Appendix — American Deposit Corp. v. Schacht
Supreme Court brief1996
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IN THE
Supreme Court of the United States
OCTOBER TERM, 1995
AMERICAN DEPOSIT CORP. and BLACKFEET
NATIONAL BANK,
Petitioners,
Vv.
JAMES W. SCHACHT, individually and as Acting
Director of Insurance of the State of Illinois,
Respondent.
On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Seventh Circuit
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI
HENRY PAUL MONAGHAN THADDEUS HOLT
435 West 116th Street 1201 Pennsylvania Avenue N.W.
New York, New York 10027 Suite 821
(212)-854-2644 Washington, D.C. 20004
(202)-223-9010
GEORGE L. SAUNDERS, JR.
THOMAS F. BUSH, JR. (Counses of Record)
SAUNDERS & MONROE DENNIS M. GINGOLD
205 North Michigan Avenue AUKAMP & GINGOLD
Suite 4201 1201 Pennsylvania Avenue N.W.
Chicago, Illinois 60601 Suite 821
(312)-946-9000 Washington, D.C. 20004
Attorneys for Petitioners
August 1, 1996
Press of Byron S. Adams -:- Washington, D.C. -:- 1-800-347-8208
ho Oo DW p>
APPENDIX CONTENTS
. Opinions in the Court of Appeals ............
Opinion of Magistrate Judge in the District Court. 64a
Determination of the OCC .............0068. 97a
. Determination of the FDIC ................ 115a
Excerpts From the McCarran-Ferguson Act,
ge eg ge fd Neer Pree eee 127a
Excerpts From the National Bank Act,
ar as ak a eS 6d 00 8 8 8 128a
. Excerpts From Illinois Insurance Code ........ 129a
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APPENDIX A
3un the
United States Court of Appeals
For the Seventh Circuit
No. 95-2462
AMERICAN DEPOSIT CORPORATION
and BLACKFEET NATIONAL BANK,
Plaintiffs-Appellants,
v.
JAMES W. SCHACHT, individually and as Acting Director
of Insurance of the State of Illinois,
Defendant-Appellee.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 95 C 207—Edward A. Bobrick, Magistrate Judge.
ARGUED JANUARY 12, 1996—DeEcIDED May 13, 1996
Before CUMMINGS, FLAUM, and DIANE P. Woop, Circuit
Judges.
CUMMINGS, Circuit Judge. The National Bank Act (“Bank
Act”) arguably permits a national bank to sell an innovative
investment product known as the “Retirement CD.” The
Illinois Insurance Code (“Insurance Code”), however, pro-
hibits selling this product without 2 certificate of authority
from the Director of Insurance. Defendant Blackfeet Na-
tional Bank (“Blackfeet”) has no such certificate and sued
for a declaration that the Illinois Insurance Code cannot
stand in the face of the National Bank Act. The district
2a
court concluded that the sale of the Retirement CD was
the “business of insurance” within the meaning of the
McCarran-Ferguson Act, which reverses the rule of fed-
eral preemption, and thus held that the Illinois Insurance
Code applied regardless of whether the sale of the Retire-
ment CD was authorized by the National Bank Act. For
the following reasons, we affirm that decision.
wv
I.
The following facts are undisputed. Plaintiff American
Deposit Corporation, of Pine, Colorado (“ADC’’) owns and
licenses to banks an investment vehicle known as the Re-
tirement CD. The Retirement CD is structured such that
the purchaser qualifies for special tax treatment by the
Internal Revenue Service. A customer first deposits money
with an individual bank and selects a maturity date in
the future (usually the customer’s anticipated retirement
date). Interest then accumulates on the deposits until the
maturity date, at which time the depositor may withdraw
in a lump sum up to two-thirds of the account balance,
including the accrued interest. Thereafter, the customer
receives the remainder of the account in periodic pay-
ments for the rest of his life—essentially a lifetime an-
nuity. The amount of each payment is determined accord-
ing to mortality tables and a guaranteed interest rate.
The customer is assured of receiving the entire amount
of the account balance regardless of his lifespan; if he dies
prior to receiving that amount in monthly payments, the
remainder of the account is paid in a lump sum to his
estate or designated beneficiary.
Blackfeet is a small national bank located on the Black-
feet Indian Reservation in Browning, Montana and is a
licensee of the Retirement .CD. By late 1994, Blackfeet
was offering the Retirement CD to investors across the
country, although it had yet to accept a deposit from an
Illinois resident. Defendant Schacht, on behalf of the State
of Illinois, issued an order on December 9, 1994, direct-
ing Blackfeet to “immediately cease and desist any and
3a
all practices which purport to offer [the Retirement CD]
to residents of the State of Illinois.” The basis for the
order was that Blackfeet was e ngaging in the business
of insurance without a certificate of authority to do so
in violation of 215 ILCS 5/24. Plaintiffs concede that
because of its lifetime monthly payments feature, the Re-
tirement CD is essentially an annuity and that the Insur-
ance Code includes “granting, purchasing or disposing of
annuities” within the “life insurance” classification of the
business of insurance. 215 ILCS 5/4(a). Section 5/24 of the
Insurance Code dictates that “{nlo company shall transact
any business of insurance until it has received a certificate
of authority” from the Director of Insurance, which plain-
tiffs concede they do not have.
The Director of Insurance issues certificates of authority
only to domestic, foreign, or alien companies. ‘Domestic
companies” are those organized under the laws of the
State of Illinois, 215 ILCS 5/2(f), “foreign companies” are
those organized under the laws of any other state or ter-
ritory of the United States, or the District of Columbia,
215 ILCS 5/2(g), and “‘alien companies” are those organ-
ized under the laws of a country other than the United
States, 215 ILCS 5/2(h). Because Blackfeet is a national
bank organized under the Bank Act, it does not qualify
for certification as any of the above.1 Additionally, 215
ILCS 5/111(c) dictates that companies which engage in
other business in addition to the life insurance business—
which, as a bank, Blackfeet obviously does—may not be
certified. Therefore, Blackfeet is not permitted under the
Insurance Code to sell and underwrite the Retirement CD
in Illinois. The only way it could accomplish the sale in
compliance with the Insurance Code would be to set up
1 The Insurance Code does allow a national bank located in a
town of 5000 or less people—such as Blackfeet—to register with
the director in order to transact insurance business in Illinois as
an insurance agent, but does not allow such a bank to act as an
underwriter of the policies. 215 ILCS 5/499.1(a) & (e).
4a
a subsidiary specifically for that purpose, which could then
be issued a certificate of authority.
Blackfeet a suit against Schacht for a declaration
that the sale of the Retirement CD is not subject to regu-
lation by the State of Illinois. Blackfeet argues that the
Bank Act, through the express authority to receive de-
posits, 12 U.S.C. § 24 (Seventh), and to enter into con-
tracts, 12 U.S.C. § 24 (Third), authorizes the sale of the
Retirement CD. We will assume, arguendo, that it does.?
Magistrate Ju Bobrick granted summary judgement
to t, concluding that “the nature of the Retirement
CD makes it an appropriate subject for regulation as an
insurance product because it entails an insurance or mor-
tality risk and a guaranteed return.”
2 In support of their claim that the Bank Act authorizes the sale
of the Retirement CD, plaintiffs offer a letter from the Office of
the Comptroller of the ncy (“OCC”), advising Blackfeet that
the OCC “had no objection if [Blackfeet] proceeds with its plans
to market and offer the Retirement CD.” [Def. App. p. 33]. Im-
portantly, however, the OCC specifically noted that “state regu-
latory officials may conclude that state insurance laws apply to
the Retirement CD.” [Doc. 36, Ex. 8, p.2]. Moreover, in a letter
responding to concern expressed by John D. Dingell, Chairman
of the United States House of Representatives Committee on
Energy and Commerce, over whether national banks underwriting
the Retirement CD would be required to comply with state insur-
ance laws, the OCC wrote: ,
In concluding that the Retirement CD represents a bank au-
thorized uct, we did not need to address the question of
whether bank is authorized to sell or underwrite annuities,
or whether annuities are insurance products. . . . State
regulatory officials may conclude that the state insurance laws
also apply to the Retirement CD or any other activity which
we interpret as being authorized by the National Bank Act.
Such a conclusion however, does not affect our interpretation
of the Act. A state’s insurance laws and the National Bank
Act are different laws with different purposes behind them.
[App. 200] (emphasis added).
5a
II.
We review the grant of a motion for summary judg-
ment de novo, drawing all reasonable inferences in favor
of the non-moving party. Smith v. Shawnee Library Sys.,
60 F.3d 317, 320 (7th Cir. 1995).
The tension in this case comes from an apparent overlap
between activities arguably authorized by the Bank Act
and activities that individual states have a legitimate in-
terest in regulating. If we assume that Blackfeet is au-
thorized to sell the Retirement CD under the Bank Act,
the pertinent question is whether the Insurance Code can
nonetheless prohibit the sale. It is well settled that a
federal law preempts a conflicting state law under the
Supremacy Clause of Article VI of the Constitution, and
the Bank Act is no exception. See, e.g., Barnett Bank of
Marion County, N.A. v. Nelson, 116 g’ Ct. 1103 (holding
that a provision of the Bank Act which allows national
banks located in towns with populations of fewer than
5000 people to act as insurance agents preempts contrary
state law); Franklin Nat’l Bank v. New York, 347 U.S.
373 (striking down an effort to apply state Saturday clos-
ing laws to national banks); Easton v. Iowa, 188 U.S. 220
(striking down state regulation of the circumstances in
which a national bank can accept deposits). Thus under
ordinary preemption rules, the provisions of the Bank Act
would trump contrary Illinois law.
However, with regard to the “business of insurance,”
the McCarran-Ferguson Act “overturnfed] the normal legal
rules of preemption” by imposing a rule “that state laws
enacted for the p se of regulating the business of in-
surance do not yield to conflicting federal statutes unless
the federal statute specifically provides otherwise.” U.S.
Dep’t of Treasury v. Fabe, 113 S. Ct. 2202, 2211. Specifi-
cally, Section 1012 of the McCarran-Ferguson Act pro-
vides:
(a) The business of insurance, and every person
engaged therein, shall be subject to the laws of the
6a
several States which relate to the regulation or tax-
ation of such business.
(b) 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 .. . unless such Act vgaiccares.| relates to
the business of insurance . . .
Thus to decide whether the onesie Code may stand
in the face of the Bank Act we must resolve three issues:
(1) whether the pertinent sections of the Insurance Code
were enacted “for the purpose of regulating the business
of insurance”; (2) whether the Retirement CD is prop-
erly considered ‘“‘the business of insurance”; and (3)
whether the pertinent provisions of the Bank Act “spe-
cifically relate to the business of insurance.” Jd.
A.
In SEC v. National Sec., Inc., 393 U.S. 453, the Court
held that “statutes aimed at protecting or regulating th[e]
relationship [between insurer and insured], directly or in-
directly, are laws regulating the “business of insurance.’ ”
Id. at 460. The opinion emphasized that the focus of the
McCarran-Ferguson Act is upon the relationship between
insurance companies and their customers:
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 whatever the exact
scope of the statutory term, it is clear where the
focus was—it was on the relationship between the in-
surance company and the policyholder. Jd.
The Court stated that the “broad category of laws en-
acted ‘for the purpose of regulating the business of in-
surance’ consists of laws that possess the ‘end, intention,
7a
or aim’ of adjusting, managing, or controlling the business
of insurance.” Id. (citing Black’s Law Dictionary 1236,
1286 (6th ed. 1990)). Section 5/24 of the Insurance Code
prohibits companies from selling any type of insurance
without gaining prior approval of the Department of
Insurance. The approval requirement is necessary for the
State of Illinois to monitor and regulate the relationship
between insurer and insured; without it, regulations that
more directly concern the actual relationship between in-
surer and insured would be impossible to enforce. Fur-
thermore, 215 ILCS 5/121-1 expressly states that the IIli-
nois General Assembly enacted the certification require-
ment because it was “concerned with protection of resi-
dents of [Illinois] against acts by insurers not authorized
to do an insurance business in [Illinois].”” We conclude that
Section 5/24 possesses the “‘ ‘end, intention, and aim’ of
adjusting, managing, or controlling the business of insur-
ance,” and was therefore enacted “for the purposes of
regulating the business of insurance.” Jd. Thus the first
prong of the test is satisfied.
B.
Having concluded that Section 5/24 was “enacted for the
purpose of regulating the business of insurance,’”’ we must
determine whether the sale of the Retirement CD is prop-
erly considered the “business of insurance.” Section 5/4(a)
expressly includes annuities in its definition of “life insur-
ance,’ but we may not simply defer to that definition.
SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 69
(“The meaning of ‘insurance’ . . . under the [McCarran-
Ferguson Act] is a federal question.’’). Thus we must go
further and examine whether the specific practice to which
the Code would be applied—the sale of the Retirement
CD—is properly considered the “business of insurance.’
See Fabe, 113 S. Ct. at 2212 (noting that an Ohio prior-
ity statute was the “business of insurance” to the extent
that it regulated policyholders, but not to the extent that
it furthered the interests of other creditors); Merchants
Home Delivery Serv., Inc. v. Reliance Group Holdings,
8a
Inc., 50 F.3d 1486, 1489 (9th Cir. 1995) (“The proper in-
quiry is whether . . . the specific practice being chal-
lenged under federal law is a part of the ‘business of
insurance.’ ”’).
Plaintiffs initially cite NationsBank of N.C. v. Variable
Annuities Life Ins. Co., 115 S. Ct. 810, in claiming that
the Supreme Court has already held that the Retirement
CD, as an annuity, is not the “business of insurance.” We
think plaintiffs read too much into that case. In Nations-
Bank, the Comptroller of the Currency had authorized
a national bank to broker annuities as “an incidental
powe[r] . . . necessary to carry on the business of bank-
ing.”” Id. at 814. In addition, the Comptroller had con-
cluded that annuities were not “insurance” within the
meaning of 15 U.S.C. § 92, which allows national banks
peep fee y ayy Petri hin ind my e or less to act as
nt for an insurance company. Court held that
the ae troller’s interpretations of the Bank Act were
and thus were given controlling weight. /d.
However, NationsBank is distinguishable from our situa-
tion. First, the holding was limited to the brokering, not
underwriting, of annuities. Jd. at 815 n.4 (“Assuring that
the brokerage in question would not deviate from tradi-
tional bank practices, the Comptroller specified that Na-
tionsBank ‘will act only as agent, . . will not have a
principal stake in annuity contracts ‘and therefore will
Saour mo interest tate or adtaariel rahe,” Second, the
holding was limited to whether federal law precluded a
national bank from brokering annuities, not ae, a
eS ee less a bank voy he
ject to state regulation.* In > Saree
Court expressly noted that “States ft classify an-
5000 brokering insurance -the argument made by Respon-
dent in NationsBank.
9a
nuities as insurance when defining the powers of . . . state
insurance regulators.” Jd. at 815. Thus, NationsBank did
not answer the question as plaintiffs suggest.
However, the Supreme Court has spoken on this issue
and articulated a tripartite standard in Union Labor Life
Ins. Co. v. Pireno, 458 U.S. 119, and Group Life & Health
| Ins. Co. v. Royal Drug Co., 440 U.S. 205, to determine
what constitutes the “business of insurance” for
of Section 1012(b) of the McCarran-Fe Act. Those
criteria are: (1) whether the practice the effect of
transferring or spreading a policyholder’s risk; (2) whether
the practice is an integral part of the policy relationship
between the insurer and the insured; and (8) whether the
practice is limited to entities within the insurance indus-
try. Pireno, 458 U.S. at 129.
We are aware that the Supreme Court, in distinguishing
the state law at issue in U.S. Dep’t of Treasury v. Fabe
metres yh dingaedeenns soil wie thew ode tm age ear wd
noted that those cases involved determinations of whether
certain activities were the “business of insurance” for pur-
poses of the second clause of Section 1012(b), which ex-
empts the “business of insurance” from antitrust laws,
not determinations of whether laws were “enacted for the
purposes of ting the business of insurance”’ for pur-
poses of the first clause of Section 1012(b):
Both Royal Drug and Pireno, moreover, involved the
scope of the antitrust immunity located in the second
=— of §[101}2(b). We deal here with the first
clause, which is not so narrowly circumscribed. The
language of §[101}2() is unambiguous: the first clause
commits laws “enacted . . . for the purpose of regu-
lating the business of insurance” to the States, while
the second clause exempts only “the business of in-
| surance” itself from antitrust laws. To equate laws
“enacted . . . for the purpose of regulating the busi-
ness of insurance” with “the business of insurance”
itself, as petitioner urges us to do, would be to read
words out of the statute. This we refuse to do. Fade,
113 S. Ct. at 2209-2210.
TT
_ a
10a
However, we do not interpret this language to mean that it
is inappropriate to utilize the criteria announced in
Drug and Pireno in cases involving the first clause of Sec-
tion 1012(b). Rather, the Court merely noted that one can-
not answer the question of whether a state law was “en-
acted for the p of regulating the business of in-
surance” merely by reference to Royal Drug and
Pireno criteria. As the Sixth Circuit recently recognized,
If . . . the issue arises of whether a particular activ-
ity is part of the “business of insurance,” the Pireno
criteria apply. See Fabe, 113 S. Ct. at 2208 (noting,
in considering claim that arose under first clause of
— § 1012(b), that Pireno “identified the three criteria
. . . that are relevant in determining what activities
constitute the ‘business of insurance.’ ”’) (emphasis
added). In short, the Fabe Court merely noted that
the scope of the respective immunities created by the
first and second clauses of § 1012(b) are different; it
assuredly did not give “business of insurance” one
meaning in the first clause and a different meaning
in the second. Owensboro Nat. Bank v. Stephens, 44
aa 388 (6th Cir. 1994), certiorari denied, 116 S. Ct.
