State Preemption Of GLB Takes A Big Hit

On Jan. 10, 2005, the Federal District Court for the District of Massachusetts upheld the determination of the Office of the Comptroller of the Currency that the Gramm-Leach-Bliley Act of 1999 preempted the Massachusetts state statute restricting sales of insurance products through banks.

The significance of the case is that for the first time a federal court ruled that GLB forbids state laws that “prevent or significantly interfere with” the ability of banks to sell insurance.

The decisionMassachusetts Bankers Association, Inc. v. Bowlerrendered by Federal District Court Judge Rya W. Zobel, reviewed the Massachusetts Consumer Protection Act Relative to the Sale of Insurance by Banks.

In May 2000, the Massachusetts Bankers Association requested the opinion of the OCC, the primary regulator of federally chartered banks, about whether GLB preempted certain provisions of the Massachusetts insurance statute. The OCC issued its decision on March 18, 2002, that the law did, in fact, preempt the states law. The U.S. Court of Appeals for the First Circuit then dismissed the petition of the Massachusetts commissioners of banks and insurance for lack of jurisdiction.

Subsequently, the Massachusetts Bankers Association and some of its member banks filed suit in Federal District Court challenging four provisions of the Massachusetts Bank Insurance Statute. The lawsuit involved two counts. Count one, brought by federally chartered members of the MBA, claimed provisions of the Massachusetts Bank Insurance Statute were preempted for national banks and federal savings banks. Count two, brought by their state-chartered counterparts, claimed that enforcement of the contested provisions against them constitutes arbitrary, discriminatory action against them because the provisions do not apply to national banks and federal savings associations.

Four provisions of the Massachusetts Bank Insurance Statute were subject to the challenge.

1. The referral prohibition forbid bank employees who are not licensed to sell insurance from initiating a discussion of insurance. Referrals to licensed agents could be made only if the customer asked about insurance.

2. The referral fee prohibition forbid banks from paying nonlicensed employees for making referrals to licensed insurance agents.

3. The waiting period restriction prohibited a bank from soliciting loan applicants for insurance sales before the loan was approved, and the approval and certain disclosures communicated to the loan customer.

4. The separation restriction required insurance sales to be carried out in an area of the bank physically separate from the rest of the bank.

The court granted partial summary judgment on count one, ruling that GLB preempted the Massachusetts Bank Insurance Statute. The court stated that GLB codified the standard of Barnett Bank of Marion County N.A. v. Nelson, 517 U.S. 25 (1996). Judge Zobel cited GLB language that “no state may, by statute…prevent or significantly interfere with the ability of a depository institution…to engage directly or indirectly…in any insurance sales…activity.”

The court noted the bankers evidence comparing bank customer referrals and sales of insurance in Massachusetts with the much higher insurance sales data for branches of the same banks in neighboring states.

The court held that GLB prohibited both the referral prohibition and the referral fee prohibition because they served to “significantly curtail the banks ability to cross market, solicit and thereby sell insurance products.”

In examining the waiting period restriction, the court noted that most retail loans require some form of insurance before the advancement of funds, so a loan applicant likely will secure insurance before approval of the loan application. The waiting period restriction, therefore, effectively blocked the ability of a bank to sell insurance to loan applicants, the court reasoned.

The court also accepted the bankers argument that the waiting period restriction increased their cost of selling because it required them to track the status of loan applications to avoid soliciting applicants before credit approval, thus violating the language of GLB.

Finally, the court found that the separation restriction also was preempted because it imposed more costs on banks by forcing them to devote more space to the insurance activity. It dismissed the defendants argument that the restriction should not be preempted because the commissioner may waive the physical separation requirement.

Interestingly, the courts ruling applied only to count one, which concerned the activities of national banks and federal savings associations. The court had granted the parties joint motion to dismiss count two until after a decision on count one. As the decision applied only to count one, the court did not rule on whether the Massachusetts law also was preempted for state chartered institutions.

Immediately following the ruling, however, the state bank plaintiffs petitioned the Massachusetts commissioners of insurance and banking to waive the restrictions that were preempted for national banks and federal savings associations.

It is expected that the commissioners will grant that waiver based on a finding that a waiver is necessary to allow state chartered institutions to compete on an even footing with their federally chartered competitors.

Theodore P. Augustinos is a partner in the insurance and reinsurance department of Edwards & Angell, Hartford, a national law firm. He may be reached at: TAugustinos@EdwardsAngell.com.


Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.