct. 1142, 1155, 90 L.Ed. 1342, 1360. See Appendix, excerpts

[11], [12], (18).

39a

McCarran Act which sanctioned continued state regu-

lation."

10 See, for example, the following remarks of Senator Ferguson :

If there is on the books of the United States a legislative

act which relates to interstate commerce, if the act does not

specifically relate to insurance, it would not apply at the

present time. Having passed the bill now before the Senate,

if Congress should tomorrow pass a law relating to interstate

commerce, and should not specifically apply the law to the

business of insurance, it would not be an implied repeal of

this bill [the McCarran Act], and this bill would not be af-

fected, because the Congress had not, under subdivision [2]

(b), said that the new law spectfically applied to insurance. I

think that makes the bill very clear.

91 Cong.Rec. 481 (Jan. 25, 1945) (emphasis added). See also

Appendix, excerpts [1], [2], [4]-[7], [22].

Although the Court rejects it, I think it helpful to give a de-

tailed answer to the contention made by the Federal Reserve

Board in its amicus brief which states:

An examination of the legislative history of the McCarran-

Ferguson Act indicates that Congress originally intended that

[the] MeCarran-Ferguson Act’s prohibition of Federal pre-

emption of State laws regulating the business of insurance

only be applicable to insurance-related activities otherwise

within the purview of Federal antitrust laws. The [state]

Act under consideration most certainly is not an antitrust

statute.

* * * * * *

. .. [W]hen Congress spoke of State regulation of the busi-

ness of insurance, it was concerned with the States’ regulating

what would have been covered potentially by the Federal anti-

trust laws.

Amicus brief at 16-18.

The Board is asserting that TIL should apply because the only

state regulatory legislation within the purview of the McCarran

Act is that correspondent to the federal antitrust laws. As does

the Court, I reject this contention as totally without merit. The

plain words of the Act itself are dispositive on this score. For ex-

ample, state tax laws relating to the business of insurance are ex-

pressly covered by 15 U.S.C.A. §§ 1011, 1012(a), (b). Tax laws,

as far as we known, have nothing to do with antitrust laws. And

if the plain words of the statute were not enough, the remarks

40a

Moreover, I also glean from the legislative history of

the McCarran Act that the states were free to regulate

as they saw fit. For example, the following statement

appears in S.Rep.No.1112, 78th Cong., 2d Sess., 5 (1944):

If the States are to be permitted to regulate, they

should be permitted to regulate as they each see fit.

The committee believes that in considering the nature

of the business of insurance, its closeness to policy-

holders in the several States, the established systems

of regulation and control by the States, and the ex-

perience and attitude of State insurance commission-

ers, regulation by the States should not be circum-

scribed by the establishment of any control over their

power of regulation or the exercise by them of that

power.

See also H.R.Rep.No.873, 78th Cong., Ist Sess., 9 (1943): ™

Insurance is also fundamentally local in character,

and therefore best regulated by the States. ... All

insurance policies are entered into in one State or

another and that State in which they are entered into

may through State regulation meet all problems pre-

sented. If regulation be undertaken by the Federal

of Senator Ferguson quoted above and those of other Congressmen

set forth in the Appendix (see excerpts [1], [2], (5], [7], [11],

[12], [14], [16], [17], [18], [19], [20], [22], [24]) should dispel

all doubts. Moreover, § 4 of the McCarran Act, 15 U.S.C.A. § 1014,

which makes the National Labor Relations Act and the Fair Labor

Standards Act specifically applicable to the business of insurance

serves as a further demonstration of a crystal clear intent that

Congressional silence meant the states were free to regulate insur-

ance in areas having no relationship to antitrust.

** Both S.Rep.No. 1112 and H.Rep.No. 873 related to an earlier

version of the Act, H.R. 3270. See generally Note, A Year of

S.E.U.A., 23 Chi.Kent L.Rev. 317 (1945) ; Comment, Federal Reg-

ulation of Insurance Companies: The Disappearing McCarran Act

Exemption, 1973 Duke L.J. 1340, 1342 & n.12.

4la

Government this must inevitably result in a general

pattern which is not applicable in meeting the require-

ments of the different States as they should be met

and as those States now meet them. The fundamental

fact is that under the law as it exists today each

State has ample power to regulate as it may see fit.

How it regulates is a matter for it to determine. ...

State regulation has promoted efficiency and satis-

faction in the insurance business, and ... such a result

has been accomplished with a steady decrease in in-

surance rates throughout the country. ... [T]here is

no reason why the States should not continue to meet

developments by the exercise of that power.

Subsequent decisions have recognized that, at the time

of the Act’s passage, Congress was well aware that the

states’ regulatory schemes differed widely and that uni-

formity of regulation was not a McCarran Act purpose

except in respects expressly provided for then and down

the road. See, e.g., Prudential Ins. Co. v. Benjamin, 1946,

328 U.S. 408, 430-31, 66 S.Ct. 1142, 90 L.Ed. 1342, 1360-61;

Dexter v. Equitable Life Assurance Soc., 2 Cir., 1975, 527

F.2d 233, 236; Ohio AFL-CIO v. Insurance Rating Board,

1971, 6 Cir., 451 F.2d 1178, 1183, cert. denied, 409 U.S. 917,

93 S.Ct. 215, 34 L.Ed.2d 180. See Appendix, excerpts [3]-

[6]. In 1945, Congress stilled its power, and Courts have

subsequently eschewed power to decide which state regu-

latory scheme is best or whether the state scheme repre-

sents the wisest and most effective type of regulation. See

Appendix, excerpts [1], [2], [5], [7], [11], [12], [14],

[16]-[20], [22], [24]; Commander Leasing Co. v. Trans-

america Title Ins. Co., 10 Cir., 1973, 477 F.2d 77; 84; All-

state Ins. Co. v. Lanier, 4 Cir., 1966, 361 F.2d 870, 873,

cert. denied, 385 U.S. 930,. 87 S.Ct. 290, 17 L.Ed.2d 212;

Mcllhenny v. American Title Ins. Co., E.D.Pa., 1976, 418

F.Supp. 364, 370; Fleming v. Travelers Indemnity Co.

D.Mass., 1971, 324 F.Supp. 1404, 1406; Holly Springs Fu-

neral Home v. United Funeral Serv., Inc., N.D.Miss., 1969,

42a

303 F.Supp. 128, 135. Following the instruction of the

Supreme Court, we must

. Start with a reluctance to disturb the state regu-

latory schemes that are in actual effect, either by dis-

placing them or by superimposing federal require-

ments on transactions that are tailored to meet state

requirements. When the States speak in the field of

‘insurance,’ they speak with the authority of a long

tradition.

SEC v. Variable Annuity Co., 1959, 359 U.S. 65, 68, 79 S.Ct.

618, 620, 3 L.Ed.2d 640, 643.

Ill. Specifics

Against this background, and in light of McCarran Act

jurisprudence, I proceed on the basis of this Court’s analy-

sis in Cochran v. Paco, ante, 606 F.2d at 464 to determine

(i) whether TIL “specifically relates” to the business of

insurance, (ii) if not, whether premium financing con-

stitutes the “business of insurance,” and (ili) if so, whether

Alabama has enacted regulatory laws (iv) which would

be “invalidated, impaired or superseded” by TIL.

A. “Specifically Relates”

I agree with the Court’s resolution in Cochran, ante,

606 F.2d at 464, of the initial question: TIL does not

“specifically relate to the business of insurance” within

the meaning of § 2(b) of the McCarran Act, 15 U.S.C.A.