1350.
Because the situation facing us involves a determination
of whether the sale of the Retirement CD is to be in-
cluded within the “business of insurance,” we shall apply
the criteria announced in Royal Drug and Pireno.
The first and most important factor in determining
whether a practice is the “business of insurance” is whether
it spreads policyholder risk. The spreading and under-
writing of a policyholder’s risk are “indispensable char-
acteristic{s] of insurance,” Pireno, 458 U.S. at 127; Royal
Drug, 440 U.S. at 212, and the legislative history of the
McCarran-Ferguson Act “strongly suggest{s] that Con-
gress understood the business of insurance to be the
underwriting and spreading of risk.” Royal Drug, 440
U.S. at 221; H.R. Rep. No. 873, 78th Cong., Ist Sess.,
8-9 (1943) (“Insurance is the distribution of risk according
PUI as she tai name maaan
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to hazard, experience, and the law of averages.”). Essen-
tially, lifetime annuities such as the Retirement CD are
the “mirror image” of life insurance policies.* With life
insurance, the issuing company gambles that the purchaser
of the policy will not pass away sooner than predicted
such that the company does not receive enough in pre-
miums and interest to cover the policy’s payout obliga-
tion;.with lifetime annuities, the position is reversed and
the company gambles that the annuitant will not survive
longer predicted such that the company will have
to pay more than the amount invested by the annuitant
* Plaintiffs cite numerous cases and treatises which have distin-
i insurance and annuities. See, e.g., Helvering v. Le Gierse,
12 U.S. 531 (“{A}jnnuities and insurance are opposites; in com-
bination the one neutralizes the risk customarily inherent in the
other . . . insurance looks to longevity, annuity to we ey Mle
3 C.J.S. Annuities § 3c (“An annuity contract is distinguished from
an insurance contract in that insurance . . . is an agreement to
. . . pay a specified sum on the death of the insured or his reaching
a certain age, while an annuity is . . . an agreement to pay a
7 sum to ry Three once Aes during no My 43 ‘ling ur.
nsurance ’ company e merely in selling an-
nuities does not conduct an fneurancs business.”). Defendant and
Amici, on the other hand, provide an equally le list of treatises
and cases stating that annuities are insurance. See, e.g., New York
Life Ins. Co. v. Sullivan, 192 A. 297 (N.H. 1937) (holding that
annuities are insurance); Mutual Ben. Life Ins. Co. v. Common-
wealth, 116 N.E. 469 (Mass. 1917) (same); A. Fi Jack, An
Introduction to the History of Life Assurance 165 (New York, E.P.
Dutton & Co. 1912) (“As it exists in the present day ... the [an-
Lyfe contract a Bs hy insurance.”); Solomon S. Huebner,
ife Insurance 47, (1915) (classifying annuities as a “leading
of life insurance”). The most we can conclude from these
ong lists of cases and treatises is that annuities are not exactly
prescticn od conn but that the two have iple similarities. Thus
courts tise writers have stated that two products are
different in some situations, and the same in others. Unfortunately,
none of the cases or treatises authoritatively answers the ques-
tion that we must decide: Whether annuities are y consid-
ered “insurance” for the purposes of the McCarran-Ferguson Act
and state regulation.
12a
(plus interest). The element of mortality risk, however,
is the same in both:
Each issuer [of an annuity] assumes the risk of mor-
tality from the moment the contract is issued. That
risk is an actuarial p ostication that a certain
number of annuitants will survive to specific ages.
Even if a substantial number live beyond their pre-
dicted demise, the company issuing the annuity—
whether it be fixed or variable—is obligated to make
the annuity payments on the basis of the mortality
prediction reflected in the contract. This is the mor-
tality risk assumed [by the issuer]. SEC v. Variable
Annuity Life Ins. Co., 359 U.S. 65, 70.
See also Associates In Adolescent Psychiatry v. Home
Life, 941 F.2d 561, 565 (7th Cir. 1991) (‘Annuities
sometimes contain an element of insurance: they may, for
example, promise a monthly payment from retirement until
death . . . [t]he seller then bears both investment and in-
surance risks.”). That typical life insurance involves pay-
ment “upon” a death, while lifetime annuities involve pay-
ment “until” a death is a distinction without a difference:
a company selling either the typical insurance policy or
the lifetime annuity uses exactly the same actuarial tables
to calculate its mortality risk and to set the price of its
product.
Not all annuities have insurance characteristics, how-
ever. The Supreme Court has noted that “ ‘insurance’ in-
volves a guarantee that at least some fraction of the bene-
fits will be payable in fixed amounts,” Variable Annuity
Life Ins. Co., 359 U.S. at 71, and thus has held that
variable annuities are not “insurance” for of the
Securities Act of 1933. Jd. at 71-73. The Retirement CD
is not a variable annuity. It offers a guaranteed payment
to the annuitant for the rest of his life in a predetermined
amount and also provides a teed return of the total
balance. Thus it involves both fundamental characteristics
of insurance: a mortality risk and a guaranteed return.
Id. at 71.
13a
Plaintiffs argue that the Retirement CD does not satisfy
the first criterion—spreading risk—by emphasizing that
the spreading and the underwriting of risk refer to “the
transfer of risk characteristic of insurance.”’ Pireno, 458
U.S. at 130 (emphasis added). They contend that “risk
characteristic of insurance” is “risk of loss resulting from
the happening of a contingent event, such as the loss of
a house by fire . . . or of a breadwinner by death.” [PI.
Br. 24]. The Retirement CD, they argue, does not spread
this type of risk, but spreads only an “investment risk,”
which they define as “the hazard of having insufficient
investment acumen to outlive an asset.” Jd.
We are unpersuaded by plaintiffs’ argument. First, de-
scribing the purchase of the Retirement CD as “h
against faulty investment acumen,” [Pl. Br. 18], does little
to distinguish it from typical insurance; purchasing fire
insurance can just as easily be described as “
against faulty fire prevention acumen.” [Brief of Amicus
Curiae American Council of Life Insurance p.6]. Second,
the purpose of purchasing a life insurance policy on a
family’s breadwinner and of purchasing a lifetime annui-
ty is essentially the same. The individual who purchases
the life insurance policy insures against no longer having
the money produced by the breadwinner, and the person
who purchases a lifetime annuity insures against no longer
having sufficient money produced by his assets. Finally,
plaintiffs’ attempt to distinguish insurance by claiming
that it involves a loss caused by a single, contingent event
overlooks an important aspect of the Retirement CD: By
providing a guaranteed minimum return on investment,
the Retirement CD insures the purchaser against a de-
cline in the market—a single, ——— event. The pur-
chaser is given the comfort that should a ion occur
in the market, causing rates of interest to fall significantly,
he will not suffer a “loss” of future income, but will con-
tinue to receive the rate of interest guaranteed in his Re-
tirement CD contract. Furthermore, insurance policies do
not always insure against circumstances that occur as a
sudden event. For example, one is currently able to pur-
chase an insurance policy that will provide nursing home
14a
care to an individual when he finally reaches an age where
he is no longer able to care for himself. In short, we con-
clude that the Retirement CD spreads policyholder risk
in a manner similar to typical insurance and thus satisfies
the first criterion of the Pireno test.
The Retirement CD satisfies the second and third Pireno
factors as well. It is not only an “integral part’ of the
policy ‘relationship between the insurer and the insured,
it is the very document that evidences that relationship.
It dictates the rights and obligations of both parties and
sets forth the amount of deposit, date of first withdrawal,
rate of interest, and the guaranteed amount of monthly
payments. The third factor is met because the Retirement
CD is an annuity, virtually all of which are issued by in-
surance companies. See Barron’s, Oct. 3, 1994, at 23
(noting that nearly all of the $1 trillion worth of annuities
currently in effect in the United States are issued by
regulated insurance com — Furthermore, forty-two
state legislatures currently consider annuities to be an in-
surance industry activity and regulate them as such. [Brief
of Amicus Curiae Council of Life Insurance, Ex. D (listing
statutes)}; see also SEC v. Variable Annuity Co., 359 U.S.
at 69 (“All states regulate ‘annuities’ under ‘insurance’
laws.’’). They do so because a state’s interests in regu-
lating the sale of annuities are virtually identical to its
interests in regulating the sale of typical insurance. States
attempt to ensure that companies remain sufficiently solvent
to meet their obligations to customers, which often do not
arise until years after the customer purchases his policy.
To do this, they require those companies frequently to
submit financial statements and actuarial opinions to in-
surance regulators and to maintain minimal capital re-
serves.5 Consumer protection concerns motivated states
to enact insurance regulations in the first place, and are
the reason they include annuities within those regulations.
5 See, e.g., 215 ILCS 5/124-5/125.24a (regulation of company’s in-
vestment); 215 ILCS 5/244 (limitations on company’s expenses); 215
ILCS 5/244.1 (Commissioner action for financial conditions hazard-
ous to policyholders).
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a
15a
Our determination that the Retirement CD is the “busi-
ness of insurance”’ is further supportec' by the legislative
history of the McCarran-Ferguson Act. While the legis-
lative history contains no explicit debate on whether an-
nuities were intended to be either included or excluded,
both the House and Senate incorporated in their delibera-
tions on the Act an August 29, 1944 report by the Na-
tional Association of Insurance Commissioners (““NAIC’’),
the voice of state insurance regulators. The NAIC’s opin-
ion was important to the debate of the Act, as evidenced
by the fact that the statute was a “modification of a
measure which was ey! y drafted by the legislative
committee of the [NAIC].” 91 Cong. Rec. 483 (Jan. 25,
1945) (Sen. O’Mahoney). As printed in the Congressional
Record, that report seems to suggest that annuities were
considered to be part of the “business of insurance”’:
The insurance business has been alert to keep abreast
with the ever-changing and expanding developments
of American social and economic life. . . . Some idea
of the complexity of the business may be gleaned
from the fact that the insurance law of New York
makes provision for 22 major kinds of insurance;
namely, life, annuity, accident and health, fire,
miscellaneous property, water damage, burglary and
theft . . 90 Cong. Rec. A3975-77 (NAIC report
introduced by Rep. Anderson) (emphasis added) (Aug.
29, 1944).6
* Plaintiffs contend that this reference is to “annuity insurance,”
which they claim is different from a typical annuity. In support
of their claim they note that “annuity insurance” is defined in
Black's Law Distnery (6th ed. 1990) under “insurance” as “{ajn
insurance contract calling for periodic payments to the insured or
annuitant for a stated period or for life.” Plaintiffs interpret this
definition to include only situations where the beneficiary of a life
insurance policy chooses to accept the proceeds of the policy in
periodic payments as to a lump sum. We do not believe
the definition is as limited as plaintiffs suggest, especially given
that an identical definition is provided for “annuity policy,” which
(Footnote continued on following page)
16a
Because the sale of the Retirement CD satisfies each
of the Supreme Court’s Pireno criteria, we conclude that
the Retirement CD is properly considered the “‘business
of insurance” for purposes of the McCarran-Ferguson Act.
C
The final question is whether the Bank Act is an act
that “specifically relates to the business of insurance”’
within the meaning of the final clause in Section 1012(b)
of the McCarran-Ferguson Act. Given the Supreme Court’s
recent decision in Barnett Bank, supra, we must conclude
that the provisions of the Bank Act before us do not “spe-
cifically relate to the business of insurance.”
In Barnett Bank, a Florida statute prohibited banks
from selling most types of insurance. The statute was in
direct conflict with Section 92 of the Bank Act, which ex-
pressly permits national banks to act as insurance agents
in towns with populations of 5000 ple or less. Thus
the question was whether the M -Ferguson Act
allowed the state statute to stand in face of the National
Bank Act. The Supreme Court concluded that the McCarran-
Ferguson Act did not apply because Section 92 of the Bank
Act “specifically relates to the business of insurance.” In
reaching that conclusion, the Court focused on the fact that
Section 92 “explicitly” grants national banks permission to
sell insurance, and contains “specific” rules prohibiting banks
from guaranteeing premium payments or the truth of state-
ments made by an assured. Barnett Bank, 116 S. Ct. at
1111-1112. Thus Section 92 “‘not only focuses directly upon
industry-specific selling practices, but also affects the rela-
tion of the insured to insurer and the spreading of risk.” Jd.
& continued
is defined under “annuity.” Black’s Law Dictionary (6th ed. 1990)
(“an insurance policy providing for monthly or periodic payments
to insured to begin at a fixed and continue insured’s
life.”) (emphasis added). If anything, these definitional references
run counter to plaintiffs’ position by demonstrating that annuities
and insurance are frequently viewed as the same product.
|
|
ileal
17a
The provisions of the Bank Act before us—the power
; “to accept deposits” and “to enter into contracts”—contain
language quite different from that in Section 92. Neither
provision “explicitly grants banks permission to conduct
insurance-related activity;” neither focuses “directly on
. specific [insurance] selling practices;” and neither “affects
the relation of the insured to insurer and the spreading
of risk.”’ Jd. Thus neither “specifically relates to the busi-
ness of insurance.”
This conclusion is supported by the Court’s statements
regarding the basic purpose of the McCarran-Ferguson
Act. The Court concluded that the purpose of the Act was
not to insulate state insurance regulation from the reach
: of all federal law, but “to protect state regulation pri-
5 marily against inadvertent federal intrusion—say, through
enactment of a federal statute that describes an affected
activity in broad, general terms, of which the insurance
business happens to comprise one part.” Jd. at 1112. As
applied to the Retirement CD, the provisions of the Bank
Act at issue are exactly the intrusion the Court warned
against: they describe an affected activity (banking) in
broad terms, of which the insurance business (the Retire-
ment CD) is only a part.
ITI.
The dissent expresses concern that even if we conclude
that the McCarran-Ferguson Act allows Illinois to regulate
the sale of the Retirement CD, we must then reach the
“vexing” constitutional question of whether the banking
activities of national banks are ever subject to state regu-
lation. However, Barnett Bank demonstrates that the
Bank Act possesses no unique immunity from the McCarran-
Ferguson Act.
As stated above, the question in Barnett was whether
. a state statute could stand in the face of the Bank Act.
| The Court could have adopted the dissent’s approach by
. concluding that the activities of national banks are sim-
| ply not subject to state interference, regardless of the
McCarran-Ferguson Act. However, that was not the ap-
proach taken by the Court. The Court undertook a de-
. wee Le
AO AOI MCT ae Md
ee ee ee eee
18a
tailed analysis of Section 92 and concluded that the anti-
preemption rule did not apply because Section 92 “‘spe-
cifically related to the business of insurance.” Jd. at 1113.
Thus if the Court had concluded that Section 92 did not
“specifically relate to the business of insurance,” it would
have applied the anti-preemption rule of the McCarran-
Ferguson Act and allowed the Florida statute to stand
in the face of the Bank Act. The Court left no doubt about
this, as revealed in the following language:
An amicus argues that our interpretation would give
the [McCarran-Ferguson] Act “little meaning,” be-
cause “whenever a state statute ‘regulates’ the busi-
ness of insurance, any conflicting federal statute neces-
sarily will ‘specifically relate’ to the insurance busi-
ness.” Brief for American Council of Life Insurance
as Amicus Curiae 4. We disagree. Many federal stat-
utes with potentially pre-emptive effect . . . use gen-
eral language that does not appear to “specifically
relate” to insurance; and where those statutes con-
flict with state law that was enacted “for the pur-
se of ting the business of insurance,” the
cCarran-Ferguson Act’s anti-pre-emption rule will
apply. Jd. (emphasis added).
Given Barnett Bank, we believe that the Bank Act, just
like any other federal law, is within the reach of the
McCarran-Ferguson Act.
IV.
Because the relevant sections of the Illinois Insurance
Code were “enacted for the purposes of regulating the
business of insurance,”’ and because the Retirement CD
is a fixed annuity and properly considered the “business
of insurance,’ the McCarran-Ferguson Act requires that
the Bank Act not be interpreted to impair or supersede
those sections. Thus we affirm the decision of the district
court that Illinois may regulate the sale of the Retire-
ment CD, despite the fact that wal hcknt Kot ae CD
may be a practice that the National ing Act express-
ly authorizes. |
|
19a
DiaANE P. Woon, Circuit Judge, concurring. The Retire-
ment CD that Blackfeet National Bank wants to offer in
Illinois is, as the majority opinion notes, an innovative
product. Therein lies the core difficulty for this case. In
the face of the creativity and innovation that is taking
place in financial markets, we are obliged to decide whether
the act of offering this particular Retirement CD amounts
to engaging in the “business of insurance,” within the mean-
ing of the 1945 statute commonly known as the McCarran-
Ferguson Act, 15 U.S.C. § 1012. The dissent makes a
number of compelling policy arguments, and I have little
doubt that permitting national banks to issue innovative,
hybrid instruments such as the Retirement CD would be
beneficial to competition as a whole. Nevertheless, our job
is not to question the wisdom of the statutes Congress
has passed or the rules Congress has given us for deter-
mining how those statutes relate to one another. From
that perspective, it seems clear to me that the principal
opinion has come to the only conclusion that is consistent
with the language of the relevant statutes, governing Su-
preme Court precedent and the economic function of the
Retirement CD.
