THE McCARRAN-FERGUSON ACT AND REVERSE PREEMPTION PART I

The third paper in our student blog series is written by Mr. Alex Martin and discusses the interplay between the McCarran-Ferguson Act, the Federal Arbitration Act, and the Patient Protection and Affordable Care Act. Here is part one of five!

THE McCARRAN-FERGUSON ACT AND REVERSE PREEMPTION PART I

Part II | Part III | Part IV | Part V

By: Alex Martin

“What is important is to spread confusion, not eliminate it.” – Salvador Dalí

This paper discusses the McCarran-Ferguson Act generally, the Federal Arbitration Act (“FAA”) generally, and the reverse preemption of the FAA via the McCarran-Ferguson Act specifically.  Reverse preemption of the FAA via the McCarran-Ferguson Act sounds facially confusing at the outset.  In order to better understand and flesh-out reverse preemption of the FAA via the McCarran-Ferguson Act, two case studies are presented, namely:  one case study finding reverse preemption of the FAA via the McCarran-Ferguson Act and one case study not finding reverse preemption of the FAA via the McCarran-Ferguson Act.  These two case studies, when read together, present an important principle.

Moreover, this paper addresses current issues surrounding the McCarran-Ferguson Act.  Specifically, the possible implications that may be drawn from the recent enactment of the Patient Protection and Affordable Care Act (“PPACA”).

The McCarran-Ferguson Act

Under the United States Constitution, Congress has the power to regulate interstate commerce.[1]  In 1868, in Paul v. Virginia,[2] the Supreme Court held that the Commerce Clause did not preclude the states’ power to tax and regulate the insurance industry within their respective borders.  In 1944, however, in United States v. South-Eastern Underwriters Association,[3] the Supreme Court held that the insurance industry involved interstate commerce and was, therefore, also subject to regulation by Congress under the Commerce Clause.[4]

The result of South-Eastern—that the insurance industry was subject to regulation by Congress under the Commerce Clause—was highly controversial in its time.  Many individuals criticized South-Eastern as threatening the states’ power to tax and regulate the insurance industry within their respective borders.[5]  Immediately after the South-Eastern decision, there was a growing demand for congressional intervention, and, in response to such demand, Senators McCarran and Ferguson proposed legislation[6] to limit the application of South-Eastern—legislation that reaffirmed the states’ unadulterated right[7] to tax and regulate the insurance industry within their respective borders absent specific congressional intent to the contrary.  Shortly thereafter, in 1945, Congress enacted the McCarran-Ferguson Act.[8]

The legislative history surrounding the McCarran-Ferguson Act evidences the Act’s justification. Congress noted, the “enactment of this bill will (1) remove existing doubts as to the right of the States to regulate and tax the business of insurance, and (2) secure more adequate regulation of such business.”[9]  During the congressional hearings that surrounded the McCarran-Ferguson Act, President Franklin D. Roosevelt stated, “the responsibility for the regulation of the business of insurance has been left with the States; and I can assure you that this administration is not sponsoring Federal legislation to regulate insurance or to interfere with the continued regulation and taxation by the States of the business of insurance.”[10]  The significance of enacting the McCarran-Ferguson Act was also evidenced within the senate reports, where Congress stated, “from its beginning the business of insurance has been regarded as a local matter, to be subject to and regulated by the laws of the several states.”[11]

In 1945, the McCarran-Ferguson Act was signed into law.  The McCarran-Ferguson Act provides the following in its preamble:

The Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several states.[12]

To add substance to the Act, the Act further provides:

(a) State regulation.  The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

(b) Federal regulation.  No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance . . . .[13]

Shortly after the McCarran-Ferguson Act was signed into law, the Supreme Court analyzed Congress’ intent in passing the Act.  “Obviously Congress’ purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance.”[14]  Congress achieved this purpose in two separate and distinct ways.  The first way was by “removing obstructions which might . . . flow from its own power . . . .”[15]  Essentially, Congress exempted the insurance industry from federal legislation that did not specifically contemplate the regulation of the insurance industry.  The second way was by “declaring expressly and affirmatively that continued state regulation and taxation of this business is in the public interest and that the business and all who engage in it shall be subject to the laws of the several states.”[16]  The enactment of the McCarran-Ferguson Act in response to South-Eastern, coupled with the Act’s stated purpose, the Act’s legislative history, and the case law interpreting the Act, establish that Congress undoubtedly meant for the states to tax and regulate the insurance industry within their respective borders without federal intervention, absent specific congressional intent to the contrary.