606 F.2d 468 (5th Cir. 1979), 76-2709, Perry v. Fidelity Union Life Ins. Co.

Docket Nº:76-2709.
Citation:606 F.2d 468
Party Name:Sylvia PERRY, Individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. FIDELITY UNION LIFE INSURANCE COMPANY, Defendant-Appellee.
Case Date:January 02, 1979
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 468

606 F.2d 468 (5th Cir. 1979)

Sylvia PERRY, Individually and on behalf of all others

similarly situated, Plaintiffs-Appellants,



No. 76-2709.

United States Court of Appeals, Fifth Circuit

January 2, 1979

Dissenting Opinion Oct. 26, 1979.

Rehearing and Rehearing En Banc Denied Dec. 10, 1979.

Thomas G. Keith, Atty., Legal Aid Society of Madison County, Huntsville, Ala., George A. Moore, Huntsville, Ala., for plaintiffs-appellants.

Ralph H. Ford, Huntsville, Ala., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before BROWN, Chief Judge, THORNBERRY and MORGAN, Circuit Judges.

THORNBERRY, Circuit Judge:

In Cochran v. Paco, Inc., 606 F.2d 460 (5 Cir. 1978), we held today that the lending activities of a premium finance company do not constitute the "business of insurance" and that the McCarran-Ferguson Act ("McCarran Act"), 15 U.S.C. §§ 1011 Et seq., does not preclude application of the disclosure requirements of the Truth in Lending Act ("TIL"), 15 U.S.C. §§ 1601 Et seq., to the transaction.

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The instant case, the second in today's trilogy, 1 presents a related question: whether the McCarran Act bars TIL's application when an insurance company provides premium financing in connection with the sale of an insurance policy. The district court held that the McCarran Act was a good defense to plaintiff's TIL action and granted summary judgment for the defendant insurance company. We reverse.


Sylvia Perry was a college student in Alabama when a salesman from Fidelity Union Life Insurance Co. sold her a life insurance policy in June, 1974. To obtain the policy, which had annual premiums of $295, she made a $10 down payment and executed a promissory note to Fidelity for the remainder of the first year's premium. Fidelity provided Perry a form entitled "Disclosure Statement and Acceptance of Policy," 2 which stated that she would be paying $134 in interest over the five-year life of the note. Perry made no further payments on the note, which was ultimately assigned to a bank.

On June 24, 1975, Perry, on behalf of herself and all persons similarly situated, filed this suit, alleging that she had entered into contractual relations with Fidelity in the nature of a consumer credit transaction and that Fidelity's disclosure forms violated TIL and Regulation Z, 12 C.F.R. § 226.1 et seq. 3 She sought the statutory penalty for herself and the class, costs, and attorneys' fees. 4 Following discovery, Fidelity successfully moved for summary judgment on the ground that the McCarran Act barred application of TIL to the Perry transaction.

The district court, in an unreported opinion, held that (i) the disclosure of credit information of a premium financing arrangement is part of the business of insurance; (ii) the State of Alabama has exercised its power to regulate the premium financing aspect of the business of insurance; and (iii) application of TIL to this particular transaction would require a construction of TIL that would invalidate, impair

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or supersede Alabama law enacted for the purpose of regulating the business of insurance. This appeal followed. 5


Our opinion in Cochran v. Paco, Inc., supra, establishes the analytical framework for determining the applicability of the McCarran Act. Since we held in Cochran that TIL does not specifically relate to the business of insurance, 606 F.2d at 464, we turn immediately to the next inquiry, that is, whether Fidelity's premium financing activities, carried out in connection with its sale of an insurance policy, constitute the "business of insurance." We hold that it does not and that the McCarran Act is no bar to the application of TIL. Accordingly, we need not determine whether Alabama has "any law enacted . . . for the purpose of regulating" the financing activities or whether TIL would "invalidate, impair, or supersede" such state law. Cochran,supra, 606 F.2d at 467 n.15.

There is no doubt that the sale of an insurance policy is squarely within the "business of insurance." Securities & Exchange Comm'n v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). However, the financing of such a sale is a different activity. As we said in Cochran, premium financing "has little if any effect on an insurance company's ability to pay claims or on the nature of (its) policies" and "has only a peripheral connection with the business of insurance," 606 F.2d at 466-467. We do not think that the nature of premium financing changes, in chameleon-like fashion, simply because an insurance company rather than a loan or finance company authors the promissory note. Not all insurance company activities constitute the business of insurance, and the McCarran Act does not insulate every operation of every insurance company from federal regulation. Cochran, supra, at 465 n.13.