The dissent argues extensively that annuities should not
be considered insurance products, noting a number of dif-
ferences between the two products like the types of risks
covered, the methods of payment, and the purposes for
which they are designed. It notes, correctly, that many
investment vehicles and contracts that address mortality
risk are plainly not part of the “business of insurance.”
Where the dissent is ultimately unconvincing is in its ap-
plication of the test for determining what constitutes the
“business of insurance” as a matter of federal law for pur-
poses of § 1012.
On this point, I agree that the Supreme Court’s deci-
sions in Union Labor Life Ins. Co. v. Pireno, 458 U.S.
119, 127-129 (1982), and Group Life & Health Ins. v.
Drug Co., 440 U.S. 205, 211-17 (1979), establish the gov-
erning criteria both for the second (antitrust) clause of
§ 1012 and for the first clause. Under the first criterion,
20a
it is not enough to establish that the practice deals with
a certain type of risk (here, mortality risk); we must go
further and consider whether the practice has the effect
of transferring or spreading that risk. To take one ex-
ample from the dissent, a grantor assumes a mortality
risk when she confers a life estate in land to another
party, but there is no necessary transfer or spread of that
risk to a larger population. The Retirement CD, in con-
trast, like all annuities, spreads mortality risk among all
holders of the CD. If the issuer has good actuaries, it will
earn money overall on its Retirement CDs, even if some
individual customers live longer than their predicted life
spans. Annuities are the same as life insurance policies
in this respect: in each case, the accuracy of the issuer’s
predictions about the mortality of the customer popula-
tion determines how profitable the issuer’s business will
be. For this purpose, it does not matter whether in one
case the issuer is gambling that the customer will not die
too soon, or in the other case it is gambling that the cus-
tomer will not die too late. In both situations, there is
an ascertainable risk that is spread or transferred. In ad-
dition, for the reasons the majority offers, the annuity
aspect of the Retirement CD is an integral part of the
contractual relationship between the issuer and the cus-
tomer. Finally, even though other entities may issue an-
nuities, dissent at 46 n. 22, the dissent offers no evidence
to refute the statistics cited by amicus American Coun-
cil of Life Insurance to the effect that the overwhelming
majority of the $1 trillion of annuity contracts in the U.S.
are issued by regulated insurance companies. Thus, the
third factor of Pireno/Royal Drug is satisfied here as well.
The fact that Blackfeet is a national bank is important
to the analysis only because it requires us to decide whether
the “reverse preemption” provisions of the McCarran-
Ferguson Act apply in these circumstances or not. The
mere fact that national banks are permitted to sell the
Retirement CD does not mean that contrary state regula-
tion is supplanted. In Barnett Bank of Marion County
v. Nelson, 116 S.Ct. 1108, 1108 (1996), the Supreme Court
Fie AAAI EE a
Z2la
noted that the purpose of the provision of the National
Banking Act authorizing banks in towns with populations
of less than 5,000 to sell insurance, 12 U.S.C. § 92, might
have been to allow banks that power as long as states
also gave their permission. The Court concluded that the
unqualified language of the statute made that interpreta-
tion untenable. In this case, however, the Office of the
Comptroller of the Currency (OCC) noted twice that state
insurance laws might apply to the Retirement CD. Ante,
at 4 n. 2. The OCC would certainly have taken a different
tack if it believed that state laws necessarily had to yield
to the powers of national banks to engage in this kind
of business. I am therefore satisfied that our decision does
not raise concerns under either the Supremacy Clause or
the National Banking Act. The majority has simply recon-
ciled two bodies of federal law in a manner that respects
the Congressional limitations on each.
For these reasons, as well as for the reason set forth
in the principal opinion, I agree that the judgment below
must be affirmed.
FLAUM, Circuit Judge, dissenting. This case boils down
to one fundamental question: is the selling of the Retire-
ment CD by national banks like Blackfeet appropriately char-
acterized as “the business of insurance” under McCarran-
Ferguson.! If the selling of this product by national banks
1 I fully agree with the majority’s conclusion that the provisions
of the National Bank Act relevant to this case do not “specifical-
ly relate[ ] to the business of insurance” under section 1012(b) of
McCarran-Ferguson. In other words, this case is unlike Barnett
Bank of Marion County, N.A. v. Nelson, 116 S. Ct. 1108 (1996),
where the Supreme Court addressed a section of the National
Bank Act, 12 U.S.C. § 92, which ifically authorizes national
banks to sell insurance in towns with populations no greater than
5000 people. Not surprisingly, the Court held that this portion of
(Footnote continued on following page)
22a
sna thin tely characterized as “the business of insur-
Se ee
its insurance code, and there is no federal p
toy race Rome wenonthnciy hes oy ot preey: mer
ness of insurance” is presumed to be the province of the
states.? 15 U.S.C. § 1012. But if the selling of this an-
nuity product by a national bank is not “the business of
insurance,” M -Ferguson does not protect Illinois’
attempt to regulate this national bank practice.
As the majority properly recognizes, see supra p. 7,
the meaning of “insurance”’ (or bag Fs er sD Resell
ance”) within a federal statute like McCarran-Fe
is a federal question. See Securities and EF
Comm'n v. United ife Ins. Co., 387 U.S. 202,
210 (1967); Securities E Comm'n v. Variable
Annuity Life Ins. Co., 359 U.S. 65, 69 (1959) (hereinafter
VALIC). In VALIC, the Supreme Court noted that states
as to the nature of “insurance” and “annuity”
contracts. The Court emphasized, however, that in
context of the federal Securities Act, “how the States may
Te Te ee . . . [TJhe meaning of ‘insur-
ance’ or Hg Be . Federal Acts is a federal
question.” Jd. Thus a p ORR by Illinois, or any other
state, that a particular practice constitutes “the business
of insurance” has no bearing on our inquiry whether that
state regulation actually qualifies as protected state insur-
* continued | |
the National Bank Act did “specifically ] to the business |
Si eee torent ease coe Sa ee
o. Id. at 1112-18 Ran My = yh ade
federal insurance provision state law to
the contrary oy a tilt Our case involves a federal in-
nor an exception to the general of |
: a Oe Cr SO Seg eae Son OES ae
tion IV.
Ts eeneeaenneiaaiibiamaaaiaaiaaiiaiaiaitiiel
23a
ance tion under McCarran-Ferguson.* See Group
Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205,
230 n.38 (1979).
In my view, were it not for the Supreme Court’s recent,
unanimous decision in NationsBank of North Carolina,
* It should be noted that if this state Ted. ere
classified as “insurance business’’ under 15 TLCS sa orbiaing
transaction of “insurance business” in Illinois by co ‘
writers v. New York State Dep't, N. 876, 881
(N.Y. 1994) (holding that state are authorized to sell an
nuities on Serene, Sane 0 ey rts the
tion that annuities are not insurance”); Cruthers v. seld, 103 'A.2d
153 (N.J. prc ge ery Sheth ree Bagot gd hen wg
a ble ‘Lape 2a IS
tice, see infra section IV, and it is not by McCarran
Ferguson. Cf. Barnett Bank, 116 S. Ct. at 1111 (noting that 12
U.S.C. § 92 “grantis}] small town national banks authority to sell
24a
N.A. v. Variable Annuity Life Ins. Co., 115 S. Ct. 810
(1995), the majority’s resolution of the difficult question
at hand would be quite plausible and arguably correct.
Upon careful consideration of the Court’s approach in Na-
tionsBank, however, I do not believe we can confidently
reach the conclusion reached by the majority. And when
the NationsBank analysis is added to the substantial in-
surance literature and dictionary evidence a re-
jecting the claim that annuities are a type of “insurance,”
I must conclude that the selling of annuity-type instru-
ments by national banks cannot reasonably be character-
ized as “the business of insurance” under McCarran-
Ferguson, and thus subject to the Illinois Insurance
Code.‘ Prior decisions from the Supreme Court and this
circuit only strengthen this conclusion. In addition, the
result by the majority raises the vexing constitu-
tional question of whether a state can forbid activity by
a national bank that is authorized under federal law.
I. The NationsBank Decision
The majority quite correetly notes that the NationsBank
Court did not address the precise issue before us, since
not a national bank’s selling of the Retirement CD, is
based upon Supreme Court precedent in the insurance realm, gen-
5 Although the majority does not actually address this issue, I
believe that we must consider the supremacy i ns of allow-
ing a state agency to regulate a national ne ns
to resolve this case as the majority does. See infra section IV.
25a
that decision involved the power of a national bank to act
as a broker in the sale of annuities, not whether such a
bank could directly issue annuities. In addition, that case
did not involve any attempt by a state to regulate the
activities of a national bank under its own insurance code.
The Supreme Court appropriately limited its holding to
the actual case before it, but that does not suggest that
we should ignore the approach taken by the Court and
the reasoning and authorities upon which it relied. Ulti-
mately, in m judgment, the Court’s analysis in Nations-
Bank strongly points to the determination that the sell-
ing of annuities by national banks is not reasonably re-
garded as the business of insurance.
The NationsBank Court accepted the conclusion of the
Comptroller of the that annuities are widely recog-
ized as “investment cts."* Id. at 814. Justice Gins-
ee. writing for the entire Court, described annuities as
ollows:
By making an initial — in exchange for a
future income stream, customer is def con-
sumption, setting aside moey for retirement, future
expenses, or a rainy day. For her, an annuity is like
putting money in a bank account, a debt instrument,
or a mutual fund. Off bank accounts and
as agent in the sale of debt instruments and mutu
funds are familiar parts of the business of banking
. ... In sum, modern annuities, though more sophis-
ticated than the standard savings bank deposits of
old, answer essentially the same need. By providing
customers with the rtunity to invest in one or
more annuity options, are essentially offering
financial investment instruments of the congres-
sional authorization permits them to broker.
® The Court defined “annuities” as follows: “Annuities are con-
tracts under which the purchaser makes one or more premium
payments to the issuer in for a series of payments, which
continue either for a fixed period or for the life of the purchaser
or a designated beneficiary.” NationsBank, 115 S. Ct. at 812.
26a
Id. (emphasis added) (citations omitted). Hence the Court
accepted the view that annuities are properly described
as “investment instruments” and are analogous to bank
accounts.
The NationsBank Court also addressed the argument,
asserted by the ndents in that case and relied upon
by the majority in this case, that annuities should be con-
sidered “insurance” because they traditionally The —
sold by insurance companies. The Court
of a product by an insurance co Prensa inevitably
render the product insurance. For example, insurance
companies have long offered loans on the security of life
insurance, . . . but a loan does not thereby become insur-
ance.” Id. The Court considered and rejected the proposi-
tion that a historical association of insurance companies
with a icular product mandated the conclusion that
the product is “insurance.” The NationsBank Court also
recognized that most states have regulated annuities as
insurance, but noted that this regulation had more to do
with the fact that insurance companies are likely to sell
annuities than with a conclusion that annuities are insur-
ance: “Treatment of annuities under state law . . . is con-
textual. States generally yy annuities as insurance
when defining powers of insurance companies and
state insurance regulators. . . . But in diverse setti
States have resisted lump classification of annuities as in-
surance.” Jd. (emphasis added) (citations omitted).’
The Court emphasized that a classification—such as the
treatment of annuities as insurance within the confines
of insurance law—that makes sense in one setting may
not work in another: “As our decisions underscore, a
characterization fitting in certain contexts may be un-
suitable in others.” Jd. at 816. Thus the NationsBank
Court approved the Comptroller’s “functional” approach
+o deneliien amuadiien an "eek ‘insurance’ ” under the Na-
v See supra note 3 (noting some of the state cases concluding that
annuities are not “insurance”’).
a a ee
27a
tional Bank Act: “The Comptroller’s classification of an-
nuities, based on the tax deferral and investment features
that distinguish them from insurance, in short, is at least
reasonable.” Jd. at 817. The Court recognized that the
“key feature of insurance is that it indemniftes loss,” id.
(emphasis added), while annuities “serve an important in-
vestment purpose and are functionally similar to other in-
vestments that banks typically sell.” Jd. (emphasis added).
One other aspect of the NationsBank decision is impor-
tant to note, particularly because the issue plays a prom-
inent role in the majority’s analysis: the concept of “‘mor-
tality risk.”’ The respondents in NationsBank argued, as
the Illinois Director of Insurance does here, that annuities
resemble insurance because some annuities contain a mor-
tality risk element. The majority accepts this argument,
but there are at least two significant reasons why this
approach does not hold up. The first reason comes directly
from NationsBank, while the second is more general and
is addressed in section III below. Regarding Nations-
Bank, the Supreme Court specifically rejected “mortali-
ty risk” as the hallmark of whether a product is “insur-
ance” or not. The NationsBank Court noted that a life
interest in real property imposes a “mortality risk” on
the purchaser. Jd. at 816. The price of such an interest
is presumably calculated according to the expected life of
the purchaser (or whoever is to be used as the “measur-
ing life”). If the purchaser lives longer than expected, say
to the ripe old age of 110, the seller will be the loser—
having sold the interest for less than it turned out to be
worth. If the purchaser (or the person who is the measur-
ing life) dies young, the purchaser will be the economic
loser, since he or she will not have gotten the expected
economic benefit out of the life interest. The am wie
risk” for the purchaser in such a life estate is the ri
of dying before you have gotten the full value out of your
purchased interest, while the risk for the seller is that
the Ag merge lives longer than expected. The Nations-
Bank Court made clear, however, that “a life interest in
real property is not insurance, although it imposes some
28a
mortality risk on the purchaser.” Jd. The Court further
noted that some conventional debt instruments impose a
similar sated risk without thereby becoming “‘insur-
ance.”
II. The Literature
The opinion in NationsBank and other recent Supreme
Court opinions considering the scope of “the business of
insurance” are instructive not only for what they say, but
for the sources they look to for authoritative support. The
modern Court has shown a readiness to look to “the liter-
ature” on insurance, including insurance treatises, legal
dictionaries, and general dictionaries, for yep in
determining the meaning of “insurance” and the appro-
priate scope of McCarran-Ferguson’s “business of insur-
ance” language. After reviewing this literature in regard
to the question now before us, I find that it is nearly
unanimous in directing us to the conclusion that the sell-
ing of a specialized annuity by a national bank is not “the
business of insurance.”
The NationsBank Court twice relied on Appleman &
Appleman’s insurance treatise as authoritative on the
proper understanding of annuities and insurance—once for
the proposition that annuities are primarily investment
products, 115 S. Ct. at 815, and once for the proposition
that the sale of a product by an insurance company does
re inevitably render the product insurance. Jd. Appleman
a pleman recognize a clear distinction between “annui-
ties” and “insurance.” They note that annuities are often
used as tax-saving devices and may be established by
charitable gifts and gifts within a family, as well as be-
ing sold by institutions like insurance companies. 1 JOHN
A. APPLEMAN & JEAN APPLEMAN, INSURANCE LAW AND
PRACTICE § 81 (1981).- In. a section entitled “Annuities
Issued he Life Insurance Companies,” Appleman & Apple-
man specifi cally consider the question whether annuities
are “insurance”’ and decisively find that they are not. /d.
at § 84. They begin as follows: “Ordinarily, it is recog-
nized, even by laymen, that contracts of life insurance and
29a
of annuity are distinctly different.”* Jd. They note that
life insurance generally involves the insured making set
payments, called “premiums,” over a period of years that
entitle a designated person other than the insured to pay-
ment of a fixed amount in the event of the insured’s
death. They point out that “{ain annuity contract is almost
diametrically opposed to this,” since it traditionally in-
volves the designated recipient paying for the product,
while the isswer takes on the obligation of periodic
(usually yearly) payments in a fixed amount. Jd. Rather
than ‘ ‘creating an immediate estate for the benefit of
others,” ag) elem wel of insurance does, the purchaser
of an annuity “thas reduced his immediate estate in favor
of future contingent income.” Jd. Appleman & Appleman
conclude: “‘Annuity contracts must, therefore, be recog-
nized as investments rather than as insurance.” Id. (em-
gee added) (quoted in NationsBank, 115 S. Ct. at 815).
a Court has also relied upon Couch’s Cyclo-
‘oat of Insurance Law when eared Sie agen about
the nature of insurance, particularly
aspect of insurance. See, e.g., Union Labor Life Ins. Co.
v. Pireno, 458 U.S. 119, 127 n.7, 130 (1982); Group Life
& Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 211
(1979). Couch entitles one of his sections “Annuity as Dis-
tinguished from Insurance.” 19 GEORGE J. CoucH, CYCLo-
PEDIA OF INSURANCE LAW § 81:2 (2d ed. 1983). In this
section Couch considers various state, federal, and Su-
preme Court decisions, as well as legal and insurance com-
mentary, all of which point to the conclusion that annuities
are generally not “insurance.”’ Couch concludes,
An annuity contract differs materially from an ordi-
nary life insurance contract in that it is payable
during the life of the annuitant rather than upon a
see eee nee oan an Sie Sapereanse
of looking to “ordinary English’ when interpre terms withi
the McCarran-Ferguson Act. Barnett Bank, 116 S. at 1111 (re-
ferring three times to “ordinary English”’).
