IIAA Hails Appellate Court’s Crop Insurance Ruling

May 18, 2000

In a significant victory for independent agents, a federal appellate court yesterday unanimously affirmed a lower-court decision that overturned an Office of the Comptroller of the Currency (OCC) ruling permitting national banks to directly sell crop insurance.

The U.S. Court of Appeals for the District of Columbia Circuit’s decision in IIAA vs. the Office of the Comptroller of the Currency (No. 99-5158) is crucial to upholding both federal and state law, says Independent Insurance Agents of America (IIAA) President William M. Houston, CPCU, ARM.

“This is a tremendous victory for all independent insurance agents, even if they do not sell crop insurance,” said Houston, branch manager of the Denver office of the Reidman Insurance Corporation. “The potential ramifications of the OCC interpretive ruling could have been very broadly applied to other types of insurance coverages-such as homeowners, automobile insurance, commercial property coverages-that are tied to loans issued by national banks. This ruling effectively stops the OCC’s plan in its tracks.”

In December 1997, the OCC issued an interpretive ruling permitting national banks to sell crop insurance in conjunction with loans made to farmers, claiming the coverage was credit-related insurance and “part of or incidental to the business of banking.”

IIAA challenged the federal banking regulator’s action, arguing that it circumvented Section 92 of the National Bank Act, which restricts national bank sales of insurance to offices located in places of less than 5,000 people. At the appeals court level IIAA also argued that the OCC ruling had sidestepped provisions of the Gramm-Leach-Bliley Act, which require banks to conduct insurance activities in operating subsidiaries or affiliates of the parent holding company.

In March 1999, the U.S. District Court for the District of Columbia agreed with IIAA’s arguments. The court ruled that the OCC’s interpretive ruling was baseless because Section 92’s authorization for small-town national banks to sell insurance precludes national banks not located in small towns from selling insurance. Also, the court rejected the OCC’s “incidental powers” argument ruling that crop insurance is not credit-related.

Yesterday’s decision upheld the lower court’s finding. The case was argued in January. The impact of the appeals court’s decision is not narrow in scope, but instead is very broad in its application to all providers of property-casualty insurance products, says Houston.

“Once again, the courts have effectively stopped the OCC from applying its ‘credit-related’ logic to a wide range of other property-casualty insurance coverages,” he said. The appeals court noted that the OCC would not have stopped at crop insurance. “If the sale of crop insurance is ‘incidental’ to banking under Section 24(Seventh), there would be no way of distinguishing other general forms of insurance… Nothing about ‘crop insurance’ leads to a conclusion that it can be treated differently than other general forms of insurance under national banking laws just because its coverage is limited to farmers.”

IIAA says the appeals court ruling clarifies that the OCC cannot skirt the intent of the Gramm-Leach-Bliley financial services reform legislation and other federal regulations that require bank-insurance operations to be conducted in locations of less than 5,000 people or via operating subsidiaries or affiliates.

“This case is important because it supports the idea that the Comptroller of the Currency cannot circumvent the structural requirements of the Gramm-Leach-Bliley Act and other existing regulatory requirements to authorize banks to engage in financial activities directly,” says Robert E. Fulwider, chairman of IIAA’s Crop Insurance Task Force. “The ruling effectively requires banks to conduct insurance operations through either a subsidiary or an affiliate. They cannot bypass the intent of federal regulation and laws to engage in insurance activities directly,” says Fulwider, executive vice president of the Wuestenberg Agency, West Liberty, Iowa.

In its unanimous decision, the court chided the OCC: “The facts of this case are a rerun of those in Saxon and ALTA. Though the OCC is surely familiar with its past defeats, it seems determined to repeat them.” Addressing whether crop insurance is “part of or incidental to the business of banking,” the court wrote: “If national banks could already sell insurance under Section 24(Seventh), Congress would have no reason to pass a statute limiting that power to financial subsidiaries of only ‘well capitalized and well managed’ national banks… Congress did not intend for all national banks to have insurance powers under Section 24(Seventh).”

In closing, the court noted that the decision may have little practical effect. “National banks have the power to sell insurance, including crop insurance, if they meet the requirements of the Gramm-Leach-Bliley Act. However, they do not have the power to sell crop insurance solely under the authority of Section 24 (Seventh).”

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