Annuities Ruled "Not Insurance"

On August 7, 1997, The United States District Court for the Western District of Texas, Austin Division, properly decided that:

  • "under federal law, annuities are not insurance,"

  • annuities are not insurance for purpose of the McCarran-Ferguson Act,.

  • the VALIC I decision, SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 69 (1959), and the VALIC II case "are more persuasive" than the Seventh Circuit’s decision in American Deposit Corp. v. Schacht, and

  • "national banks are authorized under 12 U.S.C. 24(Seventh) to sell annuities as agent in the State of Texas, and that the provisions of the Texas Insurance Code which prohibit with national banks’ exercise of that authority are preempted."

[All emphasis added]

Insurers will no doubt appeal, but they should properly loose their appeal. VALIC I and VALIC II are decisions of the U. S. Supreme Court that find that annuities are not insurance. If they are not insurance, then McCarran-Ferguson does not apply.

Insurers will sniff that this only applies to annuity sales and that the issuance of annuities might somehow still be their purview.

Such an insurance industry argument would be tantamount to saying that:

  • "Okay, annuities issued by insurance companies may not be insurance under Federal law, but

  • Annuities issued by some other type of company somehow are." (This would be the only way the McCarran-Ferguson Act could still apply.)

This is an argument only an insurer could make with a straight face.

The full text of the decision follows:


In the United States District Court

For the Western District of Texas

Austin Division

 

Texas Bankers Ass’n and Broadway National Bank

Vs.

Elton (NMI) Bomer and Texas Department of Insurance

Civil No. A-96-CA-694 JN

August 7, 1997

 

Order

 

Before the Court is Plaintiff Texas Bankers Association’s and Broadway National Bank’s Motion for Summary Judgment (Clerk’s Doc. No. 36), as well as their Memorandum of Points and Authorities in Support of Their Motion of Summary Judgment (Doc. 37) files on January 31, 1997. Defendants filed their Response to Motion for Summary Judgment and Supporting Brief on January 27th (Doc. 27). Plaintiffs filed their Reply Memorandum of Points and Authorities in Support of Their Motion for Summary Judgment on February 20th (Doc. 45). Also before the Court is the Office of the Comptroller of the Currency’s Motion for Summary Judgment and Memorandum in Support filed on March 4, 1997 (Doc.47). Defendants filed their Response to this Motion on April 1st (Doc. 54)1, and the OCC filed a Reply to the Response on April 16th (Doc 57). Upon review of the summary judgment motions, all the responsive documents filed, the applicable legal authorities and the entire case file, the Court enters the following Order.

This matter involves a conflict between federal law and state law. Plaintiffs, representing the interest of the banking industry in Texas, argue that federal law allows national banks to sell annuities2. The Office of the Comptroller of the Currency ("OCC") was granted leave to intervene in this matter and similarly contends that federal law permits the sale of annuities by national banks.3 The Defendants, Elton Bomer, in his official capacity as Commissioner of Insurance, and the Texas Department in Insurance, respond that state insurance laws which prohibits banks from selling annuities are valid and are not preempted by federal law.

The controversy is submitted to the Court for its interpretation of federal and state law. The Parties agree that there are no contested issues of fact. The Court finds a legitimate action, arising from a controversy over the proper interpretation of federal and state law, and the Plaintiffs ask the Court to Provide the relief afforded by the Declaratory Judgment Act, that is, "to declare the rights and other legal relations of any interested party." 28 U.S.C. 2201(a). Of course, summary judgment must be granted when "there is no genuine issue as to any material fact and … the moving party is entitled to judgment as a matter of law. FED.R.Crv.P. 56(c). In considering the summary judgment motions, the Court must draw all reasonable inferences and resolve ambiguities against the moving parties.

Under the Texas Insurance Code, annuities are regulated like life insurance TEX. Ins. Code. art.3.01, 1. As such, any agent who desires to sell annuities must be licensed by the Defendant Commissioner of Insurance. For a corporate entity to obtain a life insurance agent license, that entity must be organized under the Texas Business Corporation Act of the Texas Professional Corporation Act and every officer, director, and shareholder must be individually licensed as an agent Id. 21.07-1, 4. National banks cannot meet the criteria because they are organized under federal law. State banks cannot meet the criteria because they are organized under special banking statutes – not the Business Corporation Act of the Professional Corporation Act. Furthermore, both national and state banks maintain that it would be impossible for every officer, director and shareholder to be licensed as life insurance agents. In short, all Parities, as well as this Court, agree that the Texas Insurance Code effectively prevents a bank from obtaining a license to sell annuities.

