Opinion ID: 1910997
Heading Depth: 1
Heading Rank: 7

Heading: The McCarran-Ferguson Act

Text: Article I, § 8, of the U.S. Constitution grants Congress the power to regulate commerce among the states. Contained within that grant of power to the federal government is an implicit limitation on the power of the states to interfere with or impose burdens on interstate commerce. Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982). If Congress expressly authorizes the states to regulate an area of interstate commerce, however, any action taken by the state within that authorization will be invulnerable to Commerce Clause challenge. Western & Southern L.I. Co. v. Bd. of Equalization, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981). Relevant to this case is the authorization Congress granted with respect to the states' regulation of insurance companies domiciled within their boundaries by enacting the McCarran-Ferguson Act (MFA). 15 U.S.C. § 1011 et seq. (1994). The MFA permits states to regulate insurance companies within their boundaries and removes all Commerce Clause limitations upon that authority. See Western & Southern L.I. Co., supra . Even the auspices of the MFA, however, do not exempt all state regulation of the activities of insurers. SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). Rather, the MFA grants states authority to regulate insurers only to the extent that state law governs the business of insurance. Id. See, also, 15 U.S.C. § 1012(a) and (b). Herein lies the critical inquiry: whether a restriction on the sale of stock in a domestic insurer is sufficiently connected to the business of insurance to be shielded by the MFA from Commerce Clause attack. Applicants argue that this restriction intrudes impermissibly into the federal realm of securities regulation. The U.S. Supreme Court has reduced the inquiry of whether a practice is part of the business of insurance to a three-part test: (1) The practice must relate to the transferring and spreading of risk, (2) the practice must be an integral part of the policy relationship between the insurer and the insured, and (3) the practice must be limited to entities within the insurance industry. Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982). As applied to the Act and orders issued pursuant to the Act, these criteria support our finding that the director's order does relate to the business of insurance. First, the restriction on stock disposition relates, albeit indirectly, to the transferring and spreading of risk. The Act and its implied powers are triggered only when a person who makes a tender offer for voting securities of a domestic insurer would acquire control of that domestic insurer. See § 44-2126. The Act affords the Director of Insurance a chance to review the financial stability of the acquiring company so that he can determine whether acquisition is in the best interests of Nebraska policyholders. See id. See, also, Hoylake Investments Ltd. v. Gallinger, 722 F.Supp. 573 (D.Ariz.1989). The director is further afforded, by virtue of §§ 44-2139 and 44-2153, the opportunity to bring any threatened change of control under his own control so that he can consider the impact of such a change on policyholders. See Gallinger, supra . Whether a domestic insurer will remain reliable to its policyholders certainly relates to the transferring and spreading of risk. In this case, the director is justifiably concerned that the stock will be transferred to more Moroun entities, legitimate or otherwise, thereby prejudicing the interests of policyholders. Notably, in states with laws similar or identical to those composing the Act, courts have found that such laws do relate to the transferring and spreading of risk. See, Gallinger, supra (Arizona law); Hoylake Investments Ltd. v. Bell, 723 F.Supp. 576 (D.Kan.1989) (Kansas law); Hoylake Investments Ltd. v. Washburn, 723 F.Supp. 42 (N.D.Ill.1989) (Illinois law). Those courts reasoned that because a change of control of an insurer can affect the quality and stability of policies, these laws satisfy the requirement that they related to the transferring and spreading of risk. The same is true for the Nebraska Act and for orders issued pursuant to the Act. The second criterion of the business of insurance is that the regulated practice must be an integral part of the policy relationship between the insurer and its insured. Pireno, supra . The Nebraska Act satisfies this criterion as well. The review and evaluation by the director involves the relationship between an insurance company and its policyholders. Cf. Alleghany Corp. v. Pomeroy, 700 F.Supp. 460 (D.N.D.1988), rev'd on other grounds 898 F.2d 1314 (8th Cir.1990) (stating that policyholder is concerned only with whether claim will be paid, not with who controls direction of company). Unfortunately, the individual policyholder is not in a position to understand the ramifications of a change of control in his insurer until the insurer becomes insolvent and unable to pay claims. The director has both the ability and the statutory responsibility to ensure that the relationship between the insurer and the policyholder is one of mutual understanding and not one of deceit. See, Bell, supra ; Washburn, supra . The third criterion of the business of insurance requires that the regulation be limited to entities within the insurance industry. This criterion is also satisfied. It is true that the Act affects not only policyholders, but also investors and stockholders who seek to own stock in Nebraska domestic insurers. See Alleghany Corp., supra . We further recognize that the Act restricts the ability of an out-of-state stockholder to sell his interest to a willing purchaser whenever the sale would result in the purchaser's owning more than 10 percent of the domestic insurer. See id. The focus of all of these restrictions, however, remains the interest of the individual policyholder. Irrespective of what sort of concern pursues ownership and control, the Act concerns itself solely with the acquisition of domestic insurance companies. See Washburn, supra . This is not an instance of the department reaching out to invade the stock market. Rather, it was applicants who wished to control the handling of CenTra's insurance claims; it was applicants who sought to gain control of their insurer by owning its stock; and it was applicants who chose to cast into jeopardy the one policy concern for whose protection the department was created: that an insurer should remain as reliable as it promises its insureds it will be. The director has not intruded into securities regulation. If anything, it is applicants who have intruded impermissibly into insurance regulation. The Act affects entities outside the insurance industry only insofar as those entities choose to enter this rightly regulated arena. Applicants assert that SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), supports their contention that the director's order transgresses the regulation of the business of insurance. In National Securities, Inc., the U.S. Supreme Court invalidated a portion of the Arizona version of the Act, a body of law substantially similar to the Nebraska Act. The portion in question required the director to find that a merger of insurers would not substantially reduce the services to be rendered to policyholders. The Court concluded that regulation whose focus is the protection of stockholders does not sufficiently relate to the MFA to be shielded from Commerce Clause attack. In contrast to the facts of National Securities, Inc., the provisions questioned in this case protect not stockholders, but policyholders. No part of the Nebraska Act is concerned with security of or services rendered to stockholders; whether merger or acquisition is equitable to stockholders is immaterial in the eyes of the director. Significantly, however, the National Securities, Inc., Court found that the section of the Arizona act that empowered the director to determine whether acquisition would substantially reduce the security of policyholders' interests clearly relates to the `business of insurance.' 393 U.S. at 462, 89 S.Ct. at 569. This holding of National Securities, Inc., and not the holding pertaining to stockholders, controls our disposition of the Act's conformity with the MFA. Policyholders' interests can come under attack from many fronts, including manipulation of ownership and control by individuals to whom an insurer's solvency is a negligible priority. In his concurrence to S.E.C. v. Variable Annuity Co., 359 U.S. 65, 90-91, 79 S.Ct. 618, 632, 3 L.Ed.2d 640 (1959), Justice Brennan wrote that [t]he prevention of insolvency and the maintenance of `sound' financial condition in terms of fixed-dollar obligations is precisely what traditional state regulation [of insurance] is aimed at. We agree, and accordingly we hold that the Nebraska Act and the director's order relate to the business of insurance and thereby qualify for the protection of the MFA against a Commerce Clause challenge.