Woodland, Irwin F.

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INSURANCE: STATE REGULATORY LEGISLATIONBARS REGULATION BY FTCFederal Trade Commission v. The .4merican Hospital & LifeInsurance Co., 357 U.S. 560 (1958)As a result of hearings before the Federal Trade Commission, therespondent insurance companies had been ordered to cease and desistfrom distributing allegedly misleading advertising materials.1 Both com-panies appealed from these orders in the appropriate appellate courts? andit was held in -both cases that under the terms of the M'cCarran-FergusonAct3 the FTC lacked jurisdiction since the states involved had their ownregulatory legislation. The FTC obtained certiorari4 in both cases andthey were combined before the Supreme Court where the decisions ofthe courts of appeals were affirmed.'The advertising materials complained of were shipped in bulk bythe companies to their agents who distributed them locally.' The Su-preme Court pointed out that the case did not raise the question of theconstitutional infirmity of the states to regulate across state lines.7 Thus,the court regarded the only "distribution" involved to be the local dis-tribution by the agents, and construed the order of the FTC as beingdirected against distribution within a state; if the state had regulatorylegislation, the order of the FTC would be invalid because of lack ofjurisdiction.'Since the decision in the instant case turned upon an interpretationof the McCarran-Ferguson Act, some study of the background of thislegislation is necessary.1 The American Hospital and Life Insurance Co., 21 Fed. Reg. 2979 (1956);National Casualty Co., 21 Fed. Reg. 3924- (1956).2 National Casualty Co. v. FTC, 245 F.2d 883 (6th Cir. 1957), cert. granted,355 U.S. 867 (1957): American Hospital and Life Insurance Co., 243 F.2d 719(5th Cir. 1957); cert. granted, 355 U.S. 867 (1957).3 15 U.S.C. §§ 1011-15 (1952).4 Supra note 2.5 FTC v. The American Hospital & Life Insurance Co., 357 U.S. 560 (1958).6 While some of the advertising complained of was distributed throughthe mails directly to potential customers, most of the material was shipped inbulk to agents who distributed it locally. The Supreme Court, however, confinedits consideration to the latter material, dismissing the former as an "insubstantialamount".7 "Whatever may have been the intent of Congress with respect to inter-state insurance practices which the states cannot for constitutional reasons regulateeffectively, that intent is irrelevant in the cases before us." 357 U.S. at 564.8 "These orders seek to proscribe activities within the boundaries of statesthat have their own statutes prohibiting unfair and deceptive insurance practicesas well as within states that do not." Id. at 562; "An examination of that statute[McCarran-Ferguson Act] and its legislative history establishes that the actwithdrew from the Federal Trade Commission the authority to regulate respon-dents' advertising practices in those states which are regulating these practicesunder their own laws." Id. at 563.RECENT DEVELOPMENTSThe rule that insurance was not commerce had been followed in anunbroken line of cases since first announced by the Supreme Court inPaul v. Virginia9 in 1868. Therefore, it came as a considerable surpriseto those interested in the "business of insurance" when the court held,in the South-Eastern Underwriters case, that insurance was commerce;when conducted across state lines it was interstate commerce and, as such,subject to federal antitrust laws.1" The court distinguished its earlierholdings by pointing out that previous litigation had never tested thepower of Congress under the commerce clause, but rather tested thevalidity of state action.1 1 Protest by insurance executives and state in-surance officials followed swiftly in the wake of the decision.' 2 Con-gressional reaction came in the McCarran-Ferguson Act which becamelaw on March 9, 1945. While the legislative history of the act'" revealsthat some members of Congress wished to nullify the South-Easterndecision and exclude all federal regulation of insurance, even a cursoryreading of the act reveals that Congress did not place the business ofinsurance beyond its reach.' 4Insurance executives were placed in a genuine quandary by theSouth-Eastern decision. State tax laws and state regulations, in view ofthe holding that insurance was commerce, might well be declared to beunconstitutional burdens on interstate commerce. State revenues, ofwhich taxes on insurance companies were an important component, werein danger. Accordingly, one of the main purposes of the act was togive legal sanction to these state laws, and prevent the collapse of existinginsurance regulation.15In essence, the McCarran-Ferguson Act was a call to action to thestates. The act provided:1. For a stated period federal regulatory legislation would9 "Issuing a policy of insurance is not a transaction of commerce." Paulv. Virginia, 75 U.S. (8 Wall.) 