THE McCARRAN-FERGUSON ACT AND REVERSE PREEMPTION PART IV

THE MCCARRAN-FERGUSON ACT AND REVERSE PREEMPTION PART IV

Part I | Part II | Part III | Part V

By: Alex Martin

Case Studies

American Bankers Insurance Company v. Inman

In Am. Bankers Ins. Co. v. Inman,[1] the Fifth Circuit was asked to determine whether Miss. Code Ann. § 83-11-109 (2013)[2] reverse preempts the FAA.  Ultimately, the court held that Miss. Code Ann. § 83-11-109 (2013) does in fact reverse preempt the FAA.[3]

The appellant argued that Miss. Code Ann. § 83-11-109 (2013) does not reverse preempt the FAA via the McCarran-Ferguson Act.[4]  Specifically, the appellant argued that Miss. Code Ann. § 83-11-109 (2013) does not “regulat[e] the business of insurance,” as the second prong of the Act requires.[5]

The Fifth Circuit began its discussion by articulating the McCarran-Ferguson Act’s test for reverse preemption, namely: “(1) [whether] the federal statute does not specifically relate to the ‘business of insurance;’ (2) [whether] the state law was enacted for the ‘purpose of regulating the business of insurance;’ and (3) [whether] the federal statute operates to ‘invalidate, impair, or supercede’ the state law.”[6]

The court quickly dismissed the first and third prongs.  In doing so, the court provided the following explanation:

‘[T]here is no question that the FAA does not relate specifically to the business of insurance[]’; thus, the first requirement of the McCarran-Ferguson Act is satisfied.  Additionally, the application of the FAA to enforce the arbitration provision would invalidate [Miss. Code Ann. § 83-11-109 (2013)]; accordingly, the third requirement of the Act is also satisfied.[7]

In evaluating the second prong, the court announced its adherence to the Group Life and Union Labor test, namely adopting the following three factors as relevant:[8]  “(1) ‘whether the practice in question has the effect of transferring or spreading a policyholder’s risk;’ (2) ‘whether the practice is an integral part of the policy relationship between the insurer and the insured;’ and (3) ‘whether the practice is limited to entities within the insurance industry.’”[9]  Because the appellant did not dispute the satisfaction of the third factor, the court confined its analysis to the first two enumerated factors.[10]

In evaluating the first factor, the court noted that Miss. Code Ann. § 83-11-109 (2013) is written into every uninsured/underinsured motorist insurance policy.[11]  As such, the court explained that Miss. Code Ann. § 83-11-109 (2013) regulates risk by subjecting all policy disputes regarding uninsured/underinsured motorist coverage to the possibility of a jury trial.[12], The court concluded that the first factor was satisfied because the enactment of Miss. Code Ann. § 83-11-109 (2013) was a determination by the Mississippi legislature to control the risks and harms caused by uninsured and underinsured motorists.[13]

In evaluating the second factor, the court noted that Miss. Code Ann. § 83-11-109 (2013) is an integral part of the insured-insurer relationship because it controls how disputes regarding uninsured/underinsured motorist coverage will be resolved.[14]  As such, the court concluded that the second factor was satisfied.[15]

Because the court found all three factors of the Group Life and Union Labor test were satisfied, the court held that the second prong of the McCarran-Ferguson Act was in turn satisfied, and, therefore, that Miss. Code Ann. § 83-11-109 (2013) reverse preempts the FAA via the McCarran-Ferguson Act.[16]

Little v. Allstate Insurance Company

In Little v. Allstate Ins. Co.,[17] the Supreme Court of Vermont was asked to determine whether Vt. Stat. Ann. tit. 12 § 5653 (2013)[18] reverse preempts the FAA.  Ultimately, the court held that Vt. Stat. Ann. tit. 12 § 5653 (2013) does not reverse preempt the FAA.[19]

The Supreme Court of Vermont began its discussion by announcing the purpose of the McCarran-Ferguson Act, namely:  “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 . . . unless such Act specifically relates to the business of insurance.”[20]

The court then provided:  “Since the FAA does not specifically relate to the business of insurance, [Vt. Stat. Ann. tit. 12 § 5653 (2013)] prevents the FAA from preempting the exclusion of the VAA if that exclusion, or the underlying common law, was enacted ‘for the purpose of regulating the business of insurance.’”[21]

In evaluating whether Vt. Stat. Ann. tit. 12 § 5653 (2013) involves the business of insurance, the court declared its adherence to the Group Life and Union Labor test, namely adopting the following three factors as relevant:[22]  (1) whether the practice in question has the effect of transferring or spreading a policyholder’s risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry.[23]  The court concluded, without further discussion, that all three factors were satisfied, and, therefore that Vt. Stat. Ann. tit. 12 § 5653 (2013) involves the business of insurance.[24]

However, the court proceeded by parsing out “regulating” from “regulating the business of insurance.”[25]  In Vermont, a common-law rule provides that arbitration agreements are revocable up to the time of award.[26]  As such, the court reasoned that Vt. Stat. Ann. tit. 12 § 5653 (2013) simply allows insurance arbitration agreements to continue to be governed by the common-law rule.[27]  Thus, the court held, because Vt. Stat. Ann. tit. 12 § 5653 (2013) does not evidence intent of the Vermont legislature to regulate the business of insurance, Vt. Stat. Ann. tit. 12 § 5653 (2013) does not reverse preempt the FAA via the McCarran-Ferguson Act.[28]

Am. Bank and Little

Am. Bank and Little illustrate the outer limits of the second prong of the McCarran-Ferguson Act—whether the state law was enacted for the purpose of regulating the business of insurance.  As previously stated, when evaluating whether a state law that prohibits or restricts mandatory arbitration in the context of insurance disputes reverse preempts the FAA via the McCarran-Ferguson Act, the second prong is oftentimes determinative.  Am. Bank discusses a state statute that affirmatively prohibits mandatory arbitration in the context of insurance disputes.  On the other hand, Little discusses a state statute that only does so indirectly.  Read together, Am. Bank and Little suggest that only state statutes that affirmatively prohibit or restrict mandatory arbitration in the context of insurance disputes satisfy the second prong of the McCarran-Ferguson Act.

In the next post, Mr. Martin discusses the possible implications that may be drawn from the recent enactment of the Patient Protection and Affordable Care Act (“PPACA”). Stay tuned!