INSURANCE PROVISIONS OF FINANCIAL SERVICES MODERNIZATION BILLS IN THE 106TH CONGRESS
CRS Report for Congress
Insurance Provisions of Financial Services
th
Modernization Bills in the 106 Congress
M. Maureen Murphy
Legislative Attorney
American Law Division
Summary
Current financial services modernization proposals would continue state regulation
of the insurance business and would generally approve expanded insurance powers for
banks. On May 6, the Senate passed S. 900 (S.Rept. 106-44), a financial modernization
bill with provisions paralleling those of H.R. 10, as introduced, with respect to state
regulation of insurance. On July 1, the House passed H.R. 10 (H.Rept. 106-74, Parts I,
II, and III). While the overall treatment of the insurance provisions in the two bills is
similar, there are some differences. Among them are the treatment of sales of title
insurance, the articulation of the standard for court review of disputes between federal
and state regulators, and the extent to which national bank subsidiaries are precluded
from underwriting insurance. H.R. 10, and not S. 900, would prohibit insurance
companies from disclosing personal medical, health, and genetic information, and
includes provisions on the redomestication of mutual insurance companies. Overall
tracking of financial reform legislation is provided in CRS Issue Brief IB10035, which
will be updated as developments warrant.
Background
At the beginning of the 106 Congress, House Banking Committee Chairman Leach’sth
version of financial modernization legislation, H.R. 10; House Banking Committee
Minority Ranking Member LaFalce’s H.R. 665; and Senate Banking Committee Chairman
Gramm’s committee staff draft legislation took distinct approaches to balancing state
authority over insurance with preservation of federally authorized insurance powers for
banks, bank subsidiaries, and bank and financial holding company affiliates. On May 6,1
the Senate passed S. 900 (S.Rept. 106-44), a financial modernization bill with provisions
paralleling those of H.R. 10, as introduced, with respect to state regulation of insurance.
See CRS Report RS20132, “Insurance Provisions in Financial Services Modernization Bills1th
in the 106 Congress: Antecedent Supreme Court Decisions.”
Congressional Research Service ˜ The Library of Congress
On July 1, the House passed H.R. 10 (H.Rept. 106-74, Parts I, II, and III). While the
overall treatment of the insurance provisions in the two bills is similar, there are some
differences. Among them are the treatment of sales of title insurance, the articulation of
the standard for court review of disputes between federal and state regulators, and the
extent to which national bank subsidiaries are precluded from underwriting insurance.
Some of the differences in the insurance provisions of the bills passed by each House are
briefly outlined as follows:
H.R. 10S. 900
Prohibits insurance underwriting in national banksSimilar provision except authorizes national banks
and their subsidiaries subject to certain exceptions.of assets of $1 billion or less to form subsidiaries
to engage in financial activities including insurance
underwriting.
Prohibits national banks and their subsidiariesNo similar provision.
from selling title insurance, except for that
lawfully conducted on the date of enactment. Also
permits title insurance sales in states which
authorize state chartered banks to sell title
insurance and only to the same extent, in the same
manner, and under the same restrictions as state-
chartered banks.
Allows a mutual insurance company to change itsNo similar provision.
domicile under certain circumstances.
Establishes National Association of RegisteredIncludes a “sense of Congress” resolution that if
Agents and Brokers for multistate insurancestates have not implemented uniform insurance
licensing purposes unless the majority of stateslicensing within three years, Congress should take
have enacted uniform laws governing insurancesteps to rectify the problems.
licensing, including reciprocity, within three years.
States would continue to regulate insurance, withSimilar except no explicit provision applying
mandatory licensing (special temporary exemptionfunctional regulation to national banks in places of
from licensing for rental car agency activities).less than 5,000.
Bank sales of insurance would be subject to state
laws.
There would be 13 safe harbors where states could
preempt federal bank regulators.
Specific provision applies functional regulation to
insurance sales by national banks in places of less
than 5,000.
Preempts States’ ability to prevent or restrictPreempts ability of states to prevent or restrict
affiliations of banking institutions with insuranceaffiliations of banking institutions with insurance
companies and specifies certain statecompanies and permits certain state administrative
administrative, management and capitalrequirements “ if the State actions do not have the
requirements that are permissible.practical effect of discriminating, either
intentionally or unintentionally” against a banking
H.R. 10S. 900
institution. No mention is made of management or
capital requirement.
