Opinion ID: 370294
Heading Depth: 2
Heading Rank: 1

Heading: Specifically Relates

Text: 19 Nowhere in TIL is there a provision that specifically relates the legislation to the business of insurance. In contrast, the McCarran Act itself contains a section that specifically relates the National Labor Relations Act and the Fair Labor Standards Act to the business of insurance. 15 U.S.C. § 1014. 10 Moreover, TIL contains no other indication that we should construe it as an implied repeal of the McCarran Act, even if we were so inclined as to ignore the Act's legislative history and judicially recognize such an implied repeal. See footnote 7, Supra, & accompanying text. 20 Although TIL does not Exempt insurance transactions from its coverage, 15 U.S.C. § 1603, 11 we cannot twist this omission into an affirmative provision that specifically relates TIL to the business of insurance. Similarly, Congress' consideration of at least some aspects of the insurance business in the passage of TIL 12 is insufficient. An express application of a federal statute to the insurance business is required before TIL would automatically defeat a McCarran Act defense. We thus agree with the district court and others that TIL does not specifically relate to such business. Cochran v. Paco, Inc., supra, 409 F.Supp. at 224; Ben v. General Motors Acceptance Corp., 374 F.Supp. 1199, 1201 (D.Colo.1974); Gerlach v. Allstate Ins. Co., supra, 338 F.Supp. at 649; In re Providence Washington Ins. Co., 89 F.T.C. 345, 354 (1976); Krischer, Supra, 30 Bus.Lawyer at 975.B. Business of Insurance 21 Having concluded that TIL does not specifically relate to the business of insurance, we must now determine whether the district court properly concluded that Paco's premium financing in connection with Cochran's purchase of an automobile insurance policy from Cotton States constitutes the business of insurance. The McCarran Act itself contains no definition of the business of insurance, and the courts have not yet established the precise metes and bounds of the term. The Supreme Court provided some guidance in Securities and Exchange Commission v. National Securities, Inc., supra, in which Justice Marshall wrote: 22 The statute did not purport to make the States supreme in regulating all the activities of insurance Companies ; its language refers not to the persons or companies who are subject to state regulation, but to laws regulating the Business of insurance. Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the business of insurance does the statute apply. Certainly the fixing of rates is part of this business; that is what South-Eastern Underwriters was all about. The selling and advertising of policies, FTC v. National Casualty Co., 357 U.S. 560, 78 S.Ct. 1260, 2 L.Ed.2d 1540 (1958), and the licensing of companies and their agents, cf. Robertson v. People of State of California, 328 U.S. 440, 66 S.Ct. 1160, 90 L.Ed. 1366 (1946), are also within the scope of the statute. Congress was concerned with the type of state regulation that centers around the contract of insurance, the transaction which Paul v. Virginia held was not commerce. The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement these were the core of the business of insurance. Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly are laws regulating the business of insurance. 23 393 U.S. at 459-60, 89 S.Ct. at 568-69. 24 In applying National Securities, we must keep in mind that Paco is not an insurance company. 13 In premium financing agreements such as the one between Paco and Cochran, Paco advances the premiums to the insurance company and Cochran, the insured, pays Paco in periodic installments. In case of default, Paco can exercise its power of attorney and cancel the policy. In this limited sense, Paco steps into the shoes of the insured and gives notice of cancellation to the insurance company and the insured, and upon such cancellation, both the insurance company and the premium finance company must credit unearned premiums to the insured. See Ga.Code Ann. §§ 84-5312, 84-5313. Thus, as the district court acknowledged, Paco is performing the same role in the insurance business as do other financing companies in the consumer sales business. 409 F.Supp. at 221. See generally Comment, Insurance Premium Financing, 19 Buff.L.Rev. 656 (1970). 25 Beyond the National Securities case, there is precious little judicial authority to aid us. The only appellate decision touching the issue is Lowe v. Aarco-American, Inc., supra. Relying on National Securities And Gerlach v. Allstate Ins. Co., supra, the court held that the credit sale of insurance policies by an insurance broker and a premium finance company was part of the business of insurance and that the transaction was thus outside the purview of TIL. The court also held that since the relevant activities were regulated extensively by the Illinois Insurance Code and the state's Premium Financing Companies Act, application of TIL would supersede Illinois law. Interestingly, there was no inconsistency between the disclosure provisions of TIL and the applicable Illinois requirements. 536 F.2d at 1162. 