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Are Insurers Above the Law?

“Until insurance companies have to play by the same rules as all other industries, collision repairers and vehicle owners will continue to have conflict with them. How can insurers’ exemption from antitrust laws be changed or eliminated? – Mike Hogan, body shop manager, Tulley Buick, Nashua, N.H.

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Antitrust laws were originally designed to encourage competition by combating business monopoly and unfair commercial practices. In 1890, the U.S. Congress passed the Sherman Antitrust Act, which had the power to regulate interstate commerce and, in general, prohibits agreements, combinations and conspiracies in restraint of trade. Practices such as price-fixing, refusing to deal with certain parties and having exclusive customers and territories were some of the Act’s targets.

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This was only the beginning. Next came the Clayton Act in 1914, which dealt with exclusive dealing, requirements contracts and tying arrangements. This statute also has provisions that involve banking, financial institutions and common carriers. The Federal Trade Commission Act, also passed in 1914, dealt with unfair or deceptive acts and trade practices.

The Robinson-Putman Act, passed in 1936, covers price discrimination and fees for brokers, allowances and services. Its purpose was to prevent large companies from using their massive buying power to obtain benefits not available to smaller purchasers.

All of these are federal statutes. In addition, most states have some form of antitrust statutes. Violations of the federal or state statutes, although they differ in various jurisdictions, can carry stiff fines and even a prison sentence.

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But the questions still remain: Are insurers exempt from all these statutes? If so, why? And can this exemption be taken away from them?

Acting Out
In addition to statutory penalties, a consumer or private citizen can sue for damages that stem from an antitrust violation. This incentive to sue has heightened because of the provisions for treble damages. And since these suits are often filed as class actions, they can result in extreme financial exposure in the event of a favorable judgment for the plaintiff.

Now we get to the meat of the matter. Most pertinent to shop manager Mike Hogan’s comments was the passage of the McCarran-Ferguson Act in 1945, which gave the insurance industry a qualified exemption from the federal antitrust laws and the Federal Trade Commission Act, depending on the extent of state regulation. This might sound like a get-out-of-jail-free card, but let’s take a closer look to see if this is really the case.

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Prior to 1944, a system of self-regulation prevailed in the insurance field. Companies imposed controls on themselves and local, regional and national trade associations. These activities were considered exempt from the regulatory authority of Congress and the antitrust laws. Why? Because of a statement made by the Supreme Court in 1869 in Paul v. Virginia, which said insurance contracts weren’t articles of commerce.

But this changed in 1944, when in United States v. South-Eastern Underwriters Association, the Supreme Court upheld a Sherman Act indictment charging that a large group of fire insurance companies conspired to fix rates and employed coercion to eliminate competition from non-member companies. This decision threatened the method insurers had used to conduct business, as well as threatened a state regulatory system that had developed over many years. To solve this problem, Congress enacted the McCarran-Ferguson Act.

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Stephen K. Halpert, professor at the University of Miami School of Law, says this legislation specifically exempts the “business of insurance” from federal antitrust laws, as it’s regulated by state law. Section 2 of the Act provides, in pertinent part:

“(a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act, specifically relates to the business of insurance: Provided that after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.”

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Halpert points out, however, that acts of boycott, coercion or intimidation and agreements to engage in these actions remain subject to the Sherman Act. This focus on state action requires the courts to balance two fundamental and sometimes competing desired results: competition, the goal of the antitrust laws and state sovereignty, which includes the power to replace the competitive market with non-competitive regulations.

In the McCarran-Ferguson Act, Congress sought to ensure that state regulation would be permitted to continue free of the Commerce Clause limitations. Congress also recognized that antitrust laws didn’t account for certain conditions and problems peculiar to the insurance business, including cooperative practices in the fire and casualty insurance business, such as combined rate-making.

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Thus the McCarran-Ferguson Act authorizes states to regulate insurance and provides an exemption from the federal antitrust laws for various activities, but only if such activities are regulated by state law. Will Hogan’s suggestion that the insurance companies lose their exemption from the federal antitrust statutes ever become a reality? It doesn’t seem that the courts are inclined in this direction. The Supreme Court has repeatedly held that repeals of antitrust laws by implication are disfavored and have only been recognized in situations where a plain repugnancy exists between the antitrust laws and a regulatory scheme. In a further limitation on implied antitrust immunities, the Supreme Court has stated that a repeal of the antitrust laws is to be implied – only where necessary – to make a regulatory structure work, and even then, only to the minimum extent necessary. Where an antitrust exemption is found to exist, it’s often narrowly construed by the courts.

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Exceptions to the Exemptions?
While the courts may not be inclined to eliminate the statutory exemption, some government officials have favored Hogan’s point of view.

In 1958 the Senate Antitrust Subcommittee undertook an extensive investigation of the insurance exemption. The subcommittee wanted to determine whether state regulation “had afforded sufficient opportunity to the free play of competitive forces consistent with sound insurance principles.” Despite strong criticism of some insurance industry practices and some state laws, the subcommittee didn’t recommend any modification of the federal insurance exemption in the McCarran-Ferguson Act. In 1961, the Congressional report concluded there was no strong demand for federal regulation of insurance, so the prevailing view was to continue state regulation.