It is further undisputed that under federal law – the National Bank Act – national banks may conduct the "business of banking" and exercise "all such incidental powers as shall be necessary to carry on the business of banking." 12 U.S.C. 24(Seventh). In 1990, the OCC, as charged by congress, determined that this law permits banks to serve as agents in the sale of annuities as a service to bank customers. The OCC considered such annuities sales to be "incidental" to "the business of banking" under the Bank Act. The Supreme Court, in NationsBank v. Variable Annuity Life Insurance Co. ("VALIC II"), determined that the OCC’s interpretation of the Bank Act was reasonable and that the OCC’s determination that annuities were properly classified as investments, not "insurance," was also reasonable. 115 S.Ct. 810, 815 (1995). Thus, there is a direct conflict between banks’ authority under federal law and restriction on that authority under Texas law. The Parties agree that under usual preemption analysis the provisions of the Insurance Code would be preempted by federal law under the Supremacy Clause. Defendants, however, argue that the reverse-preemption rule established by the McCarran-Ferguson Act requires that the Insurance Code provisions be upheld.

This central issue in this case thus becomes whether the State’s regulation of annuities sales by banks is preempted by federal law or whether it’s saved from preemption by the McCarran-Ferguson Act. The McCarran-Ferguson Act states:

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

15 U.S.C 1012(a), (b). The Act leaves regulation of "the business of insurance" to the states unless Congress enacts legislation specifically relating to the "business on insurance." Defendants assert that McCarran-Ferguson shields the Texas insurance code statutes at issue from preemption by the National Bank Act.

In this case, a proper determination regarding preemption under the McCarran-Ferguson Act requires the Court to consider whether a bank’s sale, as agent, of annuities constitutes the "business of insurance"; and, if so, whether the pertinent sections of the Texas Insurance Code which prevent banks from acting as agent in the sale of annuities constitutes "regulation" of the "business of insurance." The Court addresses the factors in turn.

The first question involves whether annuities are "insurance" for purposes of the McCarran-Ferguson Act. The Act does not define "insurance" and is silent with respect to annuities. Annuities are often classified as insurance. In fact, Defendants note that all 50 states regulate annuities like insurance products. Annuities, however, are often not classified as insurance. For instance, the Uniform Commercial Code specifically distinguishes between insurance policies and annuities. See In re Newman, 993 F.2d 90, 94-95 (5th Cir. 1993). Similarly, annuities and insurance products are treated differently by the income tax laws, see Helvering v. LeGierse, 312 U.S. 531, 541 (1941), and by the bankruptcy laws, see In re Young, 806 F.2d 1303, 1306 (5th Cir. 1987). Further, insurance treatises, legal dictionaries and other literature have concluded that annuities are primarily investment products. See American Deposit Corp. v. Schacht, 84. F.3d 834, 848-53 (7th Cir. 1996) (Flaum, C.J., dissenting).

The Court finds that the meaning of the terms "insurance" and "annuity" contained in the federal statutes is a federal question. That is, the State’s determination that an annuity is to be regulated like an insurance product is not determinative of this Court’s inquiry into federal preemption, or reverse preemption, under federal statutes. McCarran-Ferguson is a federal statute, enacted by Congress, and must be interpreted according to federal law.

The Supreme Court provided the following definition of fixed and variable annuities in the VALIC II decision:

Annuities are contracts under which the purchaser makes one or more premium payments to the issuer in exchange for a series of payments, which continue either for a fixed period or for the life of the purchaser of a designated beneficiary. When a purchaser invests in a "variable" annuity, the purchaser’s money is invested in a designated way and payments to the purchaser vary with investment performance. In a classic "fixed" annuity, in contrast, payments do not vary.

See VALIC II, 115 S.Ct. at 812. The Supreme Court determined that the OCC’s interpretation that annuities were investment products was reasonable and that the sale of annuities qualifies as part of, or incidental to, the business of banking was also a reasonable interpretation. Id at 814.

The Supreme Court further noted that "[m]odern annuities, though more sophisticated than the standard savings bank deposits of old, answer essentially the same need … [and] by providing customers with the opportunity to invest in one or more annuity options, banks are essentially offering financial investment instruments of the kind congressional authorization permits them to broker." Id. at 815 (emphasis added). Importantly, the Court recognized that annuities are more properly characterized as investment products. Id. at 816-17. In fact, both variable and fixed annuities are often marketed in competition with mutual funds, certificates of deposit and other securities.4

Defendants rely on the Seventh Circuit’s decision in American Deposit Corp. v. Schacht, 84 F.3d 834 (7th Cir.), cert. Denied, 117 S.Ct. 185 (1996), to support their position. This case, however, involved the underwriting of an annuity-like product, not the sale as agent of variable or fixed annuities. Furthermore, the Court respectfully finds that the VALIC I decision, SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 69 (1959), and the VALIC II case are more persuasive.