§ 1012(b). Nowhere in TIL is there the equivalent of

§ 4 of the McCarran Act,” 15 U.S.C.A. § 1014, which spe-

** 15 U.S.C.A. § 1014 provides:

§ 1014. Applicability of National Labor Relations Act and

Fair Labor Standards Act of 1938

Nothing contained in this chapter shall be construed to

affect in any manner the application to the business of insur-

43a

cifically relates TIL’s provisions to the business of in-

surance. Nor is there any other indication in TIL that

we should construe that statute as an implied repeal of

the McCarran Act.

B. “Business of Insurance”

It is with regard to the second issue that I most strongly

disagree with the majority. In the companion case, Cochran

v. Paco, we held that, according to National Securities,

“the key factor is the relationship between the insurer

and the insured,” ante, 606 F.2d at 466. Cochran involved

no such relationship since the defendant was not an in-

surance company, but an independent premium finance

company. Therefore, I believe we reached the correct

result by there holding the McCarran Act inapplicable.

But I cannot agree that the National Securities rule

compels the same result in the instant case where the

insurer-insured relationship does exist. The District Court

concluded that “the availability of premium financing is a

part of the sale of an insurance policy, and the disclosure

of the terms and conditions of such an arrangement direct-

ly pertains to “the relationship between the insurer and

the policyholder.” (Unpublished opinion at 6.) I must

agree.

Although the Court does not expressly embrace Ameri-

can Family Life Assurance Co. v. Planned Marketing

Assoc., E.D.Va., 1974, 389 F.Supp. 1141, it indirectly relies

on this decision to attack the District Court holding in

the instant case, ante, 606 F.2d at 470. American stated

that business activities not peculiar to the insurance in-

ance of the Act of July 5, 1935, as amended, known as the

National Labor Relations Act, or the Act of June 25, 1938,

as amended, known as the Fair Labor Standards Act of 1938,

or the Act of June 5, 1920, known as the Merchant Marine

Act, 1920.

Mar. 9, 1945, ¢. 20, § 4, 59 Stat. 34.

44a

dustry were subject to federal law. Thus, the Court today

holds that credit disclosure is “not peculiar” to the in-

surance industry and TIL should apply.

We believe the Court conveniently ignores what the “not

peculiar” language of American actually meant. The activi-

ties which were stated to be “peculiar” to the industry

were precisely those set forth in National Securities:

Acts peculiar to the insurance industry would include

such things as the relationship between the insurer

and the insured, the language and content of an in-

surance policy, the financial reliability of an insurance

company and other similar matters involved in the

insurance industry.

389 F.Supp. at 1145. American thus did no more than coin

a shorthand phrase for the National Securities standard."

To adopt the interpretation of “not peculiar” which Perry

urges would mean, for example, that ratemaking and ad-

vertising—activities certainly not “peculiar” to the insur-

ance industry in any sense of the word—fall outside the

scope of the McCarran Act. And the Supreme Court has

expressly stated in National Securities that these activities

constitute the business of insurance (see quote from Na-

tional Securities in Cochran, ante, 606 F.2d at 465.

I have found no eases directly ou point, but there are

some which provide guidance. In Gerlach v. Allstate Ins.

‘* This Circuit has recently applied the ‘‘not peculiar’’ test in

a factual situation far different from the one presently before us.

In Royal Drug Co. v. Group Life & Health Ins. Co., 5 Cir., 1977

596 F.2d 1375, the Court held that an agreement between a group

insurer providing prescription drugs and participating pharmacies

did not constitute the business of insurance for McCarran Act

purposes. The Court, relying on National Securities, cited Ameri-

can for the ‘‘not peculiar’’ holding. Id. at 1386. Nothing we say

here is inconsistent with Royal which did not involve a direct

insurer-insured relationship.

45a

Co., 8.D.Fla., 1972, 338 F.Supp. 642 (discussed in Cochran,

ante, 606 F.2d at 466, it was stated in dictum: ™

Florida law, as part of the Florida Insurance Code,

regulates insurance premium finance companies and

premium financing .. ., and specifically sets forth...

what disclosures are required in a premium financing

agreement. Thus, although Allstate’s transaction is

not premium financing, this Florida regulatory legis-

lation on the same subject as Truth in Lending, name-

ly, disclosure, would have precluded applicability of"

Truth in Lending in insurance premium consumer

credit transactions in Florida.

Id. at 650.

While I join the Court in impliedly declining to adopt

this sweeping language, I do believe that when an insur-

ance company offers premium financing as part of the

inducement to purchase a policy of insurance, that induce-

ment is as integrally related to the sale of the policy as is,

say, advertising, and such activity necessarily falls within

the business of insurance. It would be anomalous to hold

that advertising practices hawking to the world at large

the advantages of insurance fall within McCarran and a

loan of money—an inducement to purchase made directly

to the policyholder by the insurance company—does not.

Other courts, in different contexts to be sure, have used

the “inducement” reasoning to apply McCarran.

Before turning to two other cases which I find helpful

on this issue, I emphasize again, as discussed * in Cochran,

** For an appraisal of Gerlach, see Krischer, ‘‘Truth’’ in Insur-

ance Premium Financing, 30 Business Lawyer 969, 973-74 (1975).

** The legislative history of the Act is less extensive in areas

outside the antitrust sphere—and understandably so. South-East-

ern, after~all was an antitrust case and Congressional debate

46a

ante, 606 F.2d at 464, that there is no reason not to apply

standards developed in antitrust cases in interpreting

the terms of the McCarran Act. “Regulating” for anti-

trust purposes does not mean something different than

“regulating” for purposes other than antitrust."® It is well

to remember what the Supreme Court said in National

Securities. “Statutes aimed at protecting or regulating

this relationship [between the insurance company and

the policyholder], directly or indirectly, are laws regulat-

ing the ‘business of insurance.’ ” 393 U.S. at 460, 89 S.Ct.

at 569, 21 L.Ed.2d at 676 (emphasis added). To be sure,

National Securities focused on what comprised the insur-

ance business, but there is not a hint in that or any Su-

preme Court case of which we are aware—and Perry cites

none—that the fine distinction asserted is warranted.

In Dexter v. Equitable Life Assurance Soc., 2 Cir., 1975,

927 F.2d 233, 235, the plaintiff brought an antitrust action

against Equitable for requiring him to purchase life insur-

ance as a precondition to granting mortgage loans. Follow-

ing Addrisi v. Equitable Life Assurance Soc., 9 Cir., 1974,

focused primarily on reversing its effects. See, for example, the

Senate debate on the Conference Report attached as an Appendix

to the dissent of Judge Godbold in Crawford v, American Title

Ins. Co., 5 Cir., 1975, 518 F.2d 217, 230-36.

**The argument to the contrary seems to be that McCarran

antitrust cases address primarily two issues: (i) Is the activity

within the business of insurance? and (ii) To what extent is the

business regulated by state law? On the other hand, in non-anti-

trust cases, Perry argues, a third issue must be decided, namely,

does the application of the relevant federal law ‘*invalidate, im-

pair, or supersede’’ the state law? From this, Perry asserts that

the antitrust cases defining ‘‘regulate’’ cannot be read in a vacuum

apart from the cases construing ‘‘invalidate, impair, or super-

sede.’’ For reasons addressed hereinafter, we do not believe that

the District Court was guilty of this analytical mistake. See Part

III-C, infra.