30a
future contingency, and in many instances it is paid
for in a single payment which is not generally re-
garded as a premium. Consequently, a company en-
gaged in selling annuities is not subject to a statute
applicable to “insurers” unless the statute express-
ly so declares.
Id. at § 81.2, pp. €88-89. Under the Couch analysis, the
selling of annuities should not be considered “the business
of insurance” under the McCarran-Ferguson Act, since the
Act does not expressly define the issuing of annuities as
part of “the business of insurance.’
The two dominant legal encyclopedias, American Jurispru-
dence (““Am. Jur.’’) and Corpus Juris Secundum (‘‘C.J.S.”’),
likewise strongly direct the conclusion that annuities are
not “insurance” and that the selling of annuities is not
“the business of insurance.” C.J.S., in particular, does an
excellent job of illuminating the distinction between an-
nuities and true insurance products. C.J.S. notes that the
term “annuity,” as it is currently used, “designates a
fixed sum, granted or bequeathed, payable periodically, at
aliquot parts of a year, at stated intervals, and not neces-
y annually.” 3A C.J.S. Annuities § 2 (1973). C.J.S. also
izes annuities as being a form of investment, rather
than a brand of life insurance: “An annuity is not an in-
demnity against loss of death, but is essentially a form
of investment, notwithstanding the fact that in its usual
form payments are dependent upon the continuity of the
grantee’s life.”” Id. The basis for this conclusion is ex-
plained in a later section that specifically addresses the
difference between annuities and insurance.
An annuity contract differs from an insurance con-
tract, and it comprehends few of the elements of an
® The Couch analysis would leave open the possibility, also noted
supra at note 3, that a state could define annuities as “insurance”
under its own insurance code and thus proscribe their sale by non-
insurance company state entities (like state banks).
ae
3la
insurance contract. An annuity contract is distin-
i from an insurance contract in that insurance,
as generally understood, is an agreement to indem-
nify against loss in case of property damaged or de-
stroyed or to pay a specified sum on the death of
insured or on his reaching a certain age, while an
annuity is generally understood as an agreement to
pay ba specified sum to the annuitant annually dur-
ing life.
From an insurer’s viewpoint insurance looks to
longevity, while annuity looks to transiency. An an-
nuity is a provision for life with no indemnity feature;
the risk assumed is to pay as long as the insured may
live, and it is not based on contingency of loss.
The existence of the contingency that payments are
dependent upon the continuity of the annuitant’s life
does not bring an annuity within the classification of
insurance. An annuity is not an insurance contract
{even if] it provides for death benefits, refund an-
nuities, or continuation of ole yments to a designated
person after the primary beneficiary’s death.
Id. at Annuities § 3(c) (emphasis added).
The C.J.S. chapter on “insurance,’”’ which has been up-
dated recently, reaffirms the distinction between annuities
and insurance. C.J.S. recognizes that “the underwriting
of risk” has been commonly conceived by the courts and
in popular understanding as the “earmark of insurance.’
44 C.J.S. Insurance § 2a) (1993); see, e.g., VALIC, 359
U.S. 65, 73 (1959); see also infra section [II. This under-
writing ‘of risk involves two basic elements: the s
of loss from the insured to the insurer (commonly called
“risk transfer’’) and a distribution of risk among similarly
situated persons (often called “risk ri stg 44 C.J. g.
Insurance § 2a). But the term “risk” in the insurance
context is used in a narrow, gon sense that accords
with the traditional definition of “insurance.” C.J.S. notes
that “risk” in the insurance sense deals with loss or in-
juries that occur due to a “particular peril” that is in-
sured against (such as death, fire, accident, or property
32a
damage), which results from the occurrence of a specific
“casualty” or “fortuitous event”—an event which, so far
as the parties to the contract are concerned, is dependent
on chance. Jd. at Insurance § 860. Accordingly, “Insurance
has been said to be best defined as a contract whereby
one undertakes to indemnify another against loss, dam-
age, or liability arising from an unknown or contingent
event.? Id. at § 2(a) (all emphasis added).
Annuities, however, do not involve indemnification, loss/
damage/liability, or contingent events. Annuities generally
involve fixed payments determined by an agreed-upon in-
vestment feature (principal plus a guaranteed rate of in-
terest),?° rather than by the need to indemnify a particu-
lar economic loss. Annuity payments are given out accord-
ing to a pre-set schedule, rather than when something
“bad” happens. Thus there is no loss, damage, or liabil-
ity component. Annuity payments do not commence with
a contingent event, but rather begin on a contractually-
established date and continue over a period of time—
either to a pre-set ending point (such as a period of years)
or until the occurrence of a contingent event (such as the
death of the annuitant).! After considering the implica-
tions of the C.J.S. definition of “insurance,” it is not sur-
10 Even variable annuities, under which the amount of payments
can vary according to the investment success of the issuer, involve
an agreed-upon formula for calculating the payments to be made.
VALIC, U.S. 65, 69-72 (1959).
11 Even the broadest definition of “insurance” Fn, ame by C.J.S.
would not encom annuities. According to this broader defini-
tion, insurance “denotes a contract by which one party, for a com-
pensation called the ‘premium,’ assumes particular risks of the
other party and promises to pay to him or his nominee a certain
or ascertainable sum of money on a specified contingency.” 44
C.J.S. Insurance pl 2a) spa Annuities, wipe eae, do et involve
“premiums,” nor do they i ea t of money at occur-
rence of a specified contingency. At , annuities involve fixed
payments until a specified contingency; but this does not fall
within even the broad definition of “insurance.”
33a
prising that the C.J.S. treatment of annuity contracts in
this ter is short and conclusory: “Generally an an-
nuity contract is not a contract of insurance.” Jd. at § 2(b).
Am. Jur. likewise defines “insurance” in a way that
seems to preclude a finding that an annuity could qualify
as insurance. Am. Jur. recognizes that “insurance,” even
broadly defined, provides for the payment of “a certain
or ascertainable sum of money on a specified contingency.”
43 Am. Jur. 2D Insurance § 1. Am. Jur. also notes that
the authorities substantially agree that insurance involves
a payment “on the destruction, death, loss, or injury of
someone or something by specified perils.” Jd. Am. Jur.
thus ee that an insurance contract traditionally
comes to fruition with the occurrence of “an unknown or
contingent event” or a “specified peril.” Jd. Hence its con-
clusion regarding annuities, by now familiar, is not surpris-
ing: “Contracts for annuities differ materially from ordi-
nary life insurance policies, and are not generally regarded
as such. Consequently, a company engaged merely in sell-
ing annuities does not conduct an insurance business, and
is not an insurance company unless made so by a broad
statutory definition of insurance companies.” Jd. at Insur-
ance § 5 (emphasis added). Once again, McCarran-Ferguson
does not re we “fnsurance” to include annuities, nor does
it define “insurance company” so as to include an entity
that merely sells annuities.
This literature section would not be complete without
also addressing the dictionary evidence on the meaning
of “insurance.” The Supreme Court has looked to Black’s
Law Dictionary and Webster’s New International Diction-
ary in this regard. See, e.g., NationsBank, 115 S. Ct. 810,
817 (1995) (quoting the Black’s Law Dictionary definition
of “insurance”); Royal Drug, 440 U.S. 205, 211 n.7 (1979)
(quoting Webster’s New International Dictionary defini-
tion of “‘insurance’’). I do the same. Black’s defines “‘in-
surance” as follows:
A contract whereby, for a stipulated consideration,
one party undertakes to compensate the other for
34a
loss on a specified subject by specified perils. . . .
A contract whereby one undertakes to indemnify an-
other against loss, damage, or liability arising from
an unknown or contingent event and is applicable only
to some contingency or act to occur in the future.
BLACK’s LAW DICTIONARY 802 (6th ed. 1990). Once again,
the emphasis on loss that occurs due to some specific peril
or contingent event, at which time (and not before), the
rotected party will be indemnified simply does not allow
or the conclusion that an annuity can qualify as “insur-
ance.” Not only is the language of insurance (“under-
write,” “policy,” “premium,” etc.) totally different from
that of annuities, the substance and effect of an insurance
agreement is totally different from that of an annuity
agreement.!?
12 The Black’s Law Dictionary definitions of “annuity insurance”’
and Byars | policy,” noted by the majority supra at p. 15, n.6,
might initi seem to undermine the conclusion that an annuity
is not p y characterized as “insurance.” For while the
definitions of “annuity” and “insurance” in Black’s would make
these terms mutually exclusive, the reference to the term “an-
nuity insurance” under the main definition of “insurance” and the
separate definition of “annuity policy” do seem to contemplate an
overlap between insurance and annuities. The definition given by
Black’s for “annuity policy” is as follows: “An insurance policy
providing for monthly or periodic payments to insured to i
at fixed and continue insured’s life. Hamilton v. Penn
Mut. Life Ins. Co., 196 Miss. 345, 354, 17 So.2d 278, 280 (1944).”
Biack’s Law Dictionary 90 (6th ed. 1990). (Actually, the holding
in Hamilton was that annuities are most certainly not life insur-
ance; the court simply found that because insurance companies are
authorized to issue the policies, they were subject to state in-
surance laws regulating the business of life insurance. 17 So.2d
at 279-80.) And the Black’s definition provided for “annuity insur-
ance,”’ which appears in a list of nearly 100 types of insurance
noe vagy ve the main definition o ee, is nearly
equivalent: “An insurance contract calling for periodic payments
to the insured or annuitant for a stated period or for life.”
Buiack’s Law at 802. Based on Black’s more general definitions
of “annuity” and “insurance,” however, it appears that the defin-
(Footnote continued on following page)
35a
Webster’s definition of “insurance” simply substantiates
and echoes those provided above. It reads as follows:
la: the action or process of insuring or the state
of being insured usu. against loss or damage by a
contingent event (as death, fire, accident, or sir fy
b: means of insuring against loss or risks . .
the business of insuring persons or property; ee
a device for the elimination or reduction of an eco-
nomic risk common to all members of a large group
and emplo oying a system of oe contributions out
of which losses are paid b: coverage by contract
whereby for a stipulated consideration one party un-
dertakes to indemnify or guarantee another against
loss by a specified contingency or peril... .
WEBSTER’S THIRD NEW og png DICTIONARY 1173
(1993) (emphasis in original). a now the refrain is more
than familiar to the reader. The focus on indemnifying
against economic loss/damage due to future, contingent
events/perils simply belies any attempt to place annuities
within the ambit of the term “insurance.” Insurance com-
panies may well be allowed to sell annuities, just as they
12 continued
ing of these terms simply results from the fact that insurance com-
on have long been associated with selling annuities, which they
— _ sometimes termed “annuity insurance” or bogs poli-
licy” being a word specifically associated with the insur-
poet and used to refer to the written insurance contract,
as Black’s notes in its main definition of “insurance.” Jd. Thus
I interpret Black’s recognition and definition of the terms “annuity
insurance” and “annuity policy,” which are basically oxymorons
under my analysis, simply to reflect acknowledgement of the loose
way in which these terms sons sometimes been used (particular-
ly within the insurance industry), rather than an indication that
annuities can reasonably be classified as a of insurance.
Among the insurance treatises I reviewed, all of which oe gg
long lists of the myriad different types of insurance available, |
did not find one reference to “annuity insurance.” In my view,
the term is simply a misnomer for annuity products that are sold
by insurance companies.
36a
are sometimes allowed to make loans, but they are not
engaging in the “business of insurance” when they do so.
Yet amidst the modern literature on the scope of “insur-
ance,” there is at least one respected treatise that does
to place some annuities within the realm of “insur-
ance.” See ROBERT E. KEETON & ALAN I. Wipiss, In.
SURANCE Law § 1.5(c) (1988) (stating that the class of in-
surance termed “life insurance”’ includes traditional life
insurance, personal accident insurance, health insurance,
and annuity contracts). And the Court has looked
to Keeton’s insurance law treatise for guidance in previous
insurance cases—though never for the proposition that an
annuity can be considered “insurance” and not in Nations-
Bank—so it seems prudent to consider it here. See, e.g.,
Pireno, 458 U.S. 119, 127 n.7, 131 (1982) (citing Keeton
for recognition of risk transfer and distribution elements
of insurance and for claim that insurance policy itself
defines ae of risk transferred); Royal , 440 US.
205, 211 (1979) (citing Keeton’s oo of insurance
as “ ment for transferring and distributing risk’’).
Although Keeton emphasizes the significance of the risk
transfer and distribution elements of “insurance,” he
recognizes that these components alene do not make some-
thing “‘insurance.’’ “Insurance is generally understood to
be an ment for transferring and distributing risks.
U , this characterization is neither very precise
nor univ applicable as a definition of insurance be-
cause it describes many other arrangements and relation-
ships which almost uniformly are not regarded or treated
as insurance transactions.” Jd. § 1.1(b). ifically, Keeton
notes that a warranty that guarantees quality of mer-
chandise, an agreement to maintain a vehicle in good re-
ir, and even an attorney’s agreement to take a case
or a fixed fee all involve risk transfer and risk distri-
bution; yet such contractual arrangements “almost uni-
formly are not treated as insurance transactions” and are
not subject to state insurance codes. Jd. at § 1.2.
Thus Keeton izes the difficulty of formulating an
appropriate, generalizable definition of “insurance,” and
37a
he emphasizes that a definition suitable in one context
may be lacking in another: “There is no single conception
of insurance that is universally y app plicable for use in dis-
my involving questions of law.”” Jd. § 1.1(b). Nonethe-
ess, Keeton does offer a basic definition of “‘insurance,”’
which accords with the definitions considered above. He
writes, “An insurance contract generally involves an agree-
ment, by which one party (usually identified as an insurer)
is committed to do something which is of value for another
party (usually identified as an insured or a beneficiary)
upon the occurrence of some specified contingency.” Jd.
(emphasis added). Yet this definition, even acknowledging
Keeton’s caveat about not demanding perfect, overarching
definitions, raises substantial questions about Keeton’ s
willingness to treat some annuities as “insurance.”
Keeton describes annuities as follows:
An annuity contract ordinarily provides for the pay-
ment of a fixed-dollar annual benefit commencing at
a specified date and continuing as long as the an-
nuitant lives. The traditional annuity contract is in
essence and in principal purpose a risk transferring
and a risk distributing contract, and this type of con-
tract is frequently treated as a form of insurance. The
uncertainty in this context is the risk of long life, in
which case the annuity contract will pay the annui-
tant substantially more than the company received
(as a result of both premium payments and invest-
ment earnings) on behalf of that annuitant to create
the annuity benefit.
Id. at § 1.(cX4) (emphasis added). What Keeton does not
explain (and what the other commentators appear to find
decisive) is why a product that provides for payment
“upon the occurrence of” some specified event (i.e., begin-
ning with that event), as insurance does, should be treated
as equivalent to a product that provides for payment “
long as’’ or until some specified event occurs (i.e., colleen
with that event), as an annuity does. The majority notes
this feature by calling annuities the “mirror image” of
insurance. See supra p. 11. But to my mind, the mirror
38a
—. of something is the reverse of that thing, which
in this case amounts to annuities being the opposite of
insurance.
Keeton does note that “refund annuities” are more like
investments, and less like insurance, than traditional an-
nuities.15 KEETON at § 1.5(cX4). The Retirement CD is a
refund annuity. The purchaser of the Retirement CD is
guaranteed a return of at least the secrued value (pri
cipal plus interest) of the CD up until the maturity date.
If the purchaser dies before the maturity date, the value
of the CD at the time of death (all contributions made
plus accrued interest) will be disbursed to the annuitant’s
estate or designated beneficiary. Likewise, if the annui-
tant dies after the maturity date but before the annuity
payments received total the value of the CD as of the
maturity date, the annuitant’s estate or designated bene-
ficiary will be given the difference between the value of
the CD as of the maturity date and the total of the pay-
ments already received. Thus it is even more inappro-
priate to call the Retirement CD “insurance” than it is
to call traditional annuities “insurance.”” Perhaps Keeton
himself would not do so.
Ill. Caselaw
The parties have not presented, and I am not aware
of, any Supreme Court or federal circuit court case that
addresses the issue before us: the power of a state to
regulate as “insurance” the selling of an annuity product
by a national bank. The recent NationsBank case, dis-
cussed in section I above, is the most relevant authority
13° A “refund annuity” is one in which the “{ajnnuitant is assured
a specified annual sum during his life, with the further assurance
that i in the event of his premature death there will be paid to his
estate an additional amount which represents the difference be-
tween the purchase price and the amount paid out during annui-
tant’s life.” Buack’s Law Dictionary 90 (6th ed. 1990); see also
3A C.J.S. Annuities § 2 (1978).
39a
on the issue, but some of the other cases relied upon by
the majority are worth taking up, both for the aid they
can provide in addressing the issue before us and to recog-
nize their limitations.
