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 Circuits 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
[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
"Okay, annuities issued by insurance companies may not be insurance
under Federal law, but
Annuities issued by some other type of company somehow ."
(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
The full text of the decision follows:
In the United States District Court
For the Western District of Texas
Texas Bankers Assn and Broadway National Bank
Bomer and Texas Department of Insurance
Civil No. A-96-CA-694 JN
August 7, 1997
Before the Court is Plaintiff Texas Bankers Associations and Broadway National
Banks Motion for Summary Judgment (Clerks 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 Currencys 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
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, ê 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 OCCs
interpretation of the Bank Act was reasonable and that the OCCs 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 States regulation of
annuities sales by banks is preempted by federal law or whether its 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
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
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 banks 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
States determination that an annuity is to be regulated like an insurance product is
not determinative of this Courts 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 purchasers 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 OCCs
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
[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 Circuits 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
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 Natl 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
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 Acts
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 Currencys
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
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 Intervenors
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 OCCs 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 Courts
opinion concerns only the licensing regulation at issue which prevents banks, as a class,
from acting as agent in the sale of annuities.