26 In Gerlach the plaintiff had purchased an Allstate automobile insurance policy on terms 10% Down, balance in 10 installments with a flat 50cents service fee per installment. Premium financing was not involved, since the plaintiff was not contractually obligated to pay the premiums; the single consequence of default was cancellation of the policy. The court held that Allstate's activities with respect to its premium payment plan and service charge were part of its rate structure and thus subject to regulation by the state of Florida. However, in rather sweeping dictum the court also stated that a premium financing arrangement would also have constituted the business of insurance and would have thus precluded application of TIL. 338 F.Supp. at 650. The Lowe court relied on this dictum. 27 We decline to follow these decisions, which contain no reasoned discussion of the National Securities standard and which, in our view, misconstrue the test. Under National Securities, the key factor is the relationship between the insurer and the insured, and statutes aimed at protecting or regulating this relationship, directly or indirectly are laws regulating the 'business of insurance.'  393 U.S. at 460, 89 S.Ct. at 568-69. In explaining that relationship, the Court focused on the type of policy which could be issued, (and) its reliability, interpretation, and enforcement. Id. at 459, 89 S.Ct. at 568. 28 We fail to see how these elements in the insurer-insured relationship are affected to any significant extent by premium financing arrangements. Premium financing has little if any effect on an insurance company's ability to pay claims or on the nature of the policies it issues. Further, the activity could affect a policy's enforceability only in terms of whether the policy was in effect at a particular time, a question that might arise in the event of a payment error. Such a dispute, however, does not concern the details of the policy, its terms, or its coverage. We thus agree with the administrative law judge in In re Providence Washington Ins. Co., supra, a case in which a premium finance company a wholly owned subsidiary of an insurance company unsuccessfully defended charges of TIL violations on the basis of the McCarran Act. The administrative law judge said: 29 (T)he credit transactions here involved do not pertain to the particular details of the policy being purchased. The policy is purchased from (the insurance company), or such other insurance company as may be involved. The credit, as extended by (the premium finance company) to the insured, does not purport to involve the insurer regarding any of the policy's details. The policy is a self-contained document quite apart from the credit arrangement. 30 (The premium finance company) is not an insurance company. It is in the business of extending consumer credit, and, in the course of that business, it collects outstanding obligations to it. It is not engaged in the business of insurance simply because its loans are limited for the purpose of financing insurance premiums. It is no more in the business of insurance than a company which lends money for a number of purposes, including the financing of insurance premiums. 31 89 F.T.C. at 355-56. 32 In short, Paco cannot be said to be in the business of insurance simply because an insurance policy is tangentially involved. Although the borrower may appoint the premium finance company as his attorney to cancel the insurance in the event of default by the borrower, this does not make the lender-borrower relationship a part of the relationship between the insurer and the insured. Nor does the fact that the premium finance company takes a security interest affect the insurer-insured relationship. Paco's relationship to the business of insurance is much like that of an ordinary commercial lender to the business that receives the funds obtained by the borrower. When a bank repossesses and sells a car in which it has a secured interest to collect on a defaulted loan, it would be ludicrous to assert that the bank is in the automobile business. Similarly, a savings and loan association that lends money to the purchaser of a home is not in the business of selling real estate merely because it can exercise certain rights with respect to the property in the event of default. The lender's connection with the businesses involved in each of these situations is simply too tenuous, and similarly, premium financing has only a peripheral connection with the business of insurance. 33 Furthermore, even if we agreed with the district court that premium financing has a considerable impact on the cost of the insurance, 409 F.Supp. at 223, that impact is insufficient to sustain a McCarran Act defense. An activity is not a part of the business of insurance solely because it has an impact, favorable or otherwise, upon premiums charged by the insurer. Royal Drug Co. v. Group Life & Health Ins. Co., 556 F.2d 1375, 1386 (5 Cir. 1977). 34 Accordingly, we hold that premium financing by an independent premium finance company does not constitute the business of insurance for purposes of the McCarran Act. 14 Therefore, the McCarran Act does not preclude the application of TIL's disclosure requirements to the transactions in the cases before us. The McCarran Act is to be narrowly construed in the face of valid federal regulatory interests, Securities and Exchange Comm'n v. Republic Nat'l Life Ins. Co., 378 F.Supp. 430, 436 (S.D.N.Y.1974), and it is obvious that TIL reflects such interests. 15 35 The judgments in both Cochran and Jones are thus reversed and the cases remanded to the district court for further proceedings consistent with this opinion. 36 REVERSED and REMANDED. 37 BROWN, Chief Judge, concurs in the result.