Ban on banks' sales of insurance invalid States may not limit operation in small towns, court rules

Supreme Court

March 27, 1996|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- National banks may sell insurance in small towns and cannot be stopped by state laws against such sales, the Supreme Court ruled unanimously yesterday.

The ruling blocks enforcement of a Florida law, and it appears likely to bar 14 other states from applying similar laws. Maryland has no such law.

Congress long ago gave national banks in small towns permission to sell insurance and did not want states to interfere with that permission, the court said in an opinion written by Justice Stephen G. Breyer.

Although national banks have only federal permission to operate in small towns -- those with fewer than 5,000 residents -- federal regulatory officials ruled long ago that the banks do not have to confine themselves to customers who live in those towns.

Thus, the ruling frees them to operate in any state where they could legally reach customers, according to Robert C. Eager, a Washington banking attorney.

He said the ruling also was important because it clarified the division of authority over bank insurance sales between national and state officials, clearly favoring national regulation and appearing to leave no room for states to control those sales.

Consumer groups hailed the ruling, saying it gives insurance customers more options and the benefits of greater competition.

The court rejected Florida's argument that Congress intended to allow national banks to sell insurance only if they had authority to do so under a state law.

The justices also turned aside a claim that Congress had left control of such insurance sales to the states under the McCarran-Ferguson Act, passed by Congress in 1945 to protect state regulation of the insurance industry.

Under federal banking law, federally chartered banks generally are barred from selling policies issued by insurers. That law was changed in 1916 to let banks sell insurance if they are located and do business in small communities.

That permission was granted by Congress after the failure of numerous small banks. The action was intended to shore up small banks and allow them to compete more effectively with larger banks.

Since 1974, however, Florida has barred banks from selling insurance.

Its law exempts a bank that is completely independent and located in a town of fewer than 5,000 people. Thus, a small-town bank affiliated with a larger bank could not offer insurance to its customers.

That law was challenged by Barnett Bank of Marion County, a larger institution that operates a branch in Belleview, Fla., a community of 2,666 people.

Pub Date: 3/27/96

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