47a

903 F.2d 725, cert. denied, 1975, 420 U.S. 929, 95 S.Ct. 1129,

43 I..Ed.2d 400, the Second Circuit held that the challenged

tying arrangement was part of the business of insurance

under National Securities’ insured-insurer relationship

standard. The Second Circuit stated:

An insurance company’s methods of inducing people

to become policyholders pertain to the company -policy-

holder relationship, and thus constitute an integral

part of ‘the business of insurance.’

Id. at 235.

The Court would distinguish these cases by saying that

the purchase of insurance “was actually a requirement,

and forcing prospective policyholders to buy insurance

cannot be equated with making the purchase ‘easier’ by

offering premium financing.” Ante, 606 F.2d at 471, note 6.

While premium financing may make the purchase of in-

surance “easier” for some, I am sure there are many

others for whom such financing is quite necessary in order

to acquire insurance coverage. In any event, premium

financing is certainly as much an inducement for the pur-

chase of insurance as advertising, which is covered by

the McCarran Act exemption. In sum, I find these cases

parallel the facts before us and do give us guidance.

In effect, the Court adopts Perry’s attempt to avoid the

hard cold fact that this transaction was between the in-

surer and the policyholder by pointing out that Fidelity

negotiated the promissory note to a bank. She argues that

the effect of the note created a separate debtor-creditor

relationship between Perry and a different entity. Thus,

she asserts, Fidelity “has created an arrangement with a

third party which, although possibl[y] related to the

‘business of insurance’, is nevertheless ‘so remotely re-

lated’ as to remain subject to not inconsistent require-

ments of Federal laws like the Truth-In-Lending Act, and

48a

outside the protection of the narrow McCarran Act

exemption.”

I fail to see what possible bearing the subsequent nego-

tiation of Perry’s promissory note could have on the

original transaction between Perry and Fidelity insofar

as the McCarran Act is concerned. Perry was and re-

mained the policyholder and Fidelity was and remained

the insurer. The later negotiation may have created a new

and separate debtor-creditor relationship between Perry

and the bank, but that new relationship did not alter or

supplant in any respect the original, ongoing Perry-

Fidelity consanguinity.

Finally, the Court holds in effect that the loan was not

vitally connected with the insurance policy ; in other words,

Perry could have paid cash and avoided financing alto-

gether. The theory is that financing of the premiums is

unrelated to the policy, its reliability, interpretation or

enforcement. No authority is cited to support this theory

which I believe defies both precedent and logic. First, the

Supreme Court teaches that the litmus test is not a “vital

connection” between the activity and the policy; it is the

connection between the insurance company and the policy-

holder and what transpires between them—the “ ‘insur-

ance’ relationship,” with which Congress was concerned.

National Securities, 393 U.S. at 460, 89 S.Ct. at 568-69,

21 L.Ed.2d at 676. Second, I cannot see any less vital

connection between that insurance relationship and pre-

mium financing on the one hand, and advertising, for

example, on the other. Obviously the precise metes and

bounds of the term “business of insurance” are far from

clear and we need not set them here. But where, as in the

present case, the core relationship exists, we are well

within McCarran, no matter how broadly or narrowly its

exemption is construed.”

os The cases cited by Perry to support the proposition that credit

disclosure is not the business of insurance are inapposite: Hamil-

49a

C. “Regulating”’

Although the Court did not address this issue, I must

face it under Cochran’s analytical approach as succeeding

steps to achieve affirmance, not reversal. In 1957, Alabama

—expressly responding to the Congressional invitation

extended by the specific moratorium in the McCarran

Act '“—passed the Insurance Trade Practices Law, Title

ton Life Ins. Co. v. Republic Nat’l Life Ins. Co., S.D.N.Y., 1968,

291 F.Supp. 225, aff’d, 2 Cir., 1969, 408 F.2d 606; Hart v. Orion

Ins. Co., 10 Cir., 1971, 453 F.2d 1358; Sears, Roebuck & Co. v.

All States Life Ins. Co., 5 Cir., 1957, 246 F.2d 161; United States

v. Syivanus, 7 Cir., 1951, 196 F.2d 96 (McCarran Act not a de-

fense to indictment for use of mails to defraud in the sale of insur-

ance policies): Hill v. National Auto Glass Co., N.D.Cal., 1968,

293 F.Supp. 295; Fry v. John Hancock Mutual Life Ins. Co., N.D.

Tex. 1973, 355 F.Supp. 1151; American Family Life Assurance

Co. v. Planned Marketing Assoc., E.D.Va., 1974, 389 F.Supp. 1141.

Of these cases only Hart and Fry involved a direct relationship

between the insured and the insurer. In Hart, the plaintiff sought

to invoke the arbitration provision in his policy and the Court

held that the states involved did not regulate the business of in-

surance 453 F.2d at 1360. The Court never reached the question

whether arbitration constituted the business of insurance. Fry is

equally unhelpful to Perry since the District Court later reversed

itself in light of Addrist, supra, in an opinion which unfortunately

was not published, Civil No, CA-2-1301, N.D.Tex., Amarillo Div.,

June 5, 1975.

18 Ala. Code tit. 28A, § 227(1) provides:

The purpose of this chapter is to regulate trade practices

in the business of insurance in accordance with the intent of

congress as expressed in the act of congress of March 9, 1945

(Publie Law 15, 79th Congress [ch. 20, 59 U.S.Stat. at Large

33].) by defining, or providing for the determination of, all

such practices in this state which constitute unfair methods

of competition or unfair or deceptive acts or practices and

by prohibiting the trade practices so defined or determined.

(Emphasis added.) It is obvious that the Alabama Legislature

meant to cover not only those acts it specifically proscribed but

those determined by the Insurance Commissioner to be unfair or

deceptive at a subsequent date.

50a

28A, § 227 et seq., Code of Alabama. Section 228 specifi-

cally forbids “any trade practice which is defined in this

chapter as, or determined pursuant to this chapter to be,

-.. an unfair or deceptive act or practice in the business

of insurance.” (Emphasis added.) The Insurance Com-

missioner is given various administrative and supervisory

powers to enforce the Act’s prohibitions. Significantly,

those powers extend not only to specific practices banned

by the Act, but to unfair practices not defined. Ala.Code

tit. 28A, § 247(1) provides in pertinent part:

Whenever the commissioner has reason to believe

that any person engaged in the business of insurance

is engaging in this state in... any act or practice in

the conduct of such business which is not defined in

this trade practices law, that such... act or practice

is unfair or deceptive and that a proceeding by him

in respect thereto would be to the interest of the

public, he may issue and serve such person a state-

ment of the charges in that respect and a notice of

hearing thereon .. ..”°

*° § 247(2) provides for instigation of court proceedings :

(2) If such report charges a violation of this trade prac-

tices law and if such method of competition, act or practice

has not been discontinued, the commissioner may, through the

attorney general of this state, at any time after thirty (30)

days after the service of such report, cause a petition to be

filed in the circuit court of this state within the circuit

wherein the person resides or has his principal place of busi-

ness, to enjoin and restrain such person from engaging in

such method, act or practice. The court shall have jurisdiction

of the proceeding and shall have power to make and enter ap-

propriate orders in connection therewith and to issue such

writs as are ancillary to its jurisdiction or are necessary in

its judgment to prevent injury to the public pendente lite.

5la

Furthermore, insurance forms must be submitted to the

Commissioner and none can be used without his approval.”

Forms which are misleading are subject to disapproval or

withdrawal of prior approval.*! Section 28 authorizes the

Commissioner to promulgate regulations for the effectua- -

tion of the form approval system and other provisions

of the Act.

The District Court found first, that pursuant to this

authority, the Commissioner had issued guidelines speci-

fically related to the practice of offering life insurance to

college students under a premium financing arrangement.”?