The Court also considers whether the selling of annuities as agents by banks is appropriately characterized as "the business of insurance" under the McCarran-Ferguson Act. The Court has answered this question in its determination that annuities are not insurance for purpose of the Act. The OCC has determined that national banks’ sale of annuities is the "business of banking" under 12 U.S.C. 24(7), and the Supreme Court has upheld that determination as reasonable. The Court finds this determination to be persuasive and similarly finds that the sale of annuities is part of the ‘business of banking" under the National Bank Act.

The Court next considers whether the pertinent sections of the Texas Insurance Code which prevent banks from acting as agent in the sale of annuities constitutes "regulation" of the "business of insurance." The McCarran-Ferguson Act shields from preemption state laws enacted for the purpose of regulating the business of insurance. State law enacted for the purpose of regulating insurance under the Act are those laws "that possess the end, intention, or aim of adjusting, managing, or controlling the business of insurance." U. S. Dept. of Treasury v. Fabe, 113 S.Ct. 2202, 2210 (1993); Owensboro Nat’l Bank v. Stephens, 44 F.3d 388 (6th Cir. 1994), cert. Denied, 116 S.Ct. 1350 (1996). Defendants argue, however, that the laws are saved from preemption because they regulate the business of insurance.

The Texas Insurance Code provisions at issue regulate the entities that can sell annuities. The licensing scheme is exclusionary in nature by Defendants’ own admission – that is, it is impossible for a national or state bank to qualify to obtain licenses. The laws also do not appear to be designed to address problems inherent in the insurance industry, such as fraud, misrepresentation, and agent incompetence. Such problems can be addressed by regulatory measures which do not exclude banks acting as agents in the sale of annuities.5 Thus, the Court finds that the Texas provisions do not regulate "the business of insurance," and McCarran-Ferguson anti-preemption thus does not protect the State provisions at issue which prevent a national bank from exercising its authority to act as agent in the sale of annuities.

In conclusion, the National Bank Act grants federal authority for national banks to sell annuities. Under the Supremacy Clause, state statutes that prohibit banks from acting as agents in the sale of annuities are preempted. The McCarran-Ferguson Act’s anti-preemption rule does not save the Texas licensing statutes at issue because, under federal law, annuities are not insurance, national banks’ sale of annuities are not insurance, and the provisions of the Texas Insurance Code were not enacted for the purpose of regulating the business of insurance. Accordingly, 12 U.S.C. 24(Seventh) preempts the relevant provisions of the Texas Insurance Code.

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that Plaintiffs’ Motion for Summary Judgment is hereby GRANTED and that the Office of the Comptroller of the Currency’s Motion for Summary Judgment is hereby GRANTED.

ACCORDINGLY, IT IS ORDERED, ADJUDGED AND DECREED that, pursuant to the Declaratory Judgment Act, 28 U.S. C. 2201, the Court declares that national banks are authorized under 12 U.S.C. 24(Seventh) to sell annuities as agent in the State of Texas, and that the provisions of the Texas Insurance Code which prohibit with national banks’ exercise of that authority are preempted.

IT IS FURTHER ORDERED that the Parties notify the Court, by written document filed with the Clerk within fifteen (15) days of the date of this Order, if there are any further issues for the Court to resolve; and that unless the Court is informed of any further pending matter a final judgment will be entered.

 

Signed and Entered this 7th day of August, 1997.

/s/ James R. Nowlin, United States District Judge

 


Footnotes

1. The Court has also reviewed the amici curiae briefs in support of Plaintiffs’ summary judgment motion filed by the American Bankers Association and the Bankers Roundtable files on March 18th and April 29th (Docs. 50, 65). The Texas Association of Life Underwriters, James Benjamin, Terry Chilton, Ron Mullen and Mack Jones also filed a Response to Plaintiffs’ and Intervenor’s Motions for Summary Judgment on April 1st (Doc. 53).

2. Plaintiff Texas Bankers Association ("TBA") is a trade association that represents the interests of state and federally chartered banks. Plaintiff Broadway National Bank is a banking association chartered under federal law that seeks to sell fixed and variable annuities as agents.

3. The Office of the Comptroller of the Currency regulates and supervises the system of national banks in the United States. See 12 U.S.C. 1 et seq.

4. With respect to the variable and fixed annuities, the Defendants admit that "a regulatory scheme that classifies fixed and variable annuities together is reasonable because the products are similar and often packaged together." Defs’ Resp. at 6; see also VALIC II, 115 S.Ct. at 817.

5. The Court agrees with the OCC’s position that generally applicable state laws that regulate the business of insurance will apply to national banks to the same extent as other entities within the scope of those laws. The Court’s opinion concerns only the licensing regulation at issue which prevents banks, as a class, from acting as agent in the sale of annuities.

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