Preempts ability of states to discriminate against Preempts ability of states to discriminate against
insurance sales by banking institutions. insurance sales by banking institutions.
Specifies that state antitrust and general corporateNo similar provision.
laws are subject to the antidiscrimination standard
and are not preempted as restrictions on authorized
affiliations.
Expedited court review of federal and stateExpedited court review of federal and state
regulator disputes “without unequal deference.”regulator disputes “with equal deference.”
Authorizes various disclosures between bankingNo similar provisions.
regulators and state insurance regulators.
Requires federal banking agencies to consult with
state insurance regulators prior to making
determinations relating to affiliations.
Authorizes federal banking regulators to prescribeSimilar approach. There are, however, variations
consumer protection regulations respecting bankin the prescribed content of the regulations. For
insurance sales, specifying certain contents.example, H.R. 10 requires bank sales of insurance
not discriminate against domestic violence victims,
and S. 900 has no corresponding provision.
Among the disclosures in S. 900 required to be
included in regulations respecting the sales of
insurance products, and not in H.R. 10, is one
relating to the tying of the purchase of a financial
product to obtaining enhanced service from an
affiliate. There are other similar distinctions
between the two bills.
State laws would preempt unless the federal bankState laws would preempt unless the federal bank
regulators jointly determine that the federalregulators jointly determine that the federal
regulations provide greater protection.regulations provide greater protection and consider
comments by state regulators and notify the states
of federal preemption. Such preemption would not
go into effect if within three years the state
overrides the preemption by statute.
N.A.Includes a requirement that federal regulations not
have the practical effect of discriminating against
insurance sales by persons not affiliated with an
insured depository institution.
Insurance companies would be prohibited fromNo similar provision.
disclosing individually identifiable medical, health,
and genetic information, subject to certain
exceptions.
Both bills would preserve functional regulation of insurance by state regulators and
prohibit states from restricting bank affiliations permitted by federal law. The standard for
determining whether a state law or regulation discriminates against a banking concern
would be stated in terms of whether it distinguishes by its terms between depository
institutions and other persons in a way that is more adverse to the depository institution
than to the others. With respect to insurance sales activities, the bills include preemption
standards that differ according to date of enactment of state law and type of activity being
restricted. In some instances, the preemption provisions refer to the Barnett Bank of
Marion County, N.A. v. Nelson, 517 U.S. 1103 (1996) standard to preempt state laws
that “prevent or significantly interfere with the ability of an insured depository institution
or wholesale financial institution, or a subsidiary or affiliate thereof, to engage ... in any
insurance sales, solicitation, or cross-marketing activity.” These preemption standards are
as follows:
Type of State RestrictionStandard of Preemption
Any restriction falling into one of 13 safe harborsNo federal preemption. (Litigation could test
if enacted before 9/3/98whether the state law satisfies the standards of the
safe harbors, with the court under the obligation to
decide “based on its review on the merits of all
questions presented under State and Federal law,
including the nature of the product or activity and
the history and purpose of its regulation under
State and Federal law, without equal deference.”)
Any restriction falling into one of 13 safe harborsNo federal preemption. (Litigation could test
if enacted on or after 9/3/98.whether the state law satisfies the standards of the
safe harbors, with the court under the obligation to
decide “based on its review on the merits of all
questions presented under State and Federal law,
including the nature of the product or activity and
the history and purpose of its regulation under
State and Federal law, without unequal deference”
(“with equal deference,” S. 900).)
Any other state restriction relating to insuranceFederal preemption under the Barnett standard:
sales if enacted before 9/3/98.“Whether it prevents or significantly interferes with
the national bank’s exercise of its power.”
Any other state restriction relating to insuranceFederal preemption under a modified Barnett
sales if enacted on or after 9/3/98.standard; “[w]hether it prevent[s] or significantly
interfere[s] with the ability of an insured depository
institution ... to engage ... in any insurance sales,
solicitation, or cross-marketing activity.” The
court would be under the obligation to decide
“based on its review on the merits of all questions
presented under State and Federal law, including
the nature of the product or activity and the history
and purpose of its regulation under State and
Federal law, without equal deference” (“with equal
deference,” S. 900).
Caveat: State laws falling into any of four
Type of State RestrictionStandard of Preemption
categories specified as discriminating against
depository institutions are preempted.