It would be anomalous to hold that Fidelity's premium financing activities are the "business of insurance" but that the identical activities of the finance company in Cochran are not. The appropriate focus is thus the nature of the activity itself, not the type of business that is conducting it.

In making available premium financing, an insurance company is acting not as an insurer but as a creditor, and the financing activity is purely ancillary to the insurance relationship between the insurance company and the policyholder. Premium financing has virtually nothing to do with a company's reliability as an insurer, a factor that stands at the center of the insurer-insured relationship. National Securities, supra. When an insurance company offers premium financing as an inducement for persons to purchase policies, it plays two distinct roles in its relationship with the purchaser. On the one hand, the company is an insurer, the purchaser an insured; but on the other hand, the company is a creditor, the purchaser a debtor. The former relationship constitutes the "business of insurance," while the latter does not.

We do not doubt that an insurance company can, by offering a premium financing package, facilitate the sale of insurance policies. But that alone cannot elevate the activity to the "business of insurance," for one can hardly claim that the extension of credit is an integral part of the insurance business. As we have said in the antitrust context, business activities of insurance companies not peculiar to the insurance industry are outside the scope of the "business of insurance." Royal Drug Co. v. Group Life & Health Ins. Co., 556 F.2d 1375, 1386 (5 Cir. 1977); See also Battle v. Liberty Nat'l Life Ins. Co., 493 F.2d 39, 50 (5 Cir. 1974), Cert. denied, 419 U.S. 1110, 95 S.Ct. 784, 42 L.Ed.2d 807 (1975). 6

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Accordingly, we hold that premium financing by an insurance company does not constitute the "business of insurance" within the meaning of the McCarran Act and that the McCarran Act is thus no bar to the application of TIL's disclosure requirements. The judgment of the district court is reversed and the case remanded for further proceedings consistent with this opinion.


JOHN R. BROWN, Chief Judge, dissenting:

This appeal presents the esoteric question whether § 2(b) of the McCarran-Ferguson Act (the McCarran Act), 15 U.S.C.A. § 1012(b), bars the application of the disclosure requirements of the Truth-in-Lending Act, 15 U.S.C.A. §§ 1601 Et seq. (TIL) when an insurance company provides premium financing in connection with the sale of an insurance policy in Alabama, and the form used in disclosing the credit terms to the policyholder has been submitted to and approved by the Department of Insurance as required by Alabama law. I agree with the District Court that the McCarran Act is a good defense to the action and dissent from the contrary holding of the Court.

I. Prologue

Building on Cochran v. Paco's 1 holding, in which I concurred that a non-insurance company premium financing enterprise is not engaged in "the business of insurance," the Court makes a mighty leap to conclude that when the premium financing is extended directly by the selling insurance company, this is likewise not the "business of insurance."

Its principal thesis is that (i) premium financing by whomsoever advanced does not concern or affect the "relationship between insurer and insured, the type of policy which could be issued, its reliability, (interpretation) and enforcement," SEC v. National Securities, Inc., 1969, 393 U.S. 453, 460, 89 S.Ct. 564, 569, 21 L.Ed.2d 668, 676 (quoted in Cochran, ante, 606 F.2d at 465), and (ii) in extending premium financing "an insurance company is acting not as an insurer but as a creditor" 2 so that (iii) "the financing activity is purely ancillary to the insurance relationship between the" 3 insurer and policy holder.

There are a number of faults with this approach, some of which warrant the later detailed discussion.

At the outset, I firmly believe that that which insurance companies regularly and customarily do in the solicitation and sale of policies of insurance is, and is to be considered as, a part of the "business of insurance." And yet here there is not a single stitch of record evidence that premium financing is or is not a regular, accepted part of the insurance business. On the contrary, all that we have is the Court's statement that this activity is merely ancillary a fact drawn presumably from the wisdom Article III and life tenure generate.

In the next place, the very activity under scrutiny is so much a part of the business of insurance that it is precisely regulated by the Alabama...

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