Iran Investment Bill Well-Intentioned, But Unconstitutional

By | July 23, 2012

In a May 7 speech during her visit to India, Secretary of State Hillary Clinton said that the principal threat to the world is a nuclear-armed Iran because Iran is a state sponsor of terrorism.

It is understandable that California legislators may feel compelled to take action to thwart the Iranian government’s development of nuclear weapons. However, that does not justify the enactment of a state law that is unconstitutional and inconsistent with the United States’ established foreign policy.

Assembly Bill 2160 would require the California insurance commissioner to treat a domestic insurer’s investment in a company that has business operations in Iran as a non-admitted asset.

The Assembly passed AB 2160 in May. The Senate Insurance Committee approved the bill on June 28. AB 2160 is now waiting for a vote on the Senate floor. This year’s regular legislative session will end on Aug. 31.

If AB 2160 is enacted, California would be establishing an insurance investment policy that conflicts with U.S. foreign policy.

The state has broad authority to regulate the business of insurance, however, that authority is limited by the U.S. Constitution. One of the limitations is in Article II, which gives the president the power to decide U.S. foreign policy. The U.S. must speak with one voice on foreign affairs. Once the federal government establishes foreign policy on a matter, a state does not have the authority to create its own policy, no matter how well-intentioned. AB 2160 is flawed because it violates this constitutional principle.

The U.S. Supreme Court explained the limits of California’s authority to regulate insurance when the regulation conflicts with the federal government’s foreign policy in American Insurance Association v. Garamendi, 539 U.S. 396 (2003).

The federal government established a policy that the International Commission on Holocaust Insurance Claims would be the exclusive forum and remedy for resolving insurance claims of Holocaust victims and descendents. Meanwhile, California developed its own policy for dealing with insurers that were alleged to have defaulted on insurance payments to Holocaust victims. In 1999, the California Legislature enacted the Holocaust Victim Insurance Relief Act, which required any insurer doing business in California to disclose information about all policies sold in Europe between 1920 and 1945. Under the act, an insurer that failed to provide the information could lose its license to do business in California.

The Supreme Court ruled in Garamendi that California’s law was preempted because it interfered with the exercise of the federal government’s authority over federal affairs. The court explained, “The exercise of the federal executive authority means that state law must give way where, as here, there is evidence of clear conflict between the policies adopted by the two.”

AB 2160 is preempted by federal law because there is a clear conflict between the federal government’s policy on Iranian investments and the investment policy proposed by AB 2160. The federal government has a comprehensive program of sanctions against Iran which includes exports, imports and investments. The federal sanctions do not address the investments covered by AB 2160. If AB 2160 is enacted, California would be establishing an insurance investment policy that conflicts with U.S. foreign policy. That is not allowed by the Constitution.

Legislators who have voted for AB 2160 may believe the federal sanctions are too weak and California should take stronger action against the government of Iran. But concerns about the weakness of federal policy are irrelevant to the constitutional principle. The Garamendi decision states, “The basic fact is that California seeks to use an iron fist where the President has consistently chosen kid gloves. But our thoughts on the efficacy of the one approach versus the other are beside the point, since our business is not to judge the wisdom of the National Government’s policy; dissatisfaction should be addressed to the President or, perhaps, Congress. The question relevant to preemption in this case is conflict, and the evidence here is ‘more than sufficient to demonstrate that the state Act stands in the way of [the President’s] diplomatic objectives.'”

Similarly, a unanimous panel of the Ninth Circuit Court of Appeals earlier this year overturned a California statute that extended the statute of limitations for, and allowed California courts to hear, cases regarding insurance claims brought by victims of the Armenian Genocide (Movsesian v. Victoria Versicherung AG, 670 F.3d 1067 (9th Cir. 2012)). In finding that federal law preempted the California statute, the court explained, “Courts have consistently struck down state laws which purport to regulate an area of traditional state competence, but in fact, affect foreign affairs.”

A coalition of insurers and businesses is opposing AB 2160. In its June 8 letter to the Senate Insurance Committee, the coalition explained that states can legislate on foreign policy when the federal government gives the states explicit authority to do so. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 authorizes states to prohibit state and local government Iranian investment activities. However, the letter from the coalition opposing AB 2160 pointed out that “the federal bill does NOT authorize states to control, ban or otherwise affect the activities of private businesses as proposed by AB 2160.”

This does not mean, however, that California is barred from taking any action on Iranian investments. In 2008, for example, California enacted Insurance Code Section 1241.1, a law that prohibits a domestic insurer from making an investment in a foreign government that is designated as a state sponsor of terrorism by the U.S. Secretary of State. This law was enacted pursuant to explicit authority granted to states by federal laws. In contrast, there is no federal law that authorizes the insurance investment restriction in AB 2160.

The need for any such California law is minimal to begin with since there is nothing secret about insurer investments in companies that do business with Iran. Under a settlement agreement signed earlier this year, the commissioner may identify on the Department of Insurance’s website the names of insurers that have investments in companies doing business with the Iranian energy, nuclear and military sectors. However, the commissioner is not allowed to prohibit such investments from being considered as non-admitted assets, nor is the commissioner allowed to use any administrative action to pressure or punish insurers with investments in listed companies, or favor insurers that divest from listed companies. There may be differing views on the appropriateness of allowing the commissioner to issue these website postings but, unlike AB 2160, the postings do not conflict with federal law.

If AB 2160 is enacted, there no doubt would be an immediate legal challenge. According to the analysis of AB 2160 by the Assembly Committee on Insurance itself, the state would be forced to spend several hundred thousand dollars, if not more, defending the bill. In view of the Supreme Court’s holding in the Garamendi case and numerous other federal court decisions that have preempted similar state forays into foreign affairs, AB 2160 would be struck down and California, which faces huge budget problems, will have spent money defending an unconstitutional bill.

The California Legislature should put AB 2160 aside and move on to issues that it has the authority to address.

Was this article valuable?

Here are more articles you may enjoy.

From This Issue

Insurance Journal West July 23, 2012
July 23, 2012
Insurance Journal West Magazine

Excess, Surplus & Specialty Markets Directory Vol. II