Any other state restriction relating to insurance,Barnett standard, including interpretation of
other than sales, if enacted before 9/3/98.McCarran-Ferguson Act.
Any other state statute relating to insurance, otherWhether “it prevent[s] or restrict[s] an insured
than sales, if enacted on or after 9/3/98depository institution ... from engaging ... in any
activity permitted under this Act.” The court
would be under the obligation to decide “based on
its review on the merits of all questions presented
under State and Federal law, including the nature
of the product or activity and the history and
purpose of its regulation under State and Federal
law, without unequal deference.”
Caveat: There would be no federal preemption for
“State statutes ... and ... actions ... to the extent
that they ... relate to, or are issued, adopted, or
enacted for the purpose of regulating the business
of insurance in accordance with ... the ‘McCarran-
Ferguson Act,’” unless they fall into any of four
categories specified as discriminating against
depository institutions.
The thirteen safe harbors are types of laws which states could enact that distinguish
between banking institutions and other insurance-providing entities. They would cover
banking concerns acting in behalf of insurance companies, e.g., by processing claims or
providing investment management, as well as those engaged directly in providing
insurance. The safe harbor provisions would insulate from federal preemptions state
restrictions regarding: (1) requiring credit insurance issued by an affiliate or subsidiary;
(2) imposing fees for non-affiliated credit insurance that are not required for such
insurance issued by a subsidiary or affiliate; (3) misleading advertising concerning whether
the federal government guarantees the insurance product issued by the bank; (4) paying
of any insurance brokerage fee or commission to anyone not a licensed insurance broker;
(5) paying any insurance referral fee to anyone other than a licensed insurance broker; (6)
releasing insurance customer information without consent; (7) using health information
obtained in the insurance business for other purposes; (8) various specified tying
arrangements involving tying of services to the purchase of insurance; (9) informing bank
and financial holding company loan customers that the loan is not contingent upon
purchasing insurance from an affiliate or subsidiary; (10) informing insurance customers
of the absence of the federal guaranty for the insurance products; (11) separate
documentation of combined credit and insurance transactions; (12) written consent for the
inclusion of insurance premiums in credit transactions; and (13) separating insurance
transactions records and opening them to state inspection.
The four categories of state laws that are included as discriminating against
depository institutions are those that (1) distinguish by their terms between banking
institutions and others engaged in the insurance activities “in any way adverse” to the
depository institutions; (2) will have an impact on depository institutions substantially
more adverse than on the others; (3) effectively prevent depository institutions from
engaging in insurance activities permitted under the legislation; or (4) conflict with the
intent of this legislation to permit authorized affiliations between depository institutions
and insurance concerns.
Medical Records Privacy2
H.R. 10 also includes restrictions on insurance company disclosure of individually
identifiable customer health, medical, and genetic information that applies to insurance
companies and their subsidiaries and affiliates. Disclosure is authorized: (1) with consent
of the customer, (2) for various specified purposes related to insurance operations and
business; (3) in connection with payments or transfer of accounts or interests in accounts;
and (4)for various law enforcement purposes. Enforcement would be under existing state3
law or by a federal court enforcement action brought by a State. These restrictions would
go into effect on February 1, 2000. The legislation contains a sunset provision stating that
these restrictions will not take effect or will cease to take effect if legislation is enacted
satisfying the requirements of section 264(c)(1) of the Health Insurance Portability and
Accountability Act of 1996. While these restrictions are in effect there is to be
consultation with the Secretary of Health and Human Services.
“Medical Records Confidentiality” is the subject of CRS Issue Brief 98002, which2
elaborates on the relevant provisions of the Health Insurance Portability and Accountability Act
of l996.
Critics have raised concerns about the breadth of the exceptions to the consent requirement3
and whether or not the language of the provisions preempt the requirement in the Health Insurance
Portability and Accountability Act of 1996, which in the absence of Congressional medical privacy
legislation, would require the Secretary of Health and Human Services to promulgate certain
medical records privacy regulations. See statements of Rep. Condit, 145 cong. Rec. H 5291 (July
1, 1999); statement of Rep. LaFalce, 145 Cong. Rec. H 5186 (July 1, 1999); and, “Still Not
Private Enough,” Editorial, Washington Post A-1, col. 1 (July 8, 1999).