168, 183 (1868). "The business of insurance isnot commerce. The contract of insurance is not an instrumentality of commerce."Hooper v. California, 155 U.S. 648, 655 (1895).10 "No commercial enterprise of any kind which conducts its activities acrossstate lines has been held to be wholly beyond the regulatory power of Congressunder the Commerce Clause. We cannot make an exception of the business ofinsurance." U.S. v. South-Eastern Underwriters Association, 322 U.S. 533, 553(1944).11,"But past decisions of this Court emphasize that legal formulae devisedto uphold state power cannot uncritically be accepted as trustworthy guides todetermine Congressional power under the Commerce Clause." Id. at 545.12In fact, several bills were introduced in Congress prior to the decisionin South-Eastern which would have made the question in the case moot byspecifically exempting insurance from the operation of the Sherman and ClaytonActs. See S. 1362, H.R. 3270, H.R. 3269, 78th Cong., 2d Sess. (1944).13 See, e.g., 91 CONG. Rec. 1085-1094 (1945).14 See, e.g., 15 U.S.C. § 1013(a) (1952).15 SEN. RaP. No. 20, 79th Cong., 1st Sess. (1945).1959]OHIO STATE LAW JOURNALnot apply to the business of insurance. 162. At the end of the period it would again apply except to theareas in which there was state regulatory legislation.'"3. To the extent that the business of insurance went un-regulated by the state, the Federal Trade Commission Actwould apply.' 8Therefore, it became necessary for the states to enact legislationwhich covered the fields of the federal legislation. It was not necessarythat state statutes embody the same criteria as the federal laws. AsSenator Ferguson's remarks made clear, 19 the state law would controleven if in conflict with federal legislation. Thus, in the reverse of theusual preemption concept, the states were given Congressional authorityto preempt certain areas of interstate commerce regulation.In their attempt to justify their jurisdiction to regulate in the instantcases, the FTC, relying on the reservation of power to them containedin the act,2" maintained that regulate meant more than legislate; andthat if a state was not regulating administratively the mere presence ofregulatory legislation on its statute books did not prevent the FTC fromregulating. The court said this argument was not persuasive in thesecases.2 1The second main branch of the FTC argument was based on theidea that individual states cannot regulate completely because of theirlimited territorial jurisdiction. This argument, as noted previously22 wasdismissed by the Court as irrelevant.The question then, of a state's ability to regulate an unlicensed out-of-state insurer, is still an open one. The "constitutional infirmity" ofthe states to reach beyond their own jurisdiction would seem to make atleast this one area subject to the control of the FTC under the terms ofthe proviso in Section 1012(b). Nevertheless, even here the states aretaking measures to assert their own control.One of the means used is the "Unauthorized Insurance Service ofProcess Act" which is now law in forty-two states and two territories.2 316 15 U.S.C. § 1013(a) (1952).1715 U.S.C. § 1012(b) (1952).18 15 U.S.C. § 1012(b) (1952).19 "Under the language which is now in the bill as it appears in the con-ference report, if a state passes an act regulating insurance or taxing insurance,and that regulation is contrary to the Sherman Act or the Clayton Act [orFederal Trade Commission Act], then the State law would be the law." 91CONG. REC. 1481 (1945) (remarks of Senator Ferguson).20 15 U.S.C. § 1012(b) (1952).21,"However, assuming there is some difference in the McCarran-FergusonAct between 'legislation' and 'regulation', nothing in the language of that act orits legislative history supports the distinctions drawn by petitioner" 357 U.S.at 364.22 Supra note 7.23 NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, 1958 Proc. Vol. II 328.[Vol. 201959] RECENT DEVELOPMENTSThis act, which operates much like the non-resident motorists statutes,provides that insurance activity within a state by an unlicensed insurerauthorizes a designated state official to accept service of process for theinsurer. While this law enables state courts to assert jurisdiction in aproperly brought litigation, it does not provide for any administrativejurisdiction by the state insurance department.A law to remedy this situation, and one which goes far to curethe "constitutional infirmity", is now in force in seventeen states and theTerritory of Hawaii. This legislation permits the insurance departmentof a state in which an insurance company is licensed to take administrativeaction against one of its licensed companies if it is doing business in astate in which it is unlicensed.2"While the State of Ohio has not enacted this statute, it has adoptedall of the "Model Acts"2 5 which have been prepared by the NationalAssociation of Insurance Commissioners.2 6 Like her sister states, Ohiohas not yet found any formal means of regulating advertising activitiesin Ohio conducted from outside the state by an unlicensed insurer.2724This legislation is of two types. One is a reciprocal statute and is opera-tive only between states which have passed the reciprocal statute. Examples ofthis type are UTAH CODE ANN. § 31-7-13 (1953), VA. CODE ANN. § 38.1-433(1950). The other type permits the superintendent of insurance to take actionagainst any licensed company when it is brought to his attention that the com-pany is doing business in a state in which it is unlicensed. See ORE. REV. STAT.