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In contrast, in its 1977 Report of the Task Group on Antitrust Immunities, the Department of Justice contended the insurance industry should be allowed to conduct business without an antitrust exemption and has recommended a dual system of federal and state regulation.

In 1991, several pieces of federal legislation may have signaled a Congressional willingness to intervene in insurance industry regulation, although the intervention was aimed strictly at solvency issues. But the House Judiciary Committee did consider the repeal or wholesale revision of the McCarran-Ferguson Act.

If it doesn’t appear the federal antitrust exemption for insurance companies will disappear the near future, does that mean there’s no remedy if auto insurance companies practice such activities as fixing labor rates or steering to preferred shops – which many contend are antitrust violations?

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A federal remedy is still available but with certain limitations. An exemption doesn’t stop anyone from filing a complaint against an insurance company for an alleged violation of federal antitrust statutes. Both private citizens and government attorneys general have filed numerous actions against companies protected by an exemption. In such situations, the exemption involved gets raised as a defense, and the following key issue in the litigation is often whether or not the conduct in question falls within the exemption. In other words, a defendant’s answer to the lawsuit is that its conduct is excused because it’s not within the definition of the “business of insurance.”

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In other cases where the exemption granted by McCarran-Ferguson is asserted as a defense to a federal antitrust violation claim, the litigation has centered on the scope of the state regulation necessary to trigger the exemption. What constitutes sufficient state regulation of insurance to qualify for the antitrust exemption wasn’t spelled out in the statute and seems the most troublesome outstanding problem concerning the scope of the exemption.

It’s important to note the insurance exemption applies only where:

  • the challenged conduct is a part of the business of insurance;
  • the business of insurance is regulated by state law; and
  • the challenged conduct doesn’t constitute a boycott, coercion or intimidation.

It’s interesting that shortly after the passage of the Act, the Antitrust Division of the Justice Department instituted a number of proceedings directed against acts of boycott, coercion and intimidation. By 1999, however, the Annual Review of Antitrust Law Developments reports there were no reported cases construing the boycott exception to the McCarran-Ferguson Act immunity.

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Above the Law?
I wouldn’t go so far as to say that companies within the insurance industry shouldn’t be concerned with antitrust laws. Instead, companies under exemptions must focus on the precise scope of the exemption and the extent to which it provides protection from antitrust litigation. In other words, a federal antitrust action could potentially be successful if the plaintiff shows his lawsuit fell outside the three threshold requirements listed above.

To determine if a particular practice constitutes the business of insurance, the Supreme Court has focused on whether a practice relates to the spreading and underwriting of a policyholder’s risk, whether there’s a direct connection between the practice and the contractual relationship of the insurer and the insured, and whether the practice is limited to members of the insurance industry.

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Peer review of medical fees, provider agreements and the provision of escrow services haven’t been held to constitute the business of insurance. For example, an agreement between a medical association and an insurer to offer malpractice insurance exclusively to association members has been held to be within the business of insurance.

In states with legislation that prohibits unfair practices in the insurance industry and provides for administration, supervision and enforcement of the law, the state regulation requirement needed to satisfy the insurance antitrust exemption appears to be met.

However, Halpert suggests that even if an insurer were exempt from a federal antitrust action, the remedies affected within state law may be adequate. He points out that most states have fair trade laws that impact body shops and offer a remedy outside the antitrust statutes. The Florida Code, for example, has provisions that prohibit certain unfair methods of competition in the business of insurance. These provisions are enforced by the Department of Insurance, which may issue cease and desist orders, revoke licenses and assess civil penalties.

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It’s also important to remember there are still the traditional lawsuits based on fraud, breach of contract, misrepresentation or other legal theories. These potential causes of action aren’t limited by the federal antitrust exemption granted to insurance companies.

While it doesn’t appear the repeal of the federal antitrust exemption is around the corner, as Hogan would prefer, there are other remedies in the law for alleged unfair or illegal practices. However, any change in insurance company procedures is most likely to come from public outcry, which must be strong in the face of powerful insurance lobbies and funds in order to effect any change.

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Writer Susan Martin has her own law practice in Miami and is licensed to practice in the state and federal courts of Texas, Florida, Hawaii and Nevada. She’s also married to a body shop owner.

The Federal Antitrust Timeline
1890
– Congress passes the Sherman Antitrust Act, which regulates interstate commerce and prohibits agreements, combinations and conspiracies in restraint of trade. Practices such as price-fixing, refusing to deal with certain parties and having exclusive customers and territories are some of the Act’s targets.

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1914 – Congress enacts the Clayton Act, which addresses exclusive dealing, requirements contracts and tying arrangements.

1914 – Congress enacts the Federal Trade Commission Act, which addresses unfair or deceptive acts and trade practices.

1936 – Congress passes the Robinson-Putman Act, which deals with price discrimination and fees for brokers, allowances and services. Its purpose is to prevent large companies from using their massive buying power to obtain benefits not available to smaller purchasers.

1945 – Congress passes the McCarran-Ferguson Act, which gives the insurance industry a qualified exemption from the federal antitrust laws and the Federal Trade Commission Act, depending on the extent of state regulation.

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