*° Ala. Code tit. 28A, § 321 reads in part:

(1) No basic insurance policy or annuity contract form,

or application form where written application is required and

is to be made part of the policy or contract, or printed rider

or endorsement form or form of renewal certificate, shall be

delivered, or issued for delivery in this state, unless the form

has been filed with and approved by the commissioner.

** Under § 322, the Commissioner may disapprove the forms on

several grounds, three of which are relevant here: (i) if the form

violates or fails to comply with Title 28A; (ii) if it has any title,

heading, or other indication of its provisions which is misleading ;

and (iii) if it contains provisions which are unfair, inequitable,

or contrary to the public policy of Alabama or which would, be-

cause such provisions are unclear or deceptively worded, encourage

misrepresentation.

** These guidelines, which delineate the purposes they were de-

signed to serve, are set forth in full:

JANUARY 1, 1971

Effective January 15, 1971

SUBJECT: GUIDELINES TO BE FOLLOWED BY COM-

PANIES OFFERING LIFE INSURANCE PLANS TO

COLLEGE STUDENTS UNDER A PREMIUM FINANC-

ING ARRANGEMENT

Proceeding under the assurance that a Life Insurance

Plan sold to a College Student is:

(a) A good source of business for life insurance companies.

52a

(b) A good plan on which young people can establish a

sound financial insurance program.

It is felt, nevertheless, that this type of program presents

certain areas of concern, particularly in the presentation of

the policy when a premium financing arrangement is offered

in connection with the sale of it.

In hope of strengthening this type of marketing procedure

and at the same time offering additional safeguards for the

protection of this segment of the insurance buying public, the

following guidelines and procedures will be adopted by all

companies and their agents offering this type policy in this

state.

1. If the insured is a minor and executes a promissory note

for the payment of the first year’s premium, such note must

be co-signed by the insured’s parent, legal guardian, or adult

spouse.

2. The giving of a promissory note in connection with the

first premium must be set out in the application over the ap-

plicant’s signature, showing the amount of the note, and the

amount of any down payment made to an agent at the time

of sale. (Note—It is strongly recommended by this office that

a down payment be required as a prudent procedure.)

3. If a note is taken to finance less than the full first year

premium, the balance must be paid by the applicant at the

time the application is taken.

4. This down payment must be paid by the applicant in

eash or by valid executed note and any payment, directly or

indirectly, by the agent under any circumstances shall be

construed to be a rebate or special inducement.

5. A copy of the note and any assignment must be attached

to the policy, or in lieu thereof, the policy may contain a pro-

vision or endorsement which describes such financing arrange-

ment.

6. Upon delivery, a policy receipt or acceptance form must

be executed which recites that:

(a) The policy has been issued as represented

(b) The insured acknowledges and understands the pro-

visions and obligations of the financial indebtedness that he

has incurred.

7. Such receipt or acceptance form (outlined in Item 6

above) should be registered by number (preferably corre-

sponding to policy number) in the home office.

53a

(a) This receipt must be sent with the policy at time of

delivery only.

(b) These receipts or acceptance forms shall not be made

available as supplies to field representatives or agents but

must be furnished from the Home Office in transmittal of

the policy to the writing agent

8. Promissory notes should not be sold or otherwise trans-

ferred by the payee (agent), nor any commissions on the sale

paid to the agent until such form (outlined in Item 7 above)

has been received in the Home Office of the Company.

9. The note purchaser, assignee, or company shall notify

the note maker (Insured) and all co-makers regarding the

purchase or transfer of the note, after such purchase or trans-

fer, inviting any questions relative to the note, or the policy

which is used as collateral security for the note.

10. Maximum amount of any financing arrangement which

ean be executed in connection with such a transaction will

be in accordance with reasonable and sound underwriting

practices as determined by the management of the company.

(Note—It is the recommendation of this Office that a financed

program should not be sold to an undergraduate on a basis

where premiums would come due prior to the anticipated date

of graduation by the insured. )

11. The disturbing of any permanent insurance, including

the partial or total replacement of any provisions of an exist-

ing policy for the purpose of placing additional insurance,

will be cause for necessary investigation and review by this

Department’s personnel.

12. Agents or field representatives of the company who are

licensed by this State to represent the company as licensed

life agents may not represent, refer to or hold themselves out

to the public under any special title or as representatives of

any special policy or company division unless otherwise iden-

tified as a licensed agent of the company for which he holds

a license.

13. In the case of a request being made by an insured ex-

pressing a desire to cancel such a policy and premium arrange-

ment, this Office will expect and fully appreciate the coopera-

tien of the company and its agents in bringing such matters

to a satisfactory conclusion as expeditiously as possible.

If, at the time the letter of acceptance is presented with

the policy to the applicant for his signature and he decides

54a

Second, the Fidelity-Perry form at issue * had been both

submitted to and approved by the Commissioner. Third,

the Court, applying the definition—a state regulates the

business of insurance when it has generally authorized or

he does not wish the plan, the policy will be returned to the

company with his signed request for release. The policy and

note will then be cancelled and the applicant released from

any liability, and refund made of any down payment,

14. It is recommended that the cash values shown at the

time of presentation should be a specimen of the policy being

offered and not for a larger policy. For example, if you are

selling a $10,000 policy, you should show the values for this

policy and not for a $50,000 or $75,000 program. This leads

to misunderstanding on the part of the insured when he re-

ceives his $10,000 policy and the cash values are less than

what he was shown at the time of sale.

NOTE—If a sales presentation is made for an amount of in-

surance greater than that sold, then an appropriate summary

must be given to the Insured for the exact amount of policy

sold not later than the date of delivery

15. All sales material, notes, and other forms used in the

sale of such programs must be submitted in duplicate with

duplicate Jetters of transmittal at the time that the policy

form is submitted for approval. If found acceptable, the

duplicate copy of such materials will be returned as ‘‘filed’’.

No such material may be used until so ‘‘filed’’ with the De-

partment. No materials may be added or amended unless first

submitted and found acceptable as outlined above.

16. Effective Date. This Bulletin shall be effective on and

after January 15, 1971.

Done and ordered at Montgomery, Alabama, this 30th day

of December A. D., 1970.

R. FRANK USSERY ‘

SUPERINTENDENT OF INSURANCE

38 See note 2 of the Court’s opinion, ante.

55a

permitted certain standards of conduct **—concluded that

Alabama regulates the business of insurance within the

meaning of §2(b) of the McCarran Act.

Since the Court takes no position on this, I am forced

to consider the argument put forward by Perry. She chal-

lenges this holding by comparing the meager requirements

of the Alabama guidelines to the detailed requirements

of TIL. She does not argue that Alabama fails to regulate

the business of insurance at all, but that the State does

not regulate it in a manner that will fulfill the purpose of

TIL: to afford a meaningful comparison of credit terms.

Perry essentially contends that form approval is meaning-

less in the absence of the specific credit disclosure require-

ments of TIL and posits the possibility that Fidelity could

have submitted an entirely different form containing none

of the disclosures and still have received approval within

the existing regulations.

There are several answers to this contention. First, we

have a form on which certain disclosures were made (see

note 2 of Court’s opinion, ante). The State approved that

form—not a hypothetical one containing fewer or less de-

tailed disclosures.** And if we are going to posit possibili-

ties, for all we know the Insurance Commissioner could

have determined that the Fidelity form was quite sufficient

to make understandable “the provisions and obligations

of the financial indebtedness that [s]he ha[d] incurred”

(Guidelines, 6(b)) and that more detailed disclosures a la

TIL were unnecessary. See generally Davis, Protecting

Consumers from Overdisclosure and Gobbledygook: An

** This definition was first announced in California League of

Independent Ins. Producers v. Aetna Casualty & Surety Co., N.D.

