Note: This is the first of a two-part series on the McCarran-Ferguson Act.
The McCarran Ferguson Act was birthed during a time of rapid expansion in the American insurance industry. In the early 1800s, a need for governmental regulation became vital due to large casualties and increased competition that threatened the viability of many American companies.
Paul v. Virginia, was the first case to lay the groundwork that would eventually lead to the passage of the McCarran Ferguson Act.1 In Paul, the Supreme Court held that “issuing a policy of insurance is not a transaction of commerce.” Later decisions interpreted this ruling to mean that the federal government had no power to regulate the insurance industry under the commerce clause in the United States Constitution.2 As a result of this interpretation, no federal regulation of the insurance industry was enacted over the next 75 years.
In United States v. South-Eastern Underwriters Association, the Supreme Court revisited the validity of the interpretation noting that the question addressed in Paul was really not whether Congress had the power to regulate the business of insurance under the commerce clause, but rather, whether the commerce clause precluded state regulation.3 In South-Eastern Underwriters Association, the court held that the insurance industry was appropriate for federal regulation under the commerce clause. This holding created widespread controversy and dismay. While insurance companies had called for federal regulation in the past, they had now viewed state regulation to be the lesser of two evils. Insurance companies feared that price-fixing and other anti-competitive conduct in which they have participated in since Paul, would now be prohibited under the Sherman Act.
Impact on the insurance industry: States decide
President Roosevelt signed the McCarran-Ferguson Act into law on March 9, 1945. This act reaffirmed the state rights to tax and regulate the insurance industry within their respective borders, absent of specific congressional intent to the contrary. The McCarran Act created a target exemption for insurance activities that constitute the “business of insurance,” are “regulated by State law” and do not constitute “an agreement to boycott, coerce or intimidate or an act of boycott, coercion or intimidation.” Like other exemptions from antitrust laws, this exemption is construed narrowly and has been subject to extensive court interpretation for the past 65 years.
Under the McCarran-Ferguson Act, insurance companies are shielded from prosecution under Federal antitrust laws. States are permitted to regulate virtually every aspect of insurance from licensing to market practices to financial solvency, and all insurance activity is subject to regulatory supervision. This hasn’t always turned out the best for policy holders. Over the past several decades, insurance companies have profited by dramatically increasing their profits by collusively setting their prices above competitive levels.4 Although insurance commissioners in every state retain the right to review rates, those rights are not actively exercised in states that have adopted competitive rating or “use and file” laws. Therefore, McCarran has allowed insurance companies to keep premiums artificially high at the expense of insureds.
To learn more about the impact the McCarran-Ferguson act has had on policyholders, stay tuned for the second part of my series next week.
1 Paul v. Virginia, 75 U.S. 168 (1869).
2 New York Life Ins. Co. v. Deer Lodge County, 231 U.S. 495, 510-12 (1913); New York Life Ins. Co. v. Cravens, 178 U.S. 389, 401 (1900); Hooper v. California, 155 U.S. 648 (1895).
3 United States v. South Eastern Underwriters Ass’n, 322 U.S 533, 534, 544 (1944).