Mass. Agents Urge State to Fight Bank Ruling

January 26, 2005

Massachusetts insurance agents are urging the state to appeal a recent court ruling that permits banks selling insurance in the state to skirt certain consumer protections imposed by the state legislature.

The Massachusetts Association of Insurance Agents said it is disappointed with the U.S. District Court ruling that decided in favor of banks that the state provisions could be bypassed because, the court said, they conflict with federal law governing banks’ sales of insurance.

In a letter to Commissioner of Insurance Julianne Bowler and Commissioner of Banking Steven L. Antonakes, both defendants in the case, MAIA President and CEO Frank Mancini urged the state to protect its right to regulate those that it licenses to sell insurance and decried the effect on agents if the ruling goes unchallenged.

“The four provisions preempted are critical to maintain a level playing field for all insurance producers,” Mancini wrote. “Should the four provisions not be enforced, banks will gain advantages in offering insurance not enjoyed by non-bank producers.”

The Massachusetts Bankers Association successfully challenged the state rules as too restrictive.The provisions at issue prohibited banks from paying referral fees for insurance customers to non-licensed personnel; restricted when a bank employee could refer a customer to the bank’s insurance division; imposed a waiting period after a loan application before a bank could offer insurance; and required a physical separation of a bank’s insurance sales operation from its tellers and other services.

The case centered on whether the four challenged provisions “prevent or significantly interfere” with the ability of banks to sell, solicit or cross-market insurance.

The defendants had argued that the federal Gramm Leach Bliley Act that removed many of the separations between banking and insurance did not pre-empt state laws governing how federal banks could sell insurance in Massachusetts.

But U.S. District Judge Ryan Zobel disagreed, writing in his Jan. 10 decision that the federal Gramm Leach Bliley Act:
• pre-empts state law by allowing bank employees to refer customers to the bank’s insurance division, which state law says they cannot do unless specifically asked by the customer;
• allows banks to pay their employees for referring customers to the bank’s insurance agency;
• allows banks to discuss insurance with loan applicants, which state law says they cannot do until the loan is approved.

“We’re disappointed and we’ll take a look at our options in the very near future,” said Chris Goetcheus, a spokesman for Office of Consumer Affairs and Business Regulation, which oversees the divisions of banking and insurance. The officials have not yet decided whether to appeal.

The judge’s decision applies only to federally chartered banks, but could eventually apply to state chartered banks as well.

The federal Office of the Comptroller of Currency ruled in March 2002 that federal law pre-empted state law, but Massachusetts filed suit in the 1st U.S. Circuit Court of Appeals to set aside that ruling. In February 2003, the appeals court dismissed the state’s suit, suggesting that the issue would best be settled in trial court. The bankers association filed suit in August 2003.

The case is Massachusetts Bankers Association, Inc., et al v. Julianne M. Bowler and Steven L. Antonakes, et al.

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