Cal. 1959, 175 F.Supp. 857, 860. See text accompanying notes 27 °

and 28, infra.

2° Perry has conceded that there was some disclosure by char-

acterizing Fidelity’s efforts as ‘‘half-hearted compliance’’ with

TIL regulations.

56a

Emperical Look at the Simplification of Consumer Credit

Contracts, 63 Virginia L.Rev. 841 (1977); Comment, 19

Buffalo L.Rev. 656, 670 (1970). A comparison of the form

here and the TIL violations alleged (notes 2 and 3 of

Court’s opinion, ante) demonstrates that very technical

violations are involved. Under these circumstances, the

Alabama Insurance Commissioner could have viewed Fi-

delity’s disclosures as fair and not deceptive.”

But we need not play the speculation game. As discussed

in Part II, the law is clear that the particular scheme

Alabama adopts for regulating the business of insurance

is not a matter for the Courts to pass upon so long as it

is regulating that business within the meaning § 2(b) as

judicially interpreted.

Thus, we come to the definition of “regulating” which

was applied below—a state regulates the business of in-

surance when it has generally authorized or permitted

certain standards of conduct. This test was first announced

in California League of Independent Producers v. Aetna

Casualty & Surety Co., N.D.Cal., 1959, 175 F.Supp. 857,

860. Despite the fact that it has been widely followed with

only slight variation elsewhere *“—and in the Fifth Cir-

76 [T]he obvious intent of Congress was to set standards by

which to achieve meaningful ‘‘truth-in-length’’ and not to

deviously set traps by which windfalls could be reaped by

fanciful lawyers.

Philbeck v. Timmers Chevrolet, Inc., 5 Cir., 1974, 499 F.2d 971,

981 n.22, quoting Andrucci v. Gimbel Bros., Inc., W.D.Pa., 1973,

365 F.Supp. 1240, 1243.

*7 EF. g., Lawyers Title Co. v. St. Paul Title Ins. Corp., 8 Cir.,

1975, 526 F.2d 795, 797; Ohio AFL-CIO v. Insurance Rating Bd.,

6 Cir., 1971, 451 F.2d 1178, 1181, cert. denied, 1972, 409 U.S. 917,

93 S.Ct. 215, 34 L.Ed.2d 180; Pterucci v. Continental Casualty

Co., W.D.Pa., 1976, 418 F.Supp. 704, 709; McIlhenny v. American

Title Ins. Co., E.D.Pa., 1976, 418 F.Supp. 364, 369; Mathis v.

Automobile Club Inter-Ins. Exchange, W.D.Mo., 1976, 410 F.

Supp. 1037, 1040; Gerlach v. Allstate Ins. Co., S.D.Fla., 1972, 338

F.Supp. 642, 650; Holly Springs Funeral Home v. United Funeral

Serv., Inc., N.D. Miss., 1969, 303 F.Supp. 128, 135.

57a

cuit *“—Perry insists that this standard applies in anti-

trust cases and is not “necessarily relevant in determining

whether or not the McCarran Act acts as a bar” to TIL.

By adopting the decision of the District Court for the

Northern District of Alabama in Crewford v. American

Title Ins. Co., 1975, 518 F.2d 217, 218, this Circuit estab-

lished *® the applicable standard for us to follow:

The McCarran Act renders the federal [act] in-

applicable when state legislation generally proscribes,

permits or otherwise regulates the conduct in question

and authorizes enforcement through a scheme of ad-

ministrative supervision.

There is no doubt that Alabama has regulated the

Fidelity conduct challenged here to a plainly sufficient

degree to pass this test. The Alabama statute generally

proscribes any act which the Commissioner deems to be

unfair and deceptive and has clearly authorized enforce-

28 Crawford v. American Title Ins. Co., 1975, 518 F.2d 217, 218.

2 A year earlier, this Court in Battle v. Liberty National Life

Ins. Co., 1974, 493 F.2d 39, 51 n.12, specifically declined to decide

what the appropriate standard should be:

In determining whether there is state regulation of the

insurance business, the courts have adopted varying points of

view. In Ohio AFL-CIO v. Insurance Rating Board, 451 F.2d

1178 (6th Cir., 1971), cert. den., 409 U.S. 917, 93 S.Ct. 215,

34 L.Ed.2d 180 (1972), the court stated that the requirement

of state regulation under the McCarran Act is satisfied if the

state has ‘‘ ‘generally authorized or permitted certain stand-

ards of conduct.’’’ Jd. at 1182. The regulatory scheme was

considered sufficient even though it may not have been en-

forced. In Travelers Ins. Co. v. Blue Cross, 481 F.2d 80 (3

Cir. 1973), the court recognized the test set forth in the in-

surance rating case, but then found that the state regulation

was more ‘‘aggressive’’ and encompassing. Because we dis-

agree with the district court for other reasons specified above,

we need not determine either the standard or the extent of

insurance regulation in Alabama at this time.

58a

ment through a scheme of administrative supervision.

Regulations have been issued specifically with regard to

the sale of life insurance policies to college students under

premium financing arrangements. The Fidelity forms have

been submitted and approved. In this connection, other

courts have placed weight on state supervision of insur-

ance company contracts and forms in determining whether

the state was “regulating” the business of insurance for

McCarran purposes. 7'ravelers Ins. Co. v. Blue Cross, 3

Cir., 1973, 481 F.2d 80, 83, cert. denied, 414 U.S. 1093, 94

S.Ct. 724, 38 L.Hd.2d 550; Pierucci v. Continental Casualty

Co., W.D.Pa., 1976, 418 F.Supp. 704, 709. As detailed

above, the Commissioner is empowered to remedy decep-

tive or unfair practices, not only through withdrawal of

approval or disapproval of forms but by court action as

well.

Perry basically urges us to hold that unless Alabama

adopts the same requirements for insurance companies

that TIL places on others, it is not “regulating” the busi-

ness of insurance. But it is not for us to say in what

precise manner that State should determine whether Fi-

delity’s credit disclosure practices vis-a-vis its policyhold-

ers are unfair or deceptive. Alabama has undertaken su-

pervision of the sale of life insurance policies to college

students such as the one sold to Perry and has set the

standards which it believes are necessary to protect Ala-

bama insureds. McCarran’s “regulating” requirement is

thus satisfied.

D. “Invalidate, Impair, Or Supersede”’

Again, I must take an issue not addressed by the Court.

The District Court held that the application of TIL “to

disclosure forms and statements which have been submit-

ted to and approved by the Commissioner of Insurance...

would ¢ ‘ow the Federal Act to supersede state regulation

of this aspect of the business of insurance, and invalidate

59a

those state regulations which might be inconsistent with

the Federal Act, e. g., paragraphs 2, 5, and 6 of the guide-

meee

In attacking this holding, Perry strenuously urges that

imposition of TIL requirements here would not result in

a conflict between the state and federal laws. I construe

this argument to mean essentially that supplementary

TIL requirements can be imposed without invalidating,

impairing, or superseding Alabama law. Apart from the

fact that the same could be said about almost any law,

I do not believe that “invalidate, impair, or supersede”

means the mere absence of conflict. That term includes the

displacement of, or the superimposition of federal require-

ments on, transactions that are tailored to meet state

requirements. Variable Annuities, supra, 359 U.S. at 68,

79 S.Ct. at 620, 3 L.Ed.2d at 643.

For example, under the Alabama guidelines, {| 2 (note 22,

supra), the insurance company is required to disclose “the

amount of any down payment made to the agent at the

time of the sale.” Fidelity’s form (note 2 of the Court’s

opinion ante) listed “Cash Downpayment.” Perry’s com-

plaint alleged the failure to disclose in addition the “total

downpayment” as required by § 226.8(c)(2) of Regulation

Zz."