§ 736.645 (1958).25 The State Fair Trade Practice Act, OHIO REV. CODE §§ 3901.19-.23 (1955);The Unauthorized Insurance Service of Process Act, OHIo REV. CODE § 3901.17(1955); The Uniform Accident and Sickness Policy Provisions Law, OHIO REv.CODE §§ 3923.01-.99 (1956).26 These acts were prepared by the Association in an attempt to cover thefields left open to the states by the McCarran-Ferguson Act. The declarationof purpose of the State Fair Trade Practices Act, for example, says, "Thepurpose of this Act is to regulate trade practices in the business of insurancein accordance with the intent of Congress as expressed in the Act of Congressof March 9, 1945". NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, 1947Proc. 392-400.27 Nevertheless, Ohio uses some very effective informal means to controlthis situation. Among these might be mentioned the news release and personalcommunication by the Ohio Superintendent of Insurance with the like official inthe home state of the offending insurer. Briefly, this is the operation:a. news release: When it is brought to the attention of the department thatan unlicensed insurer is soliciting business within Ohio, a news release is issuedto radio and television stations and to newspapers within the area affected. Inthe release it is pointed out that X company is not licensed in Ohio and that theprotection of Ohio insurance laws is not afforded to policyholders of the com-pany. This generally has the effect of ending the campaign.b. personal communication: When it appears to the Superintendent that thenews release procedure is not, or is not likely to be effective, he will communicatedirectly with the commissioner of insurance of the home state of the offendingcompany. This officer will then inform the company of the complaint which hehas received from the Ohio Insurance Department and request that they ceaseOHIO STATE LAW JOURNALA general advertising statute2" does give a large measure of control overadvertising other than direct mail from another state.It will be seen therefore, that the states have made strong effortsto keep the regulation of insurance in their own hands and to excludefederal regulation from the field. Through the widespread adoption ofthe reciprocity statute they may very well succeed. On the other hand,so long as the FTC maintains there is an area beyond which the statescannot constitutionally reach, it can be expected that the Commissionwill continue to assert its own jurisdistion in that area. The position ofthe FTC is best stated by a portion of its brief in the instant case.Quoting extensively from the South-Eastern decision they said:To the extent therefore, that the individual states, with theirlimited territorial jurisdictions [were] not fully capable ofgoverning 'insurance' transactions which, reaching across stateboundaries, affect the people of more states than one, thatcondition necessarily continued after enactment of theMcCarran-Ferguson Act. The result, in the absence offederal legislation to fill the void is a legal vacuum-a 'noman's land' which is not effectively regulated either by thestates or the federal government.I9Irwin F. W/oodlandthe offending activity. This too, is very effective. Personal interview, OhioSuperintendent of Insurance, Nov. 7, 1958.28 Hio REV. CODE § 3905.43 (1953). "No person . . . shall publish ordistribute or receive and print for publication or distribution any advertisingmatter in which insurance business is solicited unless such advertiser has compliedwith the law of this state regulating the business of insurance .... " Only recently,under this statute, a well known national weekly magazine was persuaded to dropas an advertiser an insurance company that was unlicensed in Ohio. While theSuperintendent recognized that he could do nothing about copies of magazineswhich were mailed directly to subscribers in Ohio, he pointed out to the magazinethat he had the authority to move against all local distribution by wholesale newsoperators in Ohio. Personal interview, Superintendent of Insurance, Nov. 7, 1958.29 Brief for Federal Trade Commission, pp. 42, 43.[Vol. 20

Insurance: State Regulatory Legislation Bars Regulation by FTC

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Insurance: State Regulatory Legislation Bars Regulation by FTC

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