Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance
| Decision Date | 04 March 2005 |
| Docket Number | B-304474 |
| Parties | Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance |
| Court | Comptroller General of the United States |
Committee on Financial Services
Subject Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance
Dear Mr. Chairman:
The enclosed opinion responds to your request concerning the McCarran-Ferguson Act's exemption from the federal antitrust laws for the insurance industry. In connection with the Committee's examination of the possibility of comprehensive insurance regulatory reform, you asked us to address three issues: (1) the evolution of the exemption and its present-day scope as determined by the courts; (2) the types of insurance-related activities being conducted today which might violate the federal antitrust laws in the absence of the exemption; and (3) the types of antitrust laws currently in effect in the States. As agreed with your staff this opinion responds to the first question; we are responding to the remaining questions by separate report.
As summarized below, Part I of the opinion provides an overview of the federal antitrust laws and the application of those laws to the insurance industry prior to passage of the McCarran-Ferguson Act, 15 U.S.C. 1011 et seq ., in 1945. Part II of the opinion sets forth the Act's provisions relating to the antitrust exemption for insurance activities, which applies only to those practices that: (a) constitute the "business of insurance"; (b) are "regulated by State law"; and (c) do not constitute "an agreement to boycott, coerce, or intimidate, or [an] act of boycott, coercion, or intimidation." Part III of the opinion discusses the courts' considerable narrowing of the exemption over the last 60 years, and includes a detailed review of the key cases that have addressed whether particular activities are the "business of insurance." Courts consider three factors in determining what constitutes the "business of insurance": (1) whether the activity has the effect of transferring or spreading a policyholder's risk; (2) whether the activity is an integral part of the policy relationship between insurer and insured; and (3) whether the activity is limited to entities within the insurance industry. Today, only those activities directly tied to ratemaking and other functions at the core of and unique to the insurance industry, and activities directly related to the relationship between insurer and insured, are deemed to be the business of insurance potentially immune from the federal antitrust laws (provided they are also regulated by State law and do not constitute an act of boycott, coercion, or intimidation). Although many of the earlier court decisions suggest that additional insurance-related activities qualify for the exemption, it is unlikely that a court would rule the same way today. Attachment A to the opinion lists these "business of insurance" cases from 1959 to the present.
Beginning in the late 19th century, Congress enacted a series of antitrust laws whose purpose was to ensure a competitive business economythe Sherman Act, 15 U.S.C. 1-7, the Clayton Act, 15 U.S.C. 12-27, and the Federal Trade Commission (FTC) Act, 15 U.S.C. 41-58. The Sherman Act declared contracts combinations, and conspiracies in restraint of interstate or foreign commerce, as well as monopolies or attempts to monopolize interstate or foreign commerce, to be illegal under certain circumstances. The Clayton Act declared price discrimination, exclusive dealings arrangements, corporate mergers, and interlocking directorates to be illegal under certain circumstances. Finally, the FTC Act created the FTC and empowered it to enforce aspects of the antitrust laws and prohibited unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce.
This same period saw the growth of the fire insurance industry in America, and the increasing tendency of the States to tax fire insurance companies in order to obtain revenue, and to enact laws requiring deposits from out-of-state insurers and imposing heavy taxes on their local operations. To address persistent concerns about insurer insolvency, companies began to pool their loss experience data so they could formulate more accurate and rational insurance rates, and states began to establish administrative bodies to regulate the activities of the insurance industry. After the Civil War, insurers objected to state imposition of discriminatory taxes and to state regulation as a whole, and unsuccessfully challenged the States' authority to impose such requirements in the Supreme Court case of Paul v. Virginia , 75 U.S. (8 Wall.) 168 (1868). The insurers in Paul argued that Virginia's regulation of insurance was an unconstitutional regulation of interstate commerce, but the Supreme Court disagreed, finding that an insurance contract was not an article of commerce within the meaning of the Constitution's Commerce Clause.
In the aftermath of Paul v. Virginia, courts, legislatures, and insurance companies proceeded under the assumption that the insurance industry would be regulated by the States. States began to formally regulate the industry, and many states encouraged collaborative rate-setting to prevent future insurer insolvencies. State regulators also attempted to achieve uniformity of insurance regulation through a coalition of state insurance commissioners, which today is known as the National Association of Insurance Commissioners.
This framework of state regulation was shaken by the Supreme Court's subsequent decision in United States v. South-Eastern Underwriters Ass'n , 322 U.S. 533 (1944). Effectively overruling its decision in Paul v. Virginia, the Supreme Court in South-Eastern Underwriters held that insurance was, in fact, interstate commerce which Congress could regulate under the Commerce Clause.
In the wake of South-Eastern Underwriters, entreaties to Congress by the insurance industry, state regulators, and state legislators to clarify whether and to what extent states could continue to tax and regulate insurers resulted in quick action: Congress passed the McCarran-Ferguson Act in 1945. Although Congress had clear authority to regulate insurance, it determined in McCarran-Ferguson that it would be beneficial, as a matter of public policy, to allow the states to continue regulating and taxing such business in most instances. Consistent with this statutory scheme, the Act also included a limited exemption from the federal antitrust laws for certain insurance-related activities.
The McCarran-Ferguson Act gives the insurance industry a very limited exemption from the federal antitrust laws. To qualify for the exemption, an activity must satisfy three prerequisites. It must: (a) constitute the "business of insurance"; (b) be "regulated by State law"; and (c) not constitute "an agreement to boycott, coerce, or intimidate, or [an] act of boycott, coercion, or intimidation." In determining whether a particular activity qualifies as the "business of insurance, " the Supreme Court has developed three factors to be considered: (1) whether the activity has the effect of transferring or spreading a policyholder's risk; (2) whether the activity is an integral part of the policy relationship between insurer and insured; and (3) whether the activity is limited to entities within the insurance industry. None of these criteria is dispositive in itself.
Courts also have established parameters for the "regulated by State law" prerequisite. As a general matter, the requirement may be satisfied if an insurer is subject to general regulatory standards, such as when a state statute generally proscribes, permits, or authorizes certain conduct on the part of insurers. The availability of the exemption does not depend on the quality of the state regulatory scheme or on its effective enforcement.
Finally, the Supreme Court has ruled that conduct constitutes a prohibited "boycott" under the McCarran-Ferguson exemption where, in order to coerce a target into certain terms on one transaction, parties refuse to engage in unrelated or collateral transactions with the target. With respect to prohibited "coercion, " this has been interpreted to exclude situations where the allegedly coerced parties retain options to take other actions.
A review of cases addressing what constitutes the "business of insurance" shows that the McCarran-Ferguson exemption has been judicially narrowed in the 60 years since its enactment. The cases are highly fact-specific, however, and thus generalities about them are necessarily imprecise and must be applied with caution. Further, because the legal tests under the Act have evolved over time, it is unlikely that all of the earlier rulings would survive today and that a court would rule on the same facts in the same way. Greater reliance therefore should be placed on the most recent cases. With these caveats, the following general conclusions can be drawn:
Courts tend to find that activities among insurers involving cooperative ratemaking and related functions constitute the business of insurance. Insurers may enter into agreements or arrangements that do not involve such matters, but the more the arrangements involve functions that are not unique to the insurance business, or whose primary impact is not on the insurance market, the less likely courts are to apply the exemption.
For example, ratemaking and related activities deemed by courts to constitute the business of insurance have included...
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