While I would concede that there would be no “conflict”

in imposing § 226.8(c)(2)’s “total downpayment” disclo-

sure rule here, I do not agree that such imposition would

not invalidate, impair, or supersede the Alabama guide-

lines. I believe that the imposition of any additional re-

quirements—whether conflicting or nonconflicting—would

*° The guidelines are set forth in note 22, supra,

** Perry made no payment, down- or otherwise, other than the

$10 cash downpayment disclosed. Thus, even if Fidelity had ‘‘dis-

closed’’ to Perry the total downpayment, that amount would have

remained $10.

60a

impair or supersede Alabama’s laws and regulations be-

cause that supplementation would take from the State

the power to regulate exactly as it sees fit. And it would

in turn repeal the McCarran Act by implication in a situa-

tion where Congress has not expressed its will to do SO.

I would be unwilling to judicially legislate additional,

nonconflicting or conflicting TIL requirements onto Ala-

bama’s present specific regulation of the sale of life in-

surance policies under premium financing arrangements.

To do so would render McCarran meaningless and impose

“barrier[s] to the regulation ... of [the insurance | busi-

ness by the several States” in direct contravention of

section 1 of the Act, 15 U.S.C.A. § 1011. If Perry believes

that insurance companies who sell policies under premium

financing arrangements should be subjected to the require-

ments of TIL, her proper resort is to Congress.

Finally, Perry argues that by enacting $111 of TIL,

15 U.S.C.A. § 1610,** Congress intended an accommodation

of state and federal law. While undoubtedly true, this

contention completely overlooks the Congressional promise

*? § 1610. Effect on other laws—Inconsistent provisions

(a) This subchapter does not annul, alter, or affect, or

exempt any creditor from complying with, the laws of any

State relating to the disclosure of information in connection

with credit transactions, except to the extent that those laws

are inconsistent with the provisions of this subchapter or

regulations thereunder, and then only to the extent of the

inconsistency.

State credit charge statutes

(b) This subchapter does not otherwise annul, alter or

affect in any manner the meaning, scope or applicability of

the laws of any State, including, but not limited to, laws

relating to the types, amounts or rates of charges, or any

element or elements of charges, permissible under such laws

in connection with the extension or use of credit, nor does

this subchapter extend the applicability of those laws to any

class of persons or transactions to which they would not other-

wise apply.

6la

contained in McCarran that it would speak out if a federal

act passed under the Commerce Clause * was to apply to

the business of insurance. In a similar vein, Perry urges

that Alabama has not taken advantage of the total exemp-

tion afforded in 15 U.S.C.A. § 1633.%* This position also

ignores the clear intendment of the McCarran Act. I agree

with the Seventh Circuit’s rejection of the same conten-

tion raised in Lowe v. Aarco-American, Inc., 7 Cir., 1976,

536 F.2d 1160.*° If Alabama chooses to enact a law similar

to TIL in order to qualify for credit transaction exemp-

tions, it can do so. It can also regulate this aspect of the

business of insurance in a manner which it thinks most

suitable to protect Alabama policyholders. One has nothing

to do with the other.

I would emphasize one thing. I have expressed my

opinion here on a very narrow question. What the result

might have been if Alabama did not require form approval

or if the Insurance Commissioner had not issued guidelines

specifically relating to the sale of life insurance policies

to college students is a case which I do not address.**

** TIL was clearly enacted under the Commerce Clause. Mourn-

ing v. Family Publications Service, Inc., 1973, 411 U.S. 356, 377,

93 S.Ct. 1652, 1665, 36 L.Ed.2a 318, 334.

** § 1633. Exemption for State-regulated transactions

The Board shall by regulation exempt from the require-

ments of this part any class of credit transactions within any

State if it determines that under the law of that State that

class of transactions is subject to requirements substantially

similar to those imposed under this part, and that there is

adequate provision for enforcement.

°° However, I do join the Court, Cochran, 606 F.2d at 465, ante,

note 13, in rejecting the other holding of Lowe v. Aarco-American,

536 F.2d at 1162, that the McCarran Act applies when the trans-

action involves the insurance business, even if neither party is an

insurance company.

°° In the few cases that have involved McCarran Act defenses

to TIL claims, once the courts have found that the particular

62a

However, on the facts as they do exist, I would affirm

the holding of the District Court that the McCarran Act

does preclude application of TIL.

Appendix

Excerpts From 91 Congressional Record January 25, 1945

(Senate)

[1] At 479:

Mr. MURDOCK. I invite the Senator’s attention to para-

graph (b) of section 2 of the bill, reading as follows:

(b) No act of Congress shall be construed to invalidate,

impair, or supersede any law enacted by any State for the

activity is part of the business of insurance and that the state

has regulated that activity, they have automatically found that

application of TIL would invalidate, impair, or supersede state

law. In Gerlach, supra, the Court seemed to hold that Florida’s

statutory control over the fixing of insurance rates was enough to

trigger McCarran. In discussing an issue not before it—premium

financing—the Court found that certain sections of the Florida

statute set forth what disclosures were required to be made in a

premium financing agreement. The Court stated: ‘‘It is immaterial

that the regulation is not the same. What is controlling is that

the regulation exists.’’ 338 F.Supp. at 650.

In Lowe v. Aarco-American, Inc., 7 Cir., 1976, 536 F.2d 1160,

the Court of Appeals found that the credit sale of policies by an

insurance broker and a premium finance company constitutes part

of the business of insurance which Illinois regulated under its In-

surance Code and the Premium Financing Companies Act. Relying

on Gerlach’s dictum, the Court held that application of TIL would

supersede Illinois law on the same subject, namely, disclosure.

In Ben v. General Motors Acceptance Corp., D.Colo., 1974, 374

F.Supp. 1199, the plaintiff brought a TIL claim against GMAC

and its insurance subsidiaries. The Court stated that Colorado has

‘occupied the field of regulating the activities of insurance com-

panies in a comprehensive manner’’. Again following Gerlach, it

held that because TIL does not specifically relate to the business

of insurance, it does not apply when the state has exercised its

right to regulate and control that business. Ben can thus be read

to stand for the proposition that mere general legislation in the

field of insurance results in barring a TIL claim.

63a

purpose of regulating the business of insurance, or which

imposes a fee or tax upon such business, unless such act

specifically so provides.

That part of the bill is applicable, is it not, to Federal

statutes now in existence?

Mr. FERGUSON. That is the purpose of the section.

Mr. MURDOCK. It is also applicable, is it not, to any

Federal statutes which may be enacted in the future?

Mr. FERGUSON. Yes; provided the statutes do not

specifically relate to insurance.

Mr. MURDOCK. If the Senator will pardon me, I agree

with him that the language affects only statutes the subject

of which is insurance.

Mr. FERGUSON. Or specifically relating to insurance.

Mr. MURDOCK. Yes. But certainly that part of the bill

to which I have referred would allow repeal by State legis-

latures of the Sherman Act so far as it relates to insurance

unless the Congress of the United States should amend the

Sherman Act so as to provide specifically either the repeal,

invalidation, or impairment of such a State law.