The concept of “mortality risk” and the distinction be-
tween “insurance risk’’ and other types of risk have been
addressed by the Supreme Court as early as the 1940’s
and 50’s. In Helvering v. Le Gierse, 312 U.S. 531, 539
(1941), the Court emphasized that for a contract to qualify
as “insurance”’ under a federal statute, it must contain
“fan actual ‘insurance risk.’ ’’'* The Le Gierse Court ex-
plained that implicit in “the word ‘insurance’ in its com-
monly accepted sense. . . . is acknowledgement of that
fact that usually insurance payable to specific beneficiaries
is designed to shift to a group of individuals the risk of
premature death of the one upon whom the beneficiaries
4 In Le Gierse, 312 U.S. 531, the Court was considering whether
the proceeds of a particular insurance policy, issued jointly with
an annuity contract, were includable within the decedent’s gross
estate for federal estate tax . Under the Revenue Act,
money “receivable as insurance”’ by beneficiaries of the deceased,
up to $40,000, could be excluded from the decedent’s gross estate.
e Le Gierse Court found that the annuity contract and the life
insurance policy had to be considered together and that they “counter-
acted each other.” Jd. at 540-41. The Court emphasized that the
cumulative effect of the annuity contract and insurance con-
tract, which were issued by the same insurance company and
would not have been issued separately, nullified the “insurance
risk”’ that otherwise would have been part of the life insurance
contract. Jd. at 541 (“{IJn this combination the one neutralizes the
risk customarily inherent in the other.’”). The Court held that
because the “insurance risk” of the life insurance policy was
counteracted by the “investment risk” of the annuity policy, the
proceeds from the insurance policy did not qualify for the estate
tax “insurance” exemption. Jd. at 542 (“Any risk that the [annui-
ty] prepayment would earn less than the ge ad gy to respon-
dent as an annuity was an investment risk similar to the risk
assumed by a bank; it was not an insurance risk . . . .”). The Court
viewed annuities and insurance as ites: “From the company’s
viewpoint, insurance looks to longevity, annuity to transiency.” /d.
at 541.
40a
are dependent for support.” Jd. at 540. In other words,
the “insurance risk” shifted through life insurance is the
economic risk of | a breadwinner. The Le Gierse
Court also contrasted the “insurance risk” of true insur-
ance with the “investment risk” of annuities and stated
— “annuities and insurance are opposites.” Jd. at 542,
1
Similarly, in Securities and Exchange Comm’n v. Vari-
able Annuity Life Ins. Co., 359 U.S. 65 (1959) (VALIC)
(cited by the majority supra p. 12), the Court consid-
ered whether the variable annuities at stake were “insur-
ance” for purposes of the Securities Act of 1933, McCarran-
Ferguson, and the Investment Company Act.'5 After
noting that the question at stake was one of federal law,
id. at 69, the Court considered the ndents argument
that the variable annuities contain tained * “mortality msk,”’
which made them “insurance.’’** The Court frend that
18 The case involved an attempt by the Securities and we
Commission to require that variable annuities be
securities under the Securities Act of 1933. The respondent insur
ance companies maintained that McCarran-Ferguson
several chates and the District of Gomme resuaned candies
under their insurance codes. They also claimed that the annuities
were exempt under the Securities Act itself, which exempts both
annuities and insurance, see infra note 1 18, as well as the Invest-
ment Company Act. The Y Court simplified the n at issue
to the element shared by all three statutes: “The question com-
mon to the exemption provisions of the Securities Act and the
Investment Company Act and to x" 2(b) of the McCarran-Ferguson
Act is whether respondents are contracts of insvirance.”
VALIC. 359 U.S. at 68 (emphasis Thus the Court con-
sidered only whether the variable annuities were “insurance,” not
whether they qualified under the Securities Act exemption for
annuities.
16 The Court described the alleged “mortality risk” as follows:
Each issuer [of the variable annuities] assumes the risk of mor-
tality from the moment the contract is issued. That risk is an
actuarial prognostication that a certain number of annuitants
will survive to specified ages. Even if a substantial number
(Footnote continued on following page)
4la
this “mortality risk” element did not, however, make the
variable annuities “insurance”: “The risk of mortality,
assumed here, gives these variable annuities an aspect of
insurance. Yet it is apparent, not real; superficial, not
substantial.” Id. at 71 (emphasis added). The Court em-
phasized that since the variable annuities did not involve
any fixed return, all the investment risk remained with
the annuitant, not the issuer. Thus there was “no true
risk in the insurance sense. . . . There is no true under-
writing of risks, the one earmark of insurance as it has
commonly been conceived of in popular understanding and
usage.”’ Id. at 71-73.
The VALIC Court clung to a stricter definition of “‘in-
surance” than the one proposed by the Securities and Ex-
change Commission. The Court noted that the annuity
contracts did have “one true insurance feature,” since
they provided life insurance to insurable applicants 60
years of age or younger on a decreasing basis for five
years. Nonetheless, the Court found that even this true
insurance feature was “ancillary and secondary to the an-
nuity feature’ and thus did not turn the annuities into
“Insurance.” Jd. at 72 n.15. Although the VALIC Court
did mention “mortality risk” in the sense that today’s ma-
jority relies upon, the issue at stake was not this risk,
but the necessity of financial risk-taking on the part of
the insurance company. The variable annuities imposed
little economic risk on the issuing insurance companies,
since the return on the annuity simply varied with the
success of the insurance companies’ investments. Jd. at
69-70. This led the Court to find that the annuities at
issue were not “insurance.” The VALIC Court did not
16 continued
live beyond their predicted demise, the one issuing the
annuity—whether it be fixed or variable—is ality re to make
the annuity payments on the basis of the mo rediction
reflected in the contract. This is the mortality gre
VALIC, 359 U.S. at 70.
42a
offer a general definition of “insurance,” noting instead
that it “would not undertake to freeze” the concepts of
“Insurance” and “annuity” according to their meaning at
the time the federal statutes were passed.'7 Jd. at 71. It
simply emphasized that “insurance” must involve some
—— risk-taking on the part of the insurance company.
In more recent cases the Supreme Court has continued
to emphasize that the risk transferred by “insurance”
must be an insurance type risk, not just any old risk:
“Both the ‘spreading’ and the ‘underwriting’ of risk refer
in this context to the transfer of risk characteristic of
insurance.” Pireno, 458 U.S. 119, 130 (1982) (emphasis
added). In addition, the Royal Drug Court, while discuss-
ing the risk-spreading characteristic of insurance, cited the
Webster’s New International Dictionary definition of “‘in-
surance,” which states that insurance must protect against
“loss or damage by a contingent event” or by a “specified
contingency or peril.” 440 U.S. 205, 211 n.7 (1979); see
supra section II for full text of Webster’s definition.
As the treatises and definitions discussed in section I]
reveal, we define “the business of insurance” too broad-
ly if we fail to recognize the necessary connection to a
contingent event or peril. Although the Supreme Court
17 Despite the Supreme Court’s expressed intent not to provide
a comprehensive definition of “insurance” in VALIC, the major-
ity attempts to find in this decision a formula for “insurance,” i.e.,
insurance = mortality risk + guaranteed return. See supra p. 12.
In addition, the VALIC Court 7 rejected the claim that
the “risk of declining returns in times of depression” qualified as
the necessary “risk in the insurance sense.’”’ 359 U.S. at 71. The
Court noted, “We deal with a more conventional concept of risk-
bearing when we speak of ‘insurance.’” Jd. Thus the majority’s
reference to a “decline in the market,” see supra p. 13, as a “risk”
that the Retirement CD protects against, cannot possibly qualify
as an “insurance risk” that makes the CD “insurance.” Furth
more, with the possible exception of the stock market crash of
1929, “a decline in the market” generally does not qualify as “a
single, contingent event,” as suggested by the majority. Jd.
sins.
ae ee ny
43a
has not yet had to focus on this necessity, since it did
not impact the cases considered, the definition quoted in
Royal Drug, along with the modern Court’s repeated reli-
ance on sources like Webster’s, Couch, and Appleman &
Appleman for addressing definitional questions in the insur-
ance realm, see supra section II, strongly suggest that the
Court would recognize that “insurance” under McCarran-
Ferguson Spe gage that coverage commence only with the
happening of a contingent event or specified peril. An-
aaah, such as the Retirement CD, do not possess this -
characteristic, and thus cannot qualify as “insurance.”
It should be emphasized in the context of the current °
discussion that none of the Supreme Court cases dealing
with McCarran-Ferguson (or other insurance issues) have
been about the power of states to regulate the selling of
annuities as insurance. In fact, the cases cited by both
sides have almost all involved attempted regulation of
state-licensed insurance companies under federal securities
and antitrust laws, rather than the regulation of federal
entities under state insurance codes. The issues at stake
in the Supreme Court’s “insurance cases’’® fall into three
basic categories: 1) whether a particular state statute was
enacted “for the purpose of regulating the business of in-
surance” under McCarran-Ferguson, thus preempting an
overlapping federal statute, see United States Dep't of the
Treasury v. Fabe, 113 S. Ct. 2202 (1993) (holding that
state insolvent insurance company statute giving claims
by United States fifth priority, while federal bankruptcy
statute would give them first, e federal preemption
to extent that it protects policyho vee en and covers admin-
18 The Supreme Court’s recent decision in Barnett Bank, 116 S.
Ct. 1108, is truly both an insurance case and a banking case, since
it involves the power of national banks to sell insurance in small
towns, despite state statutes to the contrary. See supra od a
cause the focus of the case is on the express authori
by the National Bank Act—which fits within McCarran- ers S
exception to state law preemption—rather than on whether the
national banks were selling “insurance” (they clearly were), I treat
Barnett Bank in Section IV.
44a
istrative costs); Securities and Exchange Comm’n v. Na-
tional Securities, Inc., 393 U.S. 453 (1969) (holding that
state law aimed at protecting insurance company share-
holders, rather than policyholders, not enacted for purpose
of regulating “the business of insurance’’); 2) whether a
particular practice by an insurance company relates to
“the business of insurance,” such that the McCarran-Fer-
guson antitrust exemption applies,!® see Pireno, 458 U.S.
119 (1982) (holding that insurance company use of “peer
review” process to determine coverage for submitted
claims does not constitute “the business of insurance’’);
Royal Drug, 440 U.S. 205 (1979) (holding that insurance
company “Pharmacy Agreements” providing for $2 pre-
scription drugs at participating pharmacies do not consti-
tute “the business of insurance,” since agreements made
with pharmacies rather than policyholders); and 3) whether
a particular product sold by an insurance company falls
within the exemption for insurance policies and annuity
contracts under the Securities Act,?° see United Benefit,
18 McCarran-Ferguson exempts the business of insurance from
wry Fanta law when that business is already regulated by
state law:
No Act of Congress shall be construed to invalidate, impair,
or supersede any law enacted by any State for the purpose
of the business of insurance . . . unless such Act
ifically relates to the business of insurance: Provided, That
after June 30, 1948, . . . the Sherman Act, . . . the Clayton
Act, and the . . Federal Trade Commission Act, as amended,
shall be applicable to the business of insurance to the extent
that such business is not regulated by State law.
15 U.S.C. § 1012(b).
20 The relevant section exempts the following from the Securities
Act of 1933: “Any insurance or endowment policy or annuity con-
tract or optional annuity contract, issued by a corporation subject
to the supervision of the insurance commissioner, bank commis-
sioner, or any agency or officer performing like functions, of any
State or Territory of the United States or the District of Colum-
bia.” 15 U.S.C. § 77c{aX8). The fact that the Securities Act exempts
annuities and insurance separately exemplifies a Congressional
recognition of their distinct nature.
45a
387 U.S. 202 (1967) (holding that deferred annuity con-
tract not exempt because it is essentially “investment con-
tract” during accumulation phase); see also VALIC, 359
U.S. 65 (1959) (discussed above).?!
g the scope of the insurance cases considered
by the eee Court thus far, and how the focus of these
cases differs from the one at hand, serves to demonstrate
the limitations of these cases for deciding the issue before
us. In particular, the three-part test cited by the major-
ity for determining what constitutes “‘the business of in-
surance” under McCarran-Ferguson, see supra p. 6, has
an impressive pedigree of Supreme Court endorsement, yet
proves largely inappropriate and unhelpful to answering
the question now before us. The three criteria first evolved
21 The Seventh Circuit cases are in accord. In N.A.A.C.P. v.
American Family Mut. Ins. Co., 978 F.2d 287 (1992), we consid-
ered application of the federal Fair Housing Act to the insurance
industry practice of Pecganera A a oe ee or declining
to write insurance for people who live in particular geographic
areas. We held that even though the FHA did did not “specifically
relate[ ] to the business of insurance,”’ so as to avoid McCarran-
Ferguson preemption by state law (i.e., reverse preemption), the
FHA did not in any way conflict with or disp lace a state insurance
law. Thus we allowed the practice of reining to be challenged
under the FHA. We noted, however, that “{ilf Wisconsin wants
to authorize redlining, it need only say so; if it does, any challenge
to that practice under the auspices of the Fair Housing Act be-
comes untenable.” Jd. at 297. Our decision in Associates in Adoles-
cent Psychiatry, S.C. v. Home Life Ins. Co., 941 F.2d 561 (7th
Cir. specifically, fits more easily into the categories noted in the text,
— category three. We “held that the “Flexible Annuity”
Ye issue did qualify as an annuity, such that it was exempt from
the registration requirements of the Securities Act. Although we
mentioned in dicta that “(annuities oe contain an element
of insurance” (since the longer the r lives, the more the
seller has to pay), id. at 565, we 7 penguins not equate annuities and life
insurance. And since the Securities Act provides separate exemp-
tions for annuities and insurance, we did not have any reason 4
consider whether the annuity at issue could fairly be called “‘i
surance.”
46a
in the Royal Drug case and were later summarized by
the Court in Pireno as follows:
first, whether the practice has the effect of trans-
ferring or spreading a policyholder’s risk; second,
whether the practice is an integral part of the policy
relationship between the insurer and the i ; and
third, whether the practice is limited to entities with-
in the insurance industry.
458 U.S. at 129. Moreover, the Court recently reaffirmed
this “tripartite standard for divining what constitutes the
‘business of insurance.’ ”’ Fabe, 113 S. Ct. at 2206 (citing
Pireno).22 Unfortunately, this test arose in the context
of cases considering the activities of insurance companies.
All three criteria, and particularly the second criterion,
appear directed at examining an insurance company prac-
tice—not a practice by a non-insurance company that may
arguably be termed “the business of insurance.” The
Retirement CD, at least on its face, does not involve
“policyholders,” a “policy relationship,” an “insurer,” or
an “insured.”’ And as for the third criterion, it simply
restates the very question before us: should the selling
of this particular product be limited to entities within the
22 The majority rightly notes that the Fabe Court recognized that
this test develo in two cases where the issue at stake was
whether the antitrust exemption of McCarran-Ferguson applied.
The Fabe Court intimated that the ween’ f of “laws enacted for
the p of regulating the business of insurance” (the first
clause of § 1012(b), and the one at stake in Fabe) “necessarily en-
co! more than just ‘the business of insurance’ ” (the second
clause of § 1012(b), and the one at stake in Royal Drug and
Pireno). 118 S. Ct. at 2210. Any such distinction in scope between
the two clauses would not affect this case, however, since there
is no question that the Illinois Insurance Code is a law enacted
for the purpose of ting the business of insurance. The only
question here is whe Illinois is allowed to apply its insurance
code to national banks by calling their offering of an annuity prod-
uct “the business of insurance.”
47a
insurance industry?2* The most relevant part of the test
is the first criterion—whether the practice has the effect
of transferring or spreading a policyholder’s risk—but it
alone cannot decisive.
Two additional points demonstrate the limitation of the
Supreme Court’s pre-NationsBank McCarran-Ferguson
jurisprudence for addressing the question now before us.
First, the Court’s stated approach to understanding the
scope of McCarran-Ferguson reveals that it has always
been considering insurance company practices. Since 1969
the Supreme Court has steadfastly asserted that the focus
of McCarran-Ferguson is on “the relationship between the
insurance company and the policyholder.” National Se-
curities, 393 U.S. 453, 460 (1969); Royal Drug, 440 U.S.
at 216; Pireno, 458 U.S. at 128; Fabe, 113 S. Ct. at 2208.
Obviously, such a focus falls short in the case at hand,
as there is no such “relationship” to protect. The Retire-
ment CD relationship involves no insurance companies and
arguably no “policyholders.” Similarly, the Court has some-
times emphasized that the McCarran-Ferguson “reverse
preemption” doctrine is directed at “the ‘business of in-
surance’ and not the ‘business of insurance companies.’ ”
Royal Drug, 440 U.S. at 217; Pireno, 458 U.S. at 129
(quoting Royal Drug); National Securities, 393 U.S. at
459-60 (“Insurance companies may do many things which
are subject to paramount federal regulation; only when
they are engaged in the ‘business of insurance’ does
[McCarran-Ferguson] apply.”’). In these cases the Court
has recognized limitations on the federal preemption ex-
emption under McCarran-Ferguson, noting that certain
activities of insurance companies remain subject to federal
23 If the wo seh rather: selporg monn seattle ques-
tion of whether the practice at issue has been limited to entities
within the insurance industry, rather than the regulatory ques-
tion of whether the practice has been legally restricted to only
the insurance industry, the answer for annuities is that other en-
tities have historically issued them, particularly charitable organiza-
tions and non-profit institutions.
