National Banks Have No Right to Sell Insurance, Judge Decides

In a surprise decision Friday, a federal appeals court ruled that national banks have no legal right to sell insurance.

The U.S. Court of Appeals’ 2-1 decision overturns 76 years of history and marks a significant victory for insurance agents, who have been fighting a losing battle to stem banks’ incursion into their lines of business.

The ruling serves to curtail bank powers just when the Bush Administration is pressing hard to allow banks to expand their activities into a wide range of financial services without geographic limits.

Thousands of banks now sell insurance in small towns and rural areas, under the terms of a 1916 federal statute.

The comptroller of currency in 1986 expanded this power by ruling that U.S. Bancorp of Oregon and other nationally chartered banks could use their rural base to sell insurance products nationwide.

This stirred the ire of the Independent Insurance Agents of America, who filed suit challenging sales outside rural areas. The group lost in lower court.

But in a surprise move Friday, Judge James Buckley of the appeals court in the District of Columbia said banks have no statutory right to sell any insurance anywhere.

Misplaced quotation marks in a 1918 act served to delete Section 92 of the 1916 statute, which permits insurance sales. “If the deletion of section 92 was a mistake, it is one for Congress to correct, not the courts,” Buckley wrote.

“That has got to make your jaw drop a little,” said Michael Crotty, a general counsel for the American Bankers Assn., of the decision.

He said Congress, the Supreme Court and U.S. regulators for more than 70 years have never questioned that the law exists. Even the insurance agents only questioned its interpretation, he said.

“This has sweeping implications,” a Senate aide said. Although the court ruled only on nationally chartered banks regulated by the comptroller of the currency, the decision could have a ripple effect on some state-chartered banks. Some states, mainly in the Midwest, allow their banks to engage only in the same business activities permitted by national banks.

The decision leaves intact another avenue for banks to engage in nationwide insurance sales. The Supreme Court last month let stand a Delaware law that allows state-chartered subsidiaries of bank holding companies to underwrite and sell insurance.

Although surprised by the breadth of the ruling, the insurance agents’ group was delighted.

“It is clearly the largest legal victory we have ever had on banking and insurance issues,” said Bob Russbuldt, the group’s vice president for government affairs.

The comptroller’s office could appeal the decision to the Supreme Court or request it be reheard by the Court of Appeals.