Mr. FERGUSON. I appreciate the Senator has used the

word “repeal.” The bill would not go so far as to repeal

the Sherman Act except as there would be a temporary

repeal until the dates mentioned in the so-called mora-

torium section. |

[2] At 480-81:

Mr. O’MAHONEY. Does the Senator from Michigan

desire that the bill, if it shall be passed by this body, shall

be interpreted anywhere as an intention of Congress to

permit monopoly to be established in the insurance in-

dustry? :

64a

Mr. FERGUSON. No; by no means does the bill antici-

pate that any act would or should be passed which would

create monopoly.

Mr. O’MAHONEY. Then, does the Senator believe that

the bill as it now stands permits that interpretation?

Mr. FERGUSON. It would permit it. I understood the

Senator from Wyoming to be familiar with the language

on page 2, which was read by the able Senator from Utah,

and I think the bill is broad enough to allow a State to

pass a law allowing any agreement or contract other than

those inhibited in paragraph (b) of section 4. But it is not

the purpose of the bill at all to foster monopoly, or to

anticipate that any act will be passed permitting or even

encouraging monopoly. A State law relating to taxation,

a law relating to regulation, for instance, the fixing of

rates, or the fixing of the terms of a contract of insurance,

which might under some definitions of monopoly be mono-

polistic, would be permitted under the pending bill; but

if the State law undertook to authorize a boycott, a coer-

cion, or an intimidation, or an agreement to do any one of

those three things, then it would be clearly void because

Congress would have already spoken, and once Congress

speaks on interstate commerce, no State can speak con-

trary to the congressional declaration.

Mr. MURDOCK. The bill does not say what the Senator

has indicated. What the bill says is that every act of Con-

gress in existence now or which may be enacted in the

future dealing with the question of insurance or the regu-

lation of insurance shall not be construed—and that is

pretty strong language—“to invalidate, impair, or super-

sede any law enacted by any State for the purpose of regu-

lating the business of insurance, or which imposes a fee or

tax upon such business, unless such act specifically so

provides.”

65a

So we would do what? We would say to the State legis-

latures, “You can pass any law you desire with reference

to insurance and the regulation thereof which does not

involve agreements or acts of boycott, coercion, or intimi-

dation, unless the Congress at some future date specifically

repeals or invalidates your State law.”

I wonder if the Congress of the United States wants to

do that.

Mr. FERGUSON. The bill does not go as far as that.

* * * * * * * * + 7.

Mr. MURDOCK. My understanding of what the Senate

Judiciary Committee wanted to do and what I hoped it

would do was that we would by the enactment of a bill of

this kind call the attention of the respective States of the

Union to the fact that the Supreme Court of the United

States had held that the business of insurance is commerce,

and knowing that certain hardships were inevitable because

of past practice and procedure, it was my intention, and

I thought the intention of the Committee on the J udiciary,

to say to the States, “For a certain period, long enough

for you to take action, you will be allowed to make adjust-

ments of your State laws to harmonize with the decision

of the Supreme Court of the United States.” But under

the bill we would not do that. In my opinion, we would

do exactly what the Senator from Wyoming implies we

would do—that is, invite the respective State legislatures

to pass acts which would permit agreements which would

otherwise be in violation of the Sherman Act.

Mr. FERGUSON. Mr. President, I think an explanation

of paragraph (b) of section 2 should be made at this time.

The purpose of that provision is very clear, that Congress

did not want at the present time to take upon itself the

responsibility of interfering with the taxation of insurance

or the regulation of insurance by the States. We were able

to single out and to indicate that we had in mind three

66a

acts of which we wanted to make exceptions, because they

did not relate to insurance. I read from the bill:

Sec. 3. Nothing contained in the act of September 26,

1914, known as the Federal Trade Commission Act, as

amended, or the act of June 19, 1936, known as the Robin-

son-Patman Antidiscrimination Act, shall apply to the

business of insurance or to acts in the conduct of that

business.

Now on page 3, and we find section 5:

Sec. 5. Nothing contained in this act shall be construed

to affect in any manner the application to the business of

insurance of the act of July 5, 1935, as amended, known

as the National Labor Relations Act, or the act of June

25, 1938, as amended, known as the Fair Labor Standards

Act of 1938.

Mr. MURDOCK. Will the Senator yield?

Mr. FERGUSON. Permit me a further word of expla-

nation.

Mr. MURDOCK. Very well.

Mr. FERGUSON. If there is on the books of the United

States a legislative act which relates to interstate com-

merce, if the act does not specifically relate to insurance,

it would not apply at the present time. Having passed the

bill now before the Senate, if Congress should tomorrow

pass a law relating to interstate commerce, and should not

specifically apply the law to the business of insurance, it

would not be an implied repeal of this bill, and this bill

would not be affected, because the Congress had not, under

subdivision (b), said that the new law specifically applied

to insurance. I think that makes the bi!l very clear.

{[3] At 481:

Mr. RADCLIFFE. I hesitate to differ with the Senator

from Utah [Mr. Murdock], but I want to call his attention

67a

to a fact which is, of course, very obvious, that the difficul-

ties of working out the insurance readjustment following

the decision of the Supreme Court are colossal. I do not

believe any one who does not come very closely in contact

with the insurance business can realize that the decision

by the Supreme Court to which reference has been made

is one of the most far-reaching ever rendered by that

Court. It means that an enormous business which, with

the unqualified approval of the Federal Government, has

operated for many years in a certain way, must now meet

the new and fundamental conditions involved necessarily

in any passage from State to Federal regulation. That

does not involve merely one but a thousand-and-one differ-

ent problems to be handled, many of them around the first

of the present calendar year.

[4] At 481-82:

Mr. RADCLIFFE. Mr. President, I called the Presi-

dent’s attention to the gravity of the situation and asked

for a moratorium. His response was favorable, as it was

later in answer to my letter of December 20. Of course,

no one knows what legislation any State might try to pass.

It might try to pass any sort of legislation, but it is ex-

tremely unlikely that any State, knowing that at the end

of several years the moratorium provided for in this bill

will come to an end, would try to run amok and pass any

such law as the Senator from Utah suggests.

In subsection (b) there are several purposes contem-

plated. The insurance commissioners and many of the

insurance companies have been in very great doubt as to

how they could operate at this time with respect to matters

of collection of premiums, general regulations, the issuing

of licenses, and many other aspects of the business. There-

fore, it seems very desirable that somewhere in this meas-

ure there should be a statement that the right of the States

to regulate and to collect taxes should not be terminated

or should not be repealed by implication. Otherwise, I

68a

think the States may find themselves from time to time in

a very serious situation in trying to function. Unless it is

clearly stated somewhere that there is not a repeal by

implication, such omission is likely to throw restraint upon

or put serious hindrance in the way of the States function-

ing properly. In giving a moratorium to a business and to

State governments harassed greatly by the effect of the

decision of the Supreme Court, let us not do so begrudg-

ingly or in a halfway fashion which might prove to be

gravely insufficient to meet situations which we cannot

today foresee.

[5] At 482-83:

Mr. FERGUSON. I should like to answer the question

of the Senator from Maryland first. The language of sec-

tion 2 answers the question:

The business of insurance, and every person engaged

therein, shall be subject to the laws of the several States

which relate to the regulation or taxation of such business.

That is the insurance business. So the bill specifically

provides that the State laws shall apply to taxation and

regulation of insurance.

Mr. MURDOCK. I wanted to make exactly the state-

ment to the distinguished Senator from Maryland that

the Senator from Michigan has made, and that is that

nothing could be more emphatic or plainer than subsection

(a) of section 2:

The business of insurance, and every person engaged

therein, shall be subject to the laws of the several States

which relate to the regulation or taxation of such business.