48a
law (i.e., that certain insurance company activities do not
constitute “‘the business of insurance’’).24 The Court has
not yet considered a case, however, where a state prop-
erly regulated the conduct of a non-insurance company
under its McCarran-Ferguson power to regulate “the busi-
ness of insurance.’’25
IV. State Regulation of National Banks
Since the infancy of our nation and by way of some of
the most noted Supreme Court decisions in our history,
national banks have been protected from intrusive regula-
tion by the states.2© Thus if we conclude, as the major-
24 The National Securities Court also neers the danger of
a to rely on the legislative history of McCarran-Ferguson
to unravel the significance of the phrase “the business of insur-
ance.” The Court noted that “Congress was mainly concerned with
the relationship between insurance ratemaking and the antitrust
laws, and with the power of the States to tax insurance com-
panies.” 393 U.S. at 458-59. The Court concluded, “The debates
centered on these issues, and the Committee reports shed little
light on the meaning of the words ‘business of insurance.’” /d.
at 459. The report referred to by the majority, see supra p. 15,
is consistent with the Supreme Court’s observation, as it sheds
little light on the critical issue. In fact, the entire legislative history
contains not a single reference to “annuities” by any member of
or or any witness during the debates and testimony which
resulted in the Act.
25 In the only case to raise the issue, the state insurance law
was found to be preempted by a specific provision in the National
Bank Act—a provision fitting within McCarran-Ferguson’s express
exception to state control of “the business of insurance,” where
a f statute “specifically relates” to that business. See Barnett
Bank, 116 S. Ct. 1103 (discussed infra). Thus there was no true
conflict between McCarran-Ferguson’s grant of limited insurance
sovereignty to the states and the power granted national banks
to sell insurance in small towns.
26 See, e.g., M‘Cullough v. Maryland, 17 U.S. (4 Wheat.) 316, 435-
37 (1819) Salecting state power to tax national bank and focussing
on national banks as instruments of supreme national government
that states have no power to “retard, impede, burden, or in any
(Footnote continued on following page)
__
49a
ity does, that McCarran-Ferguson allows the State of IIli-
nois to regulate the selling of annuities by national banks,
we must then consider whether McCarran-Ferguson trumps
the countervailing federal principle, enshrined in the Na-
tional Bank Act, that the banking activities of national
banks are governed by federal law and generally should
not be interfered with by the states. This principle was
just reaffirmed by the Supreme Court in Barnett Bank
of Marion County, N.A. v. Nelson, 116 S. Ct. 1103, 1108
(1996), where the Court referred to our history of national
bank legislation as follows: “That history is one of inter-
preting grants of both enumerated and incidental ‘powers’
to national banks as grants of authority not normally lim-
ited by, but rather ordinarily pre-empting, contrary state
law.” Thus the majority’s interpretation of “the business
of insurance” poses a conflict not merely between state
law and federal law (which in the McCarran-Ferguson
context would usually allow state law to prevail), but
between two overriding principles of federal law: the
supremacy of the federal government in regulating na-
tional banks (the National Bank Act) and the presumed
autonomy of the states in regulating the business of in-
surance (McCarran-Ferguson).
The tradition against allowing state intrusion into the activ-
ities of national banks is a long and lofty one. In Easton v.
Towa, 188 U.S. 220, 229 (1903), the Supreme Court recog-
nized that “{tJhe principles enunciated in M‘Cullough v.
Maryland . . . and in Osborn v. Bank of United States
. .. , though expressed in respect to banks incorporated
directly by acts of Congress, are yet applicable to the
later and present system of national banks.” The Easton
Court was considering an attempt by Iowa to apply their
state banking statute, which forbid the receipt of deposits
26 continued
manner control”); Osborn v. Bank of the United States, 22 U.S.
(9 Wheat.) 738, 860 (1824) (reaffirming principles of M‘Cullough
and noting that national banks are “created for public and national
purposes”).
50a
by insolvent banks, to a national bank. While it did not
question the wisdom of such a statute or that it
was being ied unevenly within Iowa, the sound-
ly rejected state’s attempt to apply it to a national
bank. The Easton Court emghettead the public, indepen-
dent, and national character of the national bank system,
id. at 229-30, and concluded that “{sjuch being the nature
of these national institutions, it must be obvious that their
operations cannot be limited or controlled by state legisla-
tion... .”’ Id. at 230 (emphasis added).
In regard to the policy arguments made by the State
of lowa regarding i Pa retin of protecting bank cus-
tomers—w consumer protection arguments
made by the State of Illinois in the present case—the
Easton Court’s response was two-fold. First, the Court
noted that national banks are regulated by federal law
and that these provisions do seek to protect the depositors
and creditors of national banks from fraudulent banking.
Id. at 230. Second, in response to the Iowa Attorney Gen-
eral’s suggestion that the state provisions were valuable
for holding the banks to a “hi degree of diligence,”
which in turn would “give ] general public ter
cuntidunee in the stub end eabenay of eatinedk Genin,”
id. at 231, the Court simply relied on the absence of Con-
gressional intent to allow such extra protection:
(W]e are unable to perceive that Congress intended
to leave the field open for the states to attempt to
romote the welfare and stability of national banks
y direct legislation. If they had such power it would
have to be exercised and limited by their own discre-
tion, and confusion would necessarily result from con-
ne possessed and exercised by two independent au-
thorities.
Id. at 231-32. Our answer to the consumer protection ar-
guments of Illinois should be of a piece. If Congress has
not allowed for such state control of these national bank
activities, it is no response to say (as Illinois does) that
the state can better protect customers than the Comp-
troller of the Currency can. The issue is one of authority
5la
and power, not competency and expertise. The Easton
Court concluded that “it is not competent for state legis-
latures to interfere, whether with hostile or friendly in-
tentions, with national banks or their officers in the exer-
cise of the powers bestowed upon them by the general
government.” Jd. at 238.
In First National Bank of San Jose v. California, 262
U.S. 366 (1923) (hereinafter San Jose), the Court relied
upon themes similar to those in Easton. While rejecting
an a athenet by the State of California to apply its escheat
law (providing that unclaimed deposits in baal accounts
inactive for more than twenty years. would escheat to the
state) to a national bank, the Court noted that national
banks “are instrumentalities of the federal government.”
Id. at 368. The San Jose Court emphasized that “any at-
tempt by a state to define their duties or control the con-
duct of their affairs is void, whenever it conflicts with
the laws of the United States or frustrates the p a oe
of the national legislation, or impairs the efficiency o the
bank to discharge the duties for which it was crea
Id. at 369. In particular the Court noted: a
state may prohibit national banks from accep pting de
or y impair their efficiency in this regard.” id Such
state regulation would “seem incompatible with the pur-
pose to establish a system of governmental agencies spe-
cifically empowered and expected freely to accept deposits
from customers irrespective of domicile ... .” Jd. at 370.
The San Jose Court concluded by citing a long list of
cases, including M‘Cullough v. Maryland, Osborn v. Bank
of the United States, Easton, and others, as s ap for
the statement that it had “often pointed out the neces-
sity for protecting federal agencies against interference
by state legislation.” Jd.
Over thirty years later, in Franklin National Bank v.
New York, 347 U.S. 373 (1954), the Court continued to
emphasize the sovereignty of national banks in their au-
thority to receive deposits unimpeded by state regulations.
This time the Court rejected the State of New York’s
attempt to apply to national banks an advertising statute
52a
that prohibited use of the word “savings” in bank names
and advertising. The Court noted that “The National Bank
Act authorizes national banks to receive deposits without
qualification or limitation, and it provides that they shall
possess ‘all such incidental powers as shall be necessary
to carry on the business of banking... .’”’ Id. at 376.
The Court found that modern competition for banking busi-
ness necessitated the use of advertising, but could see “no
indication that Congress intended to make this phase of
national banking subject to local restrictions.”” Jd. at 378.
Thus it determined that there was “a clear conflict” be-
tween the freedom to advertise under federal law and the
restrictions of New York law that had to be resolved in
favor of federal law “‘as a matter of supremacy.” Jd. at
378-79. ““However wise or needful [the state] policy, . . .
it must give way to the contrary federal policy.” Jd. at
379.
The Court has never retreated from its insistence that
state laws not be allowed to interfere with the federally
authorized activities of national banks, particularly in re-
gard to specifically authorized activities like the taking
of deposits. Even in First National Bank in Plant City,
Fla. v. Dickinson, 396 U.S. 122 (1969) (hereinafter Plant
City), where the Court did allow the application of a Florida
branch banking statute to national banks in the state, the
Court maintained that “Congress has absolute authority
over national banks.” Jd. at 131. The difference in Plant
City was that the national statute on branch banks in-
corporated state law as to “when, where, and how” any
bank branch office could be operated. Jd. at 130 (citing
the McFadden Act, 12 U.S.C. § 36(c)). Even the parties
in Plant City agreed that the McFadden Act permitted
national banks to have branch offices “if and only if the
host State [would] permit one of its own banks to branch.”
Id. Thus allowing application of the state branch bank
statute to national banks in Florida did not in any way
undermine the Supreme Court’s established jurisprudence
re ing the supremacy and independence of national
banks.
53a
Just this term in Barnett Bank, the Supreme Court in-
voked the decisions in Easton, San Jose, and Franklin
National Bank to emphasize that the history of national
bank jurisprudence has been one of reading national bank
powers broadly and minimizing state interfe:ence with the
exercise of these powers. 116 5. Ct. at 1108-09. The Court
concluded, “In defining the pre-emptive scope of statutes
and regulations granting a power to national banks, these
cases take the view that normally Congress would not
want States to forbid, or to impair significantly, the exer-
cise of a power that Co ss explicitly granted.” Jd. at
1109. The Court noted that this leaves some room for
state regulation, at least when it does not prevent or
ignificantly impair the exercise of national bank powers.?’
Id. In nected the Barnett Bank Court recognized that
when a federal banking statute explicitly provides for
state law oversight, as in the Plant City case, consistent
state regulation is allowed. /d. (citing "Plant City). The
Barnett Bank Court emphasized, however, that “where
Congress has not expressly conditioned the grant of ‘power’
upon a grant of state permission, the Court has ordinarily
found that no such condition applies.” /d. (citing Franklin
National Bank, 347 U.S. at 378, n.7 [listing examples],
for principle that where Congress intends to subject na-
tional banks to local restrictions, it does so expressly).?®
27 As explained infra, there is little doubt that the issuing of the
Retirement CD falls within the express powers of national banks
(since the Comptroller of the Currency says that it does and the
conclusion is a reasonable one); nor is there any doubt that Illinois
intends to significantly interfere with this activity, since it wants
to forbid it entirely.
28 Even the appellee does not contend that Congress expressly
conditioned exercise of the National Bank Act powers to accept
deposits, enter into contracts, incur liabilities, and fund bank
operations—i.e., the powers under which the Retirement CD has
been authorized by the Comptroller of the Currency, see infra—
upon compliance with additional state regulation.
54a
The majority seems to read Barnett Bank as making
some kind of broad statement that McCarran-Ferguson
normally trumps the National Bank Act. See supra p. 17
(“Barnett Bank demonstrates that the Bank Act possesses
no unique immunity from the McCarran-Ferguson Act.’’).
Yet Barnett Bank contains no such message or sugges-
tion. Barnett Bank involved a convergence, rather than
a conflict, between the National Bank Act and McCarran-
Ferguson; thus there was no need to consider which stat-
ute would control. The Court simply recogni that
McCarran-Ferguson itself allows for federal law to pre-
empt state insurance law when the federal statute “‘spe-
cifically relates to the business of insurance.”?° 116 S. Ct.
at 1106 (citing McCarran-Ferguson, 15 U.S.C. § 1012(b)).
And since the federal banking provision at issue, 12 U.S.C.
§ 92, specifically provides for the sale of insurance by na-
tional banks in small towns, the Court found that this
statute fit neatly within the McCarran-Ferguson excep-
tion to state supremacy over “the business of insurance.’
Id. at 1111 ¢* ordinary English, one would say that
this statute specifically relates to the “business of insur-
ance.’ ”’) (emphasis in original). Barnett Bank was about
29 I fully agree with the majority that this provision of McCarran-
Ferguson was a “to protect state [insurance] tion
primarily against inadvertent federal intrusion.” Supra p. 17 (quot-
ing Barnett Bank, 116 S. Ct. at 1112 (emphasis in original)). The
history of McCarran- Ferguson clearly indicates that Congress
the Act in order to protect state control of the insurance
industry against unintentional interference by broad federal stat-
utes, icularly the antitrust laws. me. Soe Darnctt Banh, 116 S. Ct.
at 11 (reviewing history). The National Bank Act, however, is
not such a statute; and my analysis does not .
gest “applying” Bt the Insurance industry. ~
gestion, supra p. 17 ro sate a re banks who want to
yo yy sgt Barnet Ba ivi
es
wie
Tp
at’ chun aus vee bane ral banking. b , not
about federal intrusion into state control of the insurance business.
ae
55a
the meaning of “specifically relates,” not the meaning of
“the business of insurance’”—no one contested that the
national banks desired to sell insurance. As such, it pro-
vides no aid in answering the fundamental question in the
case at hand: whether national banks selling annuities like
the Retirement CD are engaged in “the business of insur-
ance.”*° Barnett Bank’s prim2ry relevance for our inquiry
is its strong affirmation of the presumed power of national
ee ee
erence.
Neither the majority nor the appellee have provided any
reason for retreating from the Supreme Court’s endorsed
stance of robust protection of national banks from state
interference with their banking activities. In fact, neither
the majority nor the appellee even addresses this weighty
issue.*! But it is an issue that cannot simply be ignored.
%° The majority portrays my position as being “that the activities
of national banks are simply not subject ry state interference,
ess of the McCarran-Ferguson Act.” Supra p. 17. I main-
tain no such . For example, I have no doubt that, were it
not for Section 92, the states could forbid national banks to sell
insurance in small towns or that the states can now forbid na-
tional banks to sell (pure) insurance in towns over 5000 people.
Where a national bank is clearly engaged in non- , insur-
ance activities, which are not spedinaily authorized by Congress,
McCarran- Ferguson does seem to allow state regulation, even to
the point of prohibition. The difficulty of this case is that Illinois
wants to regulate as insurance what the Comptroller of the Cur-
rency has found to be banking. See infra.
31 While the issue of national bank supremacy seems to arise
rather infrequently in this circuit, we have previously recognized
the import of the issue. In American Sur. Co. of New York v.
Baldwin, 90 F.2d 708 (7th Cir. 1937), we stated as follows:
National banks are instrumentalities of the federal cree! st mggpaeg
created for a public purpose, and, as such, y tong Snprg
ject to the paramount authority of the United States. y at-
tempt by a state to define their duties or to control the con-
duct of their affairs is void if it conflicts with the laws of the
national government and either frustrates the purpose of the
(Footnote continued on following page)
56a
If we are to approve Illinois’s current attempt to regulate
the national bank activity at issue, we should do so ex-
plicitly and only after consideration of the long and
weighty peter sth ey allowing state intrusion into the
federally authori activities of a national bank, particu-
larly the taking of deposits. Under my approach to the
“business of insurance” question under McCarran-Ferguson,
we need not address the daunting issue of a state regu-
lating the national bank activity of issuing the Retirement .
CD. Since Illinois would have no McCarran-Ferguson au-
thority to regulate the activity as “the business of in-
surance,” we would not have to consider whether this
state regulation accorded with the national and indepen-
dent nature of national banks.
The only seeming escape from this quandary for the ma- |
jority and the appellee would be a conclusion that the
offering of the Retirement CD is not truly a banking ac-
tivity authorized by the National Bank Act. For purposes
of its analysis, the majority assumes that the appellant
national banks are authorized to sell the Retirement CD
under federal law. See supra p. 4. But I would like to
_ ceritlude by going one step further, particularly since leav-
-* ing open the possibility that this activity is not author-
ized by federal law could invite speculation that the im-
mediately preceding analysis is irrelevant to the case at
oni
The Supreme Court in NationsBank has recently re-
minded us that the Comptroller of the Currency has been
“charged by Congress with superintendence of national
31 continued
federal legislation, or impairs the efficiency of these agencies
of the government to discharge the duties for the performance
of which they are created.
Id. at 709. Such a conclusion of law does not wither and die simply
because it has not been relied upon for a long span of years—at
age not without explanation of the cause and circumstances of
its demise.
57a
banks” and is “the administrator charged with supervi-
sion of the National Bank Act . . . [who] bears primary
responsibility for surveillance of ‘the business of bank-
ing.’” 115 S. Ct. 810, 812, 813 (1995). The Court empha-
sized the great deference to be accorded “‘to any reason-
able construction of a regulatory statute adopted by the
agency with the enforcement of that statute.” Jd.
at 813 (quoting Clarke v. Securities Indus. Ass’n, 479 U.S.
388, 403-404 (1987)). The NationsBank Court set forth in
bold terms the rule for evaluating the determination of
an administrator in interpreting the statute with which
he or she has been entrusted: “If the administrator’s
reading fills a gap or defines a term in a way that is
reasonable in light of the legislature’s revealed design, we
ay the administrator’s judgment ‘controlling weight.’ ”
d. at 813-14 (emphasis added) (citing Chevron, U.S.A.,
Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 844 (1984)). Thus we are required to view the Comp-
troller of the Currency’s interpretation of the National
Bank Act through a very deferential lens.
