State Preemption Of GLB Takes A Big Hit

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: [email protected].

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.