In enacting the McCarran-Ferguson Act in 1945, the U.S. Congress established in law the current unique regulatory regime of the states in regard to the nation’s insurance industry.
A patchwork system of state regulation of the business of insurance first emerged in the United States during the mid-nineteenth century. The first state insurance commissioner’s post was created by New Hampshire in 1850. Seven other states followed in that same year, including such key jurisdictions as Massachusetts, New York, and California. By 1871 nearly every state had enacted some form of regulatory legislation relating specifically to the business of insurance. The State of New York undertook the first effort to systematically organize pertinent state law into a state insurance code in 1867, but it did so under its Statutes at Large in a chapter entitled simply “Police.”
Inevitably in the face of these developments challenges arose, requiring a holding that this nascent regulatory scheme did not violate either the Commerce Clause of Article I, Section 8, or the Privileges and Immunities Clause of Article IV, Section 2, of the U.S. Constitution. Such a finding was first offered by the U.S. Supreme Court in Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1868), where the High Court upheld Virginia’s licensing power in regard to an in-state agency appointment made by an out-of-state consortium of insurance companies. Paul established the legal predicate that insurance policies are aleatory and promissory in nature, that their issuance did not constitute trade and commerce, and that they are local transactions governed by local law and custom.
Paul remained controlling law on the subject until 1944 when, in United States v. South-Eastern Underwriters Association, the Supreme Court found that rating in concert by nearly 200 private stock fire insurance companies constituted a violation of the Sherman Antitrust Act. The ruling upheld allegations by the U.S. Department of Justice that such conduct constituted (1) a conspiracy in violation of Section 1 of the act serving to restrain interstate trade and commerce by fixing and maintaining arbitrary and noncompetitive premium rates on fire and “allied lines” of insurance; and (2) a conspiracy in violation of Section 2 of the act, serving to monopolize trade and commerce in the same lines of insurance. This result threatened to invalidate the entire body of state regulatory law and practice that had emerged over more than seventy-five years since Paul. Insurance company solvency was widely viewed as being heavily dependent upon uniform insurance pricing such as was permitted and even facilitated under state jurisdiction. South-Eastern Underwriters was regarded as a mortal blow against regulation by the states, with an expected result that the insurance industry would now be freed from any kind of effective regulation at all.
Immediately following South-Eastern Underwriters, legislation was hurriedly introduced in the U.S. Congress to restore the status quo ante. The most unique aspect of the McCarran-Ferguson Act is its explicit “reverse preemption” of federal law found in Section 2(b) in all matters pertaining to the regulation of insurance, except as may be specifically directed by the Congress. In other words, in contrast to the normal pattern, whereby federal laws preempt state statutes, in the area of insurance regulation, when there is a conflict, state laws prevail. The McCarran-Ferguson Act as finally passed by the Congress differed only slightly from the original proposal put forth by the National Association of Insurance Commissioners. As such, it protects insurance companies from federal antitrust regulation. The one concession in this realm is found in Section 3(b), which states, “Nothing contained in this Act shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.” In short, the McCarran-Ferguson Act authorizes states to regulate insurance in a manner that may violate federal law unless Congress specifically legislates otherwise.
A series of federal cases in recent years has served to narrow the scope of the McCarran-Ferguson Act to some degree, by carving out some limited reservations to the reverse preemption clause and upholding federal jurisdiction under provisions of the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), the Racketeer-Influenced and Corrupt Organization Act (RICO), and other specific enactments. Other cases have upheld state regulatory jurisdiction. Limited federal oversight roles have also been posited in the Gramm-Leach-Bliley Act, the Sarbanes-Oxley corporate disclosure Act, and most recently in the USA PATRIOT Act. Nevertheless, the McCarran-Ferguson Act remains the continuing basis for state regulation of the insurance industry and continues to this day to successfully preempt most efforts by a wide range of agencies of the federal bureaucracy to directly or indirectly regulate in this sector.
Efforts to repeal McCarran-Ferguson date back to at least the 1960’s, when several large, national insurance companies failed. In the 1980’s, successful lawsuits against insurance companies led to renewed legislative efforts to pursue national instead of state regulation. Some insurers’ refusal to pay damage claims in the wake of Hurricane Katrina in 2006 led to another round of repeal efforts, albeit, again, unsuccessful. Partial McCarran-Ferguson Act repeal pertaining to health insurance has been part of an ongoing debate surrounding the Affordable Care Act. A provision to eliminate the prohibition on selling health insurance across state lines was part of the original legislative package in 2009, but was eliminated from the final legislation. In 2017, the House of Representatives passed McCarran-Ferguson repeal legislation pertaining to health insurance only, but at this writing, it remained in the Senate.
Spencer L. Kimball and Barbara P. Heaney, Federalism and Insurance Regulation: Basic Source Materials (Kansas City: National Association of Insurance Commissioners, 1995). Chris Sagers, “Much Ado About Possibly Pretty Little: McCarran-Ferguson Repeal in the Health Care Reform Effort,” Yale Law and Policy Review 38 (2010): 325-352. Shawn Zeller, “How the States Came to Rule on Insurance Regulations,” CQ Weekly Report (7 May 2007): 1340-1341.