On May 12, 1994, the Office of the Comptroller of the
Currency (“OCC’’) issued a letter to Blackfeet National
Bank stating that it had “‘no objection to a national bank
marketing [the] Retirement CD,” subject to the safety and
soundness conditions set forth in the letter. The OCC
looked to the powers given national banks under 12 U.S.C.
§ 24 (Third and Seventh) and concluded that “the express
authorizations for the Bank to receive deposits and enter
into contracts, coupled with its powers to incur liabilities
and fund its operations, clearly make the Retirement CD
an authorized Bank activity” (emphasis added).** In fact,
aa tly, the Federal Deposit Insurance Corporation (FDIC)
has also concluded that the Retirement CD is a “deposit” un-
der the terms of the Federal Deposit Insurance Act, 12 U.S.C.
§ 18130). The FDIC termed the Retirement CD a “hybrid CD,”
which would be insured by the FDIC like other bank deposits,
up to a maximum of $100,000. The only special limitation on FDIC
coverage is that annuity payments exceeding the value of the
(Footnote continued on following page)
58a
the OCC repeatedly emphasized that the power to sell
the Retirement CD was not merely an “incidental” or
“useful” aspect of the business of banking: “The product
represents the very essence of banking which is embodied
in a bank’s express authority to accept deposits and enter
into contracts, and authority to incur liabilities and fund
its operations.’’%
The*OCC noted that “the inherent relationship that the
Retirement CD customer has with the [issuing national
bank] is that of depositor or creditor.” The Océ rejected
the contention that the life-based payment structure of
the CD made its issue any less sanctioned as an expressly
authorized national bank activity: “The fact that the pro-
duct is structured to provide for interest payments keyed
in part to the expected life of the depositor does not
change the intrinsic nature of the Retirement CD as an
authorized bank product.” The OCC did condition its ap-
proval of the CD, however, on full compliance with seven-
teen listed conditions, which were directed to ensuring
the safety of the product, the soundness of the issuing
32 continued
Retirement CD at the maturity date would not be federally in-
sured, i.e., if the issuing bank failed while the holder of the Retire-
ment CD was still living, but after the total of the annuity dis-
bursements exceeded the account balance as of the maturity date,
the FDIC would not continue making the annuity payments. The
FDIC insisted that banks issuing the Retirement CD make this
restriction clear to potential purchasers, and the OCC has asserted
that it will monitor compliance with this requirement.
33 The OCC also stated:
The Retirement CD is clearly a financial product whose pri-
mary attributes are grounded in the Bank’s expressly author-
ized powers. While somewhat novel in its approach to deter-
mining the interest on deposited funds by providing customers,
inter alia, with a fixed periodic lifetime payment, the Retire-
ment CD nonetheless represents fundamentally a bank au-
thorized product.
59a
bank, and the provision of complete, accurate information
to would-be purchasers.™
In subsequent, detailed letters to senators on the Com-
mittee on Banking, Housing, and Urban Affairs, the Comp-
troller of the Currency stood by the position taken by
his office regarding authorization of the Retirement CD
as a bank product. The senators had apparently expressed
concerns about the safety of the CD and its nature as
a national bank product. In his August 18, 1994 letter to
Senator Alfonse D’Amato, the Comptroller of the Curren-
cy, Eugene A. Lewis, emphasized that his office had been
fully informed of and fully understood the structure of the
Retirement CD. He reiterated the earlier legal conclusion
issued by his office that national banks were expressly
authorized under federal law to issue the CD. He also
explained that the OCC did not issue a “formal approval”
of the product, and that none was needed for its sale,
% For example, the OCC insisted that any issuing national bank
take steps to protect itself against the risk of having to make
lifetime annuity payments surpassing the value of the invested
capital and accrued interest (when a purchaser lives longer than
expected). Any issuing bank was required to develop a detailed
plan for mitigating this risk, possibly through the purchase of com-
mercially available annuities. Other conditions were designed to
address matters such as the financial stability of the issuing banks,
accurate accounting, and implementation of te product con-
trol ms. In addition, the OCC required t an opinion on
the FDIC insured status of the CD be obtained and that poten-
tial customers be accurately informed of the prope and signifi-
cance of the FDIC’s determination. The OCC also spe-
cific language within the Retirement CD promotional materials,
such as use of the term “guaranteed,” to ensure that customers
not be misled. Many additional conditions were directed to en-
suring that potential purchasers are given clear, complete, and ac-
curate information regarding the features and risks of the CD. The
OCC even required that any issuing banks implement a special
training program for all bank personnel who would be involved
in the marketing of the CD, as well as a monitoring system to
ensure compliance with the OCC conditions and other applicable
laws and to handle customer complaints.
60a
“{bjecause offering the Retirement CD lies within the
business of banking.” Thus the Comptroller himself re-
jected the argument (asserted by the appellee in this case)
that the issuance of the “no objection” letter, rather than
a “formal approval” letter, somehow indicated that the
Comptroller had reservations about the CD.
In his letter to D’Amato, the Comptroller addressed
concerns that had been expressed about consumer pro-
tection, regulatory issues, safety and soundness, and com-
petitive equality with insurance companies. The Comp-
troller explained the consumer protection and disclosure
provisions upon which issuance of the Retirement CD was
conditioned. He expressed confidence about the OCC’s
ability to monitor the Retirement CD: “We believe the
OCC has the expertise fully to examine and evaluate Bank
practices to mitigate the risks associated with the Retire-
ment CD.” He concluded:
We believe these steps adequately and responsibly
address the supervisory concerns you have expressed
with the payment risks associated with the Retire-
ment CD. As with any bank product, we will con-
tinue to review the Bank’s implementation of these
procedures and evaluate the Bank’s effectiveness in
dealing with the risks associated with the product.
Should we determine at any point that the Bank is
materially not in compliance with these requirements,
we would direct it to cease offering the product until
it took appropriate corrective actions.
In regard to the insurance company competitors who had
expressed concerns that the CD would give national banks
a “competitive advantage” over annuity products offered
by insurance companies, the Comptroller appropriately re-
sponded that “the potential for competitive implications
does not affect the Bank’s legal authority to offer the pro-
duct.” In addition, the Comptroller properly abstained
from commenting on the potential applicability of state
6la
insurance laws to the Retirement CD,* since any such
application would likely vary from state to state and was
beyond his expertise and authority to determine.
The Comptroller’s October 11, 1994 letter to Senator
Donald Riegle, Chairman of the Committee on Banking,
Housing, and Urban Affairs, addressed many of the same
issues covered in the letter to Senator D’Amato, as well
as some additional points raised in a letter received from
Senator Riegle. The Comptroller again expressed confi-
dence in the OCC’s ability to monitor the offering of the
Retirement CD and its commitment to ensuring that dis-
closures to potential customers were clear, simple, and
complete. In addition, the Comptroller stated that Black-
feet National Bank had not commenced offering the CD,
since it had not yet complied with all seventeen condi-
tions imposed by the OCC in its no objection letter.
There can be little doubt that the Comptroller of the
Currency has authorized offering of the Retirement CD
by national banks. In so doing, he has defined terms in
the National Bank Act, such as the “taking of deposits,”
to include the sale of this product; and he has emphasized
that national banks have the power to offer the Retire-
ment CD as part of their express powers under the Na-
tional Bank Act. No one has provided this court with any
35 He wrote:
Our legal analysis and conclusions to date have been limited
to a determination of the Bank’s authority to conduct the
business of banking under the National Bank Act. State
ee Ge tal to oe ee
apply to the Retirement CD or any other acti which we
interpret as being authorized by the National E Act. Such
a conclusion, however, does not affect our interpretation of that
Act. The applicability of any particular state law to the Retire
ment CD will have to be reviewed on a case by case basis.
The appellee’s attempt to read into this statement some kind of
concession cooly Bay Comptroller that state insurance laws will ap-
ply igno plain language of the statement. The Genptrelier’s S
position was simple: no comment.
62a
reason, and I do not myself know of one, to conclude that
the Comptroller’s conclusion is not a “reasonable construc-
tion” of the National Bank Act. Because the Comptroller’s
interpretation of the National Bank Act, regarding author-
ization of the Retirement CD as a national bank product,
involves the definition of terms within the Act and is rea-
sonable in light of the revealed design of the Act, it is
entitled to controlling weight. Thus it cannot be seriously
questioned that national banks selling the Retirement CD
are engaged in a banking activity. While I believe that
we should not reach this issue—since I think we should
reject Illinois’s attempt to regulate the sale of the Retire-
ment CD outright—if we resolve the case as the majority
does, we cannot avoid the resulting conflict between fed-
eral banking law and state insurance law. I do not think
we can authorize Illinois to regulate (and potentially for-
bid) the sale of the Retirement CD by national banks in
its territory without confronting the federalism and na-
tional supremacy issues that are raised by such regula-
tion. Neither the majority nor the appellee has provided
legal authority for the proposition that a state can regu-
late as “the business of insurance’’ an activity by a na-
tional bank that the Comptroller of the Currency has spe-
cifically found to be “the business of banking.” If we are
ultimately to condone such a direct state intrusion into
the authorized activities of a national bank, we should do
so only after explicitly addressing the legal quandary at
stake. The majority’s conclusion that a national bank is-
suing an annuity is engaged in “the business of insurance”
is only half the battle.
After considering the full import of the Supreme Court’s
unanimous decision in NationsBank, 115 S. Ct. 810 (1995),
I simply cannot accept the majority’s conclusion that the
selling of an annuity by a national bank constitutes “‘the
business of insurance” under McCarran-Ferguson. While
the NationsBank opinion did not address the precise ques-
tion before us, its analysis, its tone, and the sources relied
upon all compel the inference that annuities are not truly
“insurance,” and thus that a national bank selling them
a ee ia ati
oe ee eT
63a
is not engaged in “the business of insurance.” The modern
literature on insurance powerfully affirms this conclusion,
and the history of insurance caselaw is in accord. In ad-
dition, the long and established tradition against allowing
state intrusion into the affairs of national banks cautions
against too readily condoning the present regulation by
the State of Illinois. If we are going to sanction the cur-
rent state intrusion into national bank activities—activities
specifically approved by the Comptroller of the Currency
as being “the business of banking”—we should do so only
after substantial hesitation and explicit consideration.
A true Copy:
Teste:
Clerk of the United States Court of
Appeals for the Seventh Circuit
64a
APPENDIX B
OPINION OF MAGISTRATE JUDGE
IN THE DISTRICT COURT
887 F. Supp. 1066 (N.D. Ill. 1995)
AMERICAN DEPOSIT CORPORATION, and BLACKFEET
NATIONAL BANK, Plaintiffs, vs. JAMES W. SCHACHT,
individually and as Acting Director of Insurance of the
State of Illinois, Defendant.
No. 95 C 207
EDWARD A. BOBRICK, U.S. Magistrate Judge: Before
the court are the cross-motions of plaintiffs American
Deposit Corp. (“‘ADC’’) and Blackfeet National Bank,
(‘“Blackfeet’’), and defendant James W. Schacht, Acting
Director of Insurance of the State of Illinois,
(‘“Schacht"’), for summary judgment. The American
Council of Life Insurance (‘‘ACLI’’) and the National
Association of Life Underwriters (‘‘NALU"’) have filed
briefs as amici curiae.
I. BACKGROUND
ADC has developed a new investment vehicle, re-
ferred to as a Retirement Certificate of Deposit (‘‘Re-
tirement CD’’), which, while having traditional features
of a certificate of deposit, also contains terms and fea-
tures of an annuity. (Complaint at 20-22). ADC licensed
the Retirement CD, for offering and sale, to Blackfeet, a
National Banking Association organized and operated
pursuant to the National Bank Act, Title 12 U.S.C. § 21
et seq (“‘Bank Act”’).
In 1994, Blackfeet began to market the Retirement CD,
in a rather limited fashion, in Illinois by sending infor-
mational packets to ten persons who requested them.
Blackfeet did not, and has not, accepted any deposits
from Illinois residents. Since the Retirement CD had
65a
annuity-like features ordinarily associated with life
insurance, Schacht issued a cease and desist order
against Blackfeet and ADC, and scheduled a hearing to
investigate whether Blackfeet and ADC were engaging
in insurance activities subject to state regulation. ADC
and Blackfeet, in response to Schacht’s order, filed a
complaint on January 11, 1995, seeking injunctive and
declaratory relief against Schacht. The Complaint
contends that the Bank Act authorizes the offering of
the Retirement CD, and that the Supremacy Clause and
the Dormant Commerce Clause prohibit Schacht’s actions
to regulate the offering of the Retirement CD. Both
parties have filed motions for summary judgment in this
case, essentially asking the court to determine whether
the Retirement CD is an insurance-type instrument
subject to state regulation or a certificate of deposit
which, under the Bank Act, would be outside state
regulation. The parties have filed the requisite state-
ments of undisputed facts under Local Rule 12, but this
case really turns on the characterization of the Retire-
ment CD under applicable law.' Accordingly, we begin
our analysis with an outline of the statutory framework
the parties have placed in issue, and then review the
terms of the Retirement CD along with the characteriza-
tions of the instrument the parties have offered.
' Indeed, were we to treat this as a normal motion for summary
judgment, Schacht’s motion could readily be denied. Under Local
Rule 12(mX3), a party moving for summary judgment must submit a
Statement that includes the facts that the moving party contends
entitle it to judgment. Review of Schacht’s submission fails to reveal
an allegation—let alone a fact—that Blackfeet has done or attempted
to do business in the state of Illinois. Such an element would have to
be a salient feature of Schacht’s case since we do not understand the
State of Illinois to presume to regulate the insurance industry outside
its borders. The court, however, need not assume the existence of
any facts to support a party’s position in a summary judgment pro-
ceeding. See Schulz v. Serfilco, Ltd., 965 F.2d 516, 519 (7th Cir.
1992).
66a
A. Statutory Framework
The parties’ dispute stems from the tension between
federal banking law, as embodied in the Bank Act, and
Illinois’ regulation of the insurance industry. Under the
McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et seq., state
laws enacted ‘‘for the purpose of regulating the business
of insurance’’ are exempted from traditional federal
preemption principles. 15 U.S.C. § 1012(b).2 The statute
was enacted in 1945 in response to the Supreme Court’s
decision in United States v. South-Eastern Underwriters
Assn., 322 U.S. 533, 88 L. Ed. 1440, 64 S. Ct. 1162 (1944),
in which the Court first held that the business of insur-
ance was interstate commerce subject to the coverage of
the Sherman Act.* Congress’s primary concern in enacting
the legislation was to ensure states would continue to
have the ability to tax and regulate the business of
2 The statute provides, in relevant part:
Congress hereby declares that the continued regulation and
taxation by the several States of the business of insurance is in
the public interest, and that silence on the part of the Congress
shall not be construed to impose any barrier to the regulation or
taxation of such business by the several States. (a) 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. (b) No Act of Congress shall be con-
strued to invalidate, 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: Provided, That
after June 30, 1948, the Act of July 2, 1890, as amended, known
as the Sherman Act, and the Act of October 15, 1914, as amend-
ed, known as the Clayton Act, and the Act of September 26,
1914, known as the Federal Trade Commission Act, as amended,
shall be applicable to the business of insurance to the extent
such business is not regulated by state law.
3 Prior to the South-Eastern holding, ‘‘[issuing] a policy of insurance
[was] not a transaction of commerce.’’ Paul v. Virginia, 75 U.S. 168,
8 Wall. 168, 183, 19 L. Ed. 357 (1869).
aS ae ee ee a ‘ mnt 7
67a
insurance without fear of Commerce Clause attack.
Group Life & Health Ins. v. Royal Drug Co., 440 U.S.
205, 217-218, 99 S. Ct. 1067, 59 L. Ed. 2d 261 (1979).
The McCarran-Ferguson Act ‘‘overturn{ed] the normal
legal rules of preemption’’ by imposing a rule ‘‘that state
laws enacted for the purpose of regulating the business
of insurance do not yield to conflicting federal, statutes
unless a federal statue specifically requires otherwise."’
U.S. Dept. of Treasury v. Fabe, _-—*sU.S._, 113 S. Ct.
2202, 2211, 124 L. Ed. 2d 449 (1993). The parties’ dis-
cord, understandably, involves the issue of whether the
Retirement CD falls within the business of insurance
thereby subjecting it to state regulation.
As a national bank, Blackfeet is incorporated, organ-
ized, and chartered exclusively under the Bank Act. Its
main office is located in the town of Browning, Montana,
on the Blackfeet Indian Reservation. The plaintiffs
argue that the Bank Act provides the sole authority
under which they need operate. The Bank Act author-
izes national banks such as Blackfeet to receive ‘‘depos-
its’’ as part of the exercise of ‘‘such incidental powers as
shall be necessary to carry on the business of banking.”’
12 U.S.C. § 24 (Seventh). The Office of the Comptroller
of the Currency (‘‘OCC’’), the administrator of the Bank
Act, has characterized the Retirement CD as a new form
of ‘‘deposit.’’ (See infra at 10). Essentially, the plain-
tiffs argue that the Bank Act preempts state regulation
of national banks as Schacht attempts in this case, and
that Schacht’s efforts to regulate the Retirement CD are
invalid under the Supremacy Clause.