When we go that far Congress expresses itself emphatic-

ally that the regulation of the insurance business should

be under State law. But when we take the next step in

subsection (b) it is an invitation, in my opinion, to do the

69a

very thing that I, and I hope the Senator from Maryland,

want to prohibit.

+ % * + * . 7 . 7 *

Mr. RADCLIFFE. I agree with the Senator from Utah

that the statement in subsection (a) of section 2 is quite

definite and clear. But it has seemed to those who have

been working upon this bill that there was some need or

at least advisability that there should not be any repeal by

‘implication. The statement beginning on page 1 is a general

statement setting forth the purposes.

Since there seems to be doubt in the minds of certain

people that there might be repeal by implication or that

a general statement might have some crimping effect, it

would not be at all unusual if a saving clause were put in

the bill. It may not be necessary, but in the spirit of

caution I think it might be desirable, especially knowing

the very serious problems which have been confronting

the insurance companies and the various States to leave

them free to meet conditions some of which cannot now

be foreseen. We want the companies to understand clearly

and we desire the States to realize definitely that the States

can go ahead and issue permits, collect taxes, and do the

various other things which are necessary to be done. For

that reason I think that full and unmistakable emphasis

upon that right is essential. It is unnecessary and unwise

to create any doubt as to the right of the States to go

ahead and function freely in handling insurance. ;

Mr. FERGUSON. Mr. President, I agree that it should

be very clear that the States can regulate and can tax

insurance in all its phases. Section 2, in my humble judg-

ment, is a very clear provision providing for such taxation

and such regulation. The language of the bill makes clear

the purpose of the legislation, that the taxation problem

will be taken care of, and that there will be no excuse for

paying under protest or not paying at all.

70a

Mr. FERGUSON.

Today the various States have laws relating to insurance.

It would be a physical impossibility to examine, in a short

time, all those State laws and their ramifications. One

State law provides that the insurance companies may fix

rates subject to the approval of the insurance commis-

sioner. Others provide that rates may be fixed if the Com-

mission does not repeal them.

Mr. O’MAHONEY. Does not subsection (a) of section 2

take complete account of that fact, and grant complete

protection to existing State laws?

Mr. FERGUSON. I agree that, as to existing State laws,

subsection (a) of Section 2 does so provide.

Mr. O’MAHONEY. Let me read it:

The business of insurance, and every person engaged

therein, shall be subject to the laws of the several States

which relate to the regulation or taxation of such business.

That is complete.

Mr. FERGUSON. I think that is correct.

Mr. O’MAHONEY. There is no reason for misunder-

standing on the part of any State official or any insurance

company or any policyholder with respect to the meaning

of that subsection as it applies to existing law.

Mr. FERGUSON. As it applies to existing law, that is

correct. However, subsection (b) provides for something’

further. It provides that no Federal legislation relating to

interstate commerce shall by implication repeal any exist-

ing State law unless such act of Congress specifically so

provides.

Mr. O’MAHONEY. The Senator puts his finger upon the

precise center of this dispute, or misunderstanding. Let

7la

me say to the Senator, that, recognizing the complexity

of this problem, and the desirability of maintaining State

regulation and State taxation, members of the Judiciary

Committee who were opposed to the proposal to grant a

blanket exemption from the antitrust laws desired to go

as far as was humanly possible in the direction of giving

the States a clear-cut opportunity to adjust State laws in

accordance with Supreme Court decisions and the antitrust

laws.

It is no secret that Senate bill 12, introduced by the

Senator from New Mexico [Mr. Hatch] and myself, and

Senate bill 340, the bill which was reported by the com-

mittee, are modifications of a measure which was originally

drafted by the legislative committee of the National Asso-

ciation of Insurance Commissioners. So there was an effort

to work with those groups. In drafting those two bills we

sought to spell out each particular law which might apply

to insurance. We referred specifically to the Federal Trade

Commission Act, the Robinson-Patman Act, the National

Labor Relations Act, and the Fair Labor Standards Act.

In other words, ‘a good-faith attempt was made to specify

every single law which had an application, or might have

an application, to insurance.

Section 2(b) was drafted and written into the bill which

I introduced, in the belief, not that it would be interpreted

as an additional exemption from the anti-trust laws, but

that it would be a sort of catch-all provision to take into

consideration other acts of Congress which might affect

the insurance industry, but of which we did not have knowl-

edge at the time.

[6] At 483-84:

Mr. BUSHFIELD. This whole controversy arose, Mr.

President, because of the custom and practice, which had

grown up in this country during a period of 75 years and

which had been upheld by the courts of the country, of not

72a

considering insurance to be commerce. The Supreme Court

finally decided otherwise.

Subsection (b), which has been referred to in the present

discussion, does not, it seems to me, relate at all to the

learned remarks just made by the Senator from Wyoming.

The subsection reads in part as follows:

Sec. 2. (b) No act of Congress shall be construed to

invalidate, impair, or supersede any law—

And so forth. The whole crux of the subsection is the

word “construed.”

The purpose of the framers of the bill, Mr. President,

was to provide against a sudden adverse decision by some

court in construing this Act or some State act thus throw-

ing the business of insurance into confusion. The word

“construed” is the whole crux of that particular subsection.

I think to eliminate it would destroy the assurance given

by the bill to the insurance business, and I would vote

against eliminating it.

Mr. FERGUSON. Mr. President. I think it can fairly

be stated that today absolute chaos exists in the insurance

world, and it has been caused by the decision of the

Supreme Court to which we have referred. The pending

bill is an attempt to remove and dissipate that chaos by

enacting a law by which the insurance companies will be

able to abide for the time being.

As I said before, the State of North Carolina, which I

am informed uses the revenue obtained from the taxation

of such companies for the payment of pensions, has advised

us that by February 15 of this year it will be compelled

to suspend the licenses of certain insurance companies and

all their agents to do business there because the companies

have decided that under the present chaotic conditions

they do not wish to pay the tax. They do not know whether

they should or should not pay it. If subsection (b) is

73a

deleted, I am of the opinion that we shall accomplish

nothing by enacting the bill; because the insurance com-

panies will still be unable to decide what they can or cannot

do, and for that reason they will abide by the provisions of

the State laws, and the present chaos will continue.

The bill does not provide for repeal of the Clayton Act

or of the Sherman Act, because if an attempt were made

to repeal them, before they could again become effective it

would become necessary to reenact them. So the language

of the bill is such as to provide that they will be in full

force and effect, except there will be a moratorium for a

certain period. Thus there will be no necessity for the

reenactment of those laws so as to make them apply to

insurance in the future, unless Congress desires to do so

by specific legislation.

[7] At 485-86:

Mr. REVERCOMB. Mr. President, I have listened with

interest to the discussion concerning the amendment to

paragraph (b) of section 2. It occurs to me that not only

does the proposed act provide for a suspension of the

Clayton Act and the Sherman Act, but the very purpose

of it is to restore the control of the insurance business

to the States. If we make the change proposed in this

section and say “until January 1, 1948”, then the bill in

its completeness will end in 1948. The present provision

is—and this was the measure reported unanimously by the

Committee on the Judiciary—

No act of Congress—

Existing at this time, or passed before this, or to be

passed in the future—

shall be construed to invalidate, impair, or supersede any

law enacted by any State * * * unless such act specifically

so provides.

74a

I do not think there should be any limitation of time

in the provision. We do not want the law to end on January

1, 1948. We want the business left in the control of the

States, unless by enactment in the future we specifically

state that we do not want something they are doing to be

continued.

Therefore, I call to the attention of

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