The State of Illinois regulates the insurance industry
under the Illinois Insurance Code, 215 ILCS 5/1 et seq.
(‘Insurance Code’’). The Insurance Code _ includes
‘“‘annuity contracts’’ in its definition of life insurance,
68a
215 ILCS 5/4,‘ but offers no definition of annuity or
annuity contract. The Illinois Department of Insurance
has determined that the Retirement CD is within the
definition of life insurance and annuities and, therefore,
is subject to regulation under the Insurance Code.
Pursuant to the Insurance Code, the Department of
Insurance issued a ‘‘cease and desist’’ order to Blackfeet,
charging that it was conducting insurance business
without authority and without first procuring a certifi-
* The statute defines life insurance broadly, as follows:
(a) Life. Insurance on the lives of persons and every insurance
appertaining thereto or connected therewith and granting,
purchasing or disposing of annuities. Policies of life or endow-
ment insurance or annuity contracts or contracts supplemental
thereto which contain provisions for additional benefits in case
of death by accidental means and provisions operating to safe-
guard such policies or contracts against lapse, to give a special
surrender value, or special benefit, or an annuity, in the event,
that the insured or annuitant shall become totally and perma-
nently disabled as defined by the policy or contract, or which
contain benefits providing acceleration of life or endowment or
annuity benefits in advance of the time they would otherwise be
payable, as an indemnity for long term care which is certified or
ordered by a physician, including but not limited to, professional
nursing care, medical care expenses, custodial nursing care, non-
nursing custodial care provided in a nursing home or at a resi-
dence of the insured, or which contain benefits providing accel-
eration of life or endowment or annuity benefits in advance of
the time they would otherwise be payable, at any time during
the insured’s lifetime, as an indemnity for a terminal illness shall
be deemed to be policies of life or endowment insurance or
annuity contracts within the intent of this clause.
Also to be deemed as policies of life or endowment insurance
or annuity contracts within the intent of this clause shall be
those policies or riders that provide for the payment of up to
25% of the face amount of benefits in advance of the time they
would otherwise be payable upon a diagnosis by a physician
licensed to practice medicine in all of its branches that the in-
sured has incurred one of the covered conditions listed in the
policy or rider.
pitta
ee
Diether batt site ll ont tbat tent aia) Cibelli te Ce al ehtG iin ithe ality. be:
69a
cate of authority in violation of 215 ILCS 5/121. Under
that provision, it is ‘‘unlawful for any company [includ-
ing an association, such as Blackfeet, under 215 ILCS
5/2(e)) ... to transact insurance business in this State,
without a certificate of authority from the director ...’’
The Insurance Code provides for the issuance of a certif-
icate of authority to domestic companies, 215 ILCS 5/24;
5/51, or foreign or alien companies. 215 ILCS 5/111.
Domestic companies are those organized under the laws
of the state of Dlinois. 215 ILCS 5/2(f). A foreign
company is one organized under the laws of any other
state or territory of the United States, or the District of
Columbia. 215 ILCS 5/2(g). An alien company is one
organized under the laws of a country other than the
United States. 215 ILCS 5/2(h). Organized under the
Bank Act, Blackfeet does not qualify as a domestic,
alien, or foreign company, which would lead one to
believe that there are no circumstances under which it
could receive a certificate of authority, even if it were
to submit to the administrative hearing and agree to
comply with the Insurance Code. There is another
provision in the Insurance Code, however, that allows a
national bank located in a town of 5000 or less—such as
Blackfeet—to register with the director in order to trans-
act insurance business as an insurance agency in Illinois.
215 ILCS 5/499.1(a); 215 ILCS 5/499.1(e).5 Yet another
provision that would appear to be an insurmountable
hurdle for Blackfeet states that companies that engage
in other business in addition to the life insurance busi-
ness may not be certified to transact insurance business
5 This provision essentially echoes Section 92 of the Bank Act,
which allows national banking associations located and doing business
in towns with populations of no more than 5,000 ‘“‘under such rules as
may be prescribed by the Comptroller of the Currency, [to] act as
agent for any fire, life, or other insurance company authorized by the
authorities of the State in which said bank is located to do business in
said state, by soliciting and selling insurance and collecting premiums
on policies issued by such company ...’” 12 U.S.C. § 92.
70a
under the Insurance Code. 215 ILCS 5/1l1l(c). A bank
such as Blackfeet obviously engages in many federally-
authorized banking activities that would violate this
provision.
The Insurance Code, then, includes a certain amount
of seeming incongruities, when the facts of this case are
considered, that the parties have had some difficulty
resolving. Essentially, it would appear that a national
bank could act as an agent for insurance products, but
could not underwrite insurance risks as would an insur-
ance company. In supplemental briefing in this matter,
Schacht has submitted that the practical effect of these
regulations is that the only way Blackfeet could sell and
underwrite the Retirement CD—should the instrument
qualify as insurance—is to set up a subsidiary for that
purpose. Plaintiffs point out that such a requirement
demonstrates that the Insurance Code discriminates
against national banks such as Blackfeet. The applicabil-
ity of this or any other requirement under the statutory
framework, of course, is wholly dependent on the nature
of the Retirement CD.
B. Terms of the Retirement CD
Blackfeet promotional materials (Plaintiff's Memoran-
dum in Support of its Motion for Summary Judgment
(‘‘Pl.MSJ’’), Ex. 3), describe the terms and conditions of
the Retirement CD. The customer is required to open
the Retirement CD with an minimum initial balance of
$5000. At that time the Customer also selects a Maturity
Date, which is often the customer’s expected retirement.
Interest, calculated under a formula tied to the then
current five-year, U.S. Government Treasury Note yield,
begins to accrue from the date of deposit. Under ap-
plicable IRS regulations, this interest is designed to be
tax deferred. The initial rate is in effect for one year,
and is subsequently adjusted every five years. Prior to
the Maturity Date, withdrawals are subject to penalty
7la
and IRS treatment as taxable income. On the Maturity
Date, the customer may make a cash withdrawal in the
amount of 2/3 of the account balance. Thereafter, the
customer’s lifetime Scheduled Monthly Withdrawal
Payments will begin. The amount of the monthly
payment is to be determined by the balance of the
account after Maturity Date, the age of the customer,
the monthly payment interest rate then in effect, and
the Society of Actuaries annuity table. Once deter-
mined, the monthly payments to the customer will
remained fixed over the customer’s lifetime. For tax
purposes, the payments will be apportioned from interest
and principal. The FDIC, however, will only insure an
amount equal to the customer’s deposits and accrued
interest; the total amount of lifetime monthly payments
might exceed that amount but, once they do, they are
not FDIC-insured.
C. Expert Characterizations of the Retirement CD
Each side to this dispute is armed with expert inter-
pretations as to the nature of the Retirement CD. We
begin our review of these with the OCC Interpretive
Letter holding that the Retirement CD is within the
powers of banks under the Bank Act under 12 U.S.C. §
24 (Seventh). (P1.MSJ, Ex. 1). Essentially, the OCC felt
that the offering of the Retirement CD was consistent
with a bank’s authority to receive deposits and to incur
liabilities and to fund its operations. (Jd. at 2-3). The
OCC viewed the Retirement CD as a single financial
product with a total return of the sum of (1) interest
accrued until maturity, (2) the portion of the monthly,
post-maturity payments allocable to interest, and (3) the
amount of those monthly payments occurring after the
return of the maturity balance. (Jd. at 7). The OCC
noted that, should the customer continue to live after
the maturity balance was exhausted by monthly pay-
ments, the customer would nevertheless continue to
receive monthly payments at the fixed rate. (/d.) The
72a
OCC referred to these payment as ‘“‘nothing more than
additional interest.’’ (Jd.). One of the conditions the
OCC set for the offering of the Retirement CD was that
Blackfeet mitigate the ‘‘risk of paying interest through-
out the life of each [customer] even in situations where
the maturity balance becomes exhausted,’’ with consid-
eration given to purchasing commercially available
annuities from insurance companies to fund this obliga-
tion. (Jd. at 8). Blackfeet was to submit its plan regard-
ing such mitigation to the OCC. (/d.).
While the OCC did not object to the offering of the
Retirement CD, neither did it ‘‘approve’’ it. In a letter
to the Chairman of the House Energy and Commerce
Committee, Congressman John D. Dingell, the OCC
indicated that the Retirement CD could be offered
without OCC approval since it was within the powers of
a national bank. (Memorandum of Law of ACLI, Ex. 8).
The OCC stressed that its ‘‘no-objection’’ opinion was
based solely on a determination of the bank’s authority
to conduct the business of banking. (Jd. at 1-2). The
OCC conceded that the Retirement CD possessed charac-
teristics of an annuity, but did not comment on whether
banks could underwrite annuities. (Jd. at 2). In addi-
tion, the OCC allowed that state regulatory officials
might conclude that insurance laws apply to the Retire-
ment CD. (Jd.). While the OCC did not address any stat
law requirements, it stated that the Blackfeet would be
required to comply with all applicable state laws and
regulations. (Jd. at 4). The OCC would not comment on
the preemptive effect of the Bank on state insurance
law in the context of the Retirement CD.
The FDIC also offered its opinion as to the nature of
the Retirement CD in order to determine whether it was
a deposit entitled to FDIC insurance. (P1.MSJ, Ex. 2).
The FDIC determined that, in the event of a bank failure
prior to maturity date, the Retirement CD would be
insured to the extent of principal and accrued interest to
* eo td
73a
the date of the failure. (Jd. at 3). If a failure occurred
after maturity date, the FDIC would pay the customer
the balance of the account at maturity date—principal
plus accrued interest—minus the sum of any withdrawal
and monthly payments already made. (Jd. at 3-4).
Under no circumstances, however, would the FDIC
insure the bank’s commitment to make lifetime, monthly
payments because the value of such payments was
uncertain and could exceed the total account balance.
(Id. at 4). This portion of the Retirement CD, according
to FDIC interpretation, did not fit into the definition of
deposit under the FDI Act because the expected value of
the contractually agreed-to monthly payments did not
reflect an account balance based on deposited principal
plus accrued interest. (/d. at 4).
Schacht has submitted the opinions of two experts in
the Illinois Department of Insurance regarding the
nature of the Retirement CD: that of Arnold Dutcher,
the Deputy Director of the Regulatory Division; and that
of Larry Gorski, the department’s Life Actuary. (De-
fendant’s Memorandum of Law in Support of Motion
(‘““Def. Mem.’’), Exs. A; B). Mr. Dutcher felt that the
Retirement CD was a fixed annuity life insurance con-
tract similar to those products the state regulates as
insurance. (Jd., Ex. A at 5). His opinion was based on
the Retirement CD’s promise of a monthly payment
contingent on the customer’s continued life, which gave
the Retirement CD a mortality risk. (Jd. at 4 7). The
mortality risk means that the Retirement CD is not
merely based on economic investment factors, according
to Mr. Dutcher, but on the life at risk continuing beyond
the expected term. (/d., Ex. A at ¢ 8). Mr. Dutcher
stated that dealing with this type of risk is the essence
of the insurance underwriting industry. (Jd., Ex. A at
9). Mr. Dutcher also stated that the Insurance Code was
designed to regulate underwriters and protect insureds
in various specialized ways in view of these mortality
risks. (Jd., Ex. A at { 10).
74a
Mr. Gorski basically agreed with Mr. Dutcher’s assess-
ment of the Retirement CD as an insurance product.
(id., Ex. B). Because of the mortality risk inherent in
such products, Mr. Gorski explained that state regula-
tions such as the Insurance Code have built-in, conserva-
tive features with respect to the necessary reserve
amounts for underwriting. (Jd., Ex. B at 4 12-13).
These specialized regulations also touch on minimum
capital and surplus amounts. (/d., Ex. B at 4 15). Over-
all, then, the Insurance Code is designed to protect
policyholders or annuitants given the specialized risks
inherent in insurance or annuity products. (/d., Ex. B at
qq 18-19).
ll. ANALYSIS
A. Abstention
Before returning to the Retirement CD itself, we must
address Schacht’s contentions that the federal court
should abstain in this matter under two doctrines drawn
from Supreme Court opinions: Younger v. Harris, 401
U.S. 37, 91 S. Ct. 746, 27 L. Ed. 2d 669 (1971); and
Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87
L. Ed. 1424 (1943). In addressing these contentions we
note, first, that ‘‘only exceptional circumstances justify a
federal court’s refusal to decide a case in deference to
the States.’ New Orleans Public Service, Inc. v. Council
of City of New Orleans (‘‘NOPSI’’), 491 U.S. 350, 368, 105
L. Ed. 2d 298, 109 S. Ct. 2506 (1989). Second, and on the
other hand, courts have long recognized a few well-
defined classes of cases that fall outside the norm where
abstention is not only permissible but expected. Youwng-
er, 401 U.S. at 43-44, 91 S. Ct. at 750.
1. Younger Abstention
In Younger, the Supreme Court held that absent
extraordinary circumstances, federal courts must abstain
from enjoining ongoing state criminal proceedings. Jd. at
75a
41, 91 S. Ct. at 750. At the core of any justification for
abstention the Court noted, are the notions of comity
and federalism:
The concept does not mean blind deference to
‘States’ Rights’? any more than it means centraliza-
tion of control over every important issue in our
National Government and its courts. ... What the
concept does represent is a system in which there is
sensitivity to the legitimate interests of both State
and National Government, and in which the Nation-
al Government, anxious though it may be to vindi-
cate and protect federal rights and federal interests,
always endeavors to do so in ways that will not
unduly interfere with the legitimate activities of the
States.
Id. at 44, 91 S. Ct. at 750. Although Younger involved a
suit to enjoin a state criminal proceeding, the doctrine
has since been expanded beyond state criminal prosecu-
tions to civil proceedings in state court implicating
important state interests, NOPSI, 491 U.S. at 367-68, 109
S. Ct. at 2517-18 (citing Huffman v. Pursue Ltd., 420
U.S. 592, 604, 95 S. Ct. 1200, 1208, 43 L. Ed. 2d 482
(1975); Moore v. Sims, 442 U.S. 415, 423, 99 S. Ct. 2371,
2377, 60 L. Ed. 2d 994 (1979)), and to certain state
administrative proceedings that are judicial in nature.
See Middlesex County Ethics Comm. v. Garden State Bar
Assoc., 457 U.S. 423, 102 S. Ct. 2515, 73 L. Ed. 2d 116
(1982) (awyer disciplinary proceeding initiated by state
ethics committee); Ohio Civil Rights Comm’n v. Dayton
Christian Sch., Inc., 477 U.S. 619, 106 S. Ct. 2718, 91 L.
Ed. 2d 512 (1986) (barring injunction against an ongoing
sex discrimination proceeding before state civil rights
commission). Through these and other decisions, a
three-part test has evolved for determining whether
Younger abstention is appropriate in a given situation:
(1) the judicial or judicial in nature state proceedings
must be on-going;
76a
(2) the proceedings must implicate important state
interests; and
(3) there must be an adequate opportunity in the
state court proceeding to raise constitutional chal-
lenges.
Middlesex County, 457 U.S. at 432, 102 S. Ct. at 2521;
Trust & Inv. Advisers, Inc. v. Hogsett, 43 F.3d 290, 295
(7th Cir. 1994). We address each part of this test in turn.
Schacht submits that the proceeding at issue here-
in—the Department of Insurance’s administrative hear-
ing—is judicial in nature. It is governed by the Lllinois
Administrative Code, which provides that it shall be
quasi-judicial, with the hearing officer conducting
examination of witness, requiring production of evidence
and ruling on admissibility. Witnesses are subject to
cross-examination. The proceeding itself consists of the
disposition of any preliminary motions, the presentation
of the parties’ opening statements, the presentation of
the parties’ cases-in-chief, opportunity for rebuttal, and
closing statements. Plaintiffs do not really contest the
nature of the proceedings, other than to argue that
substance, rather than form, is the controlling factor in
such a determination, citing NOPSI. (Plaintiff’s Memo-
randum in Opposition (‘‘Pl. Opp.’’) at 22). In NOPSI,
however, the Court found that the ratemaking chal-
lenged therein, which established a rule for the future,
was not judicial in nature but legislative. 491 U.S. at
371, 109 S. Ct. at 2520. Here, defendants cannot, and do
not, seriously argue that the challenged proceeding is
one in which there is the making of a new rule for the
future and is therefore legislative. Clearly, the adminis-
trative proceeding is aimed at determining the applica-
bility of the Insurance Code to the Retirement CD.
Next, Schacht contends that important state interests
are involved. Clearly, the regulation of the insurance
industry is an important state interest. See supra at 3-4.
77a
Plaintiffs do not dispute this, but focus their attention
on the remaining part of the test, the competency of the
state forum to address their constitutional concerns. A
fundamental assumption underlying the Younger absten-
tion doctrine is the availability of a competent state
forum. Withrow v. Larkin, 421 U.S. 35, 44 n. 8, 95 S.
Ct. 1456, 43 L. Ed. 2d 712 (1975); Gibson v. Berryhill,
411 U.S. 564, 577, 93 S. Ct. 1689, 36 L. Ed. 2d 488 (1973).
When the state tribunal is deemed to be biased or to
have othe
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