Wiley, Rein & Fielding: Federal Preemption and the McCarran-Ferguson Act: An Analytical Primer

Federal Preemption and the McCarran-Ferguson Act: An Analytical Primer
By Cynthia T. Andreason
January 12, 2000 | Mealey's Emerging Insurance Disputes, Vol. 5, No. 1

I. Introduction
Since 1945, state regulation and taxation of insurance companies has been protected by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1012 (“McCarran-Ferguson”). McCarran-Ferguson’s overall purpose is to reserve to the states the right to regulate and tax insurance companies. To effectuate that purpose, McCarran-Ferguson provides two separate exemptions from federal preemption, a general exemption for “any law enacted by any state for the purpose of regulating the business of insurance,” and a provision exempting insurance companies from federal antitrust laws in states which regulate “the business of insurance.” McCarran-Ferguson Act, section 1012(b). The United States Supreme Court has made clear that the scope of the general exemption is broad, while the scope of the antitrust exemption is more limited.

Despite that, some appellate courts have limited the scope of the general exemption, at least one of them holding that it is narrower than the antitrust exemption. Those courts have done so by reasoning that federal preemption law, which holds generally that federal law preempts state law in the event of a direct conflict, should be applied in reverse to determine the effect of McCarran-Ferguson on federal law, a concept which has been labeled “inverse preemption.” This reasoning has incorporated a “direct conflict” requirement into McCarran-Ferguson analysis at the appellate level. Some appellate courts have also used a narrow definition for the term “law” as it is used in the general exemption.

The Supreme Court’s recent ruling in Humana, Inc. v. Forsyth, 525 U.S. 299 (1999), reaffirmed the general exemption’s broad scope. The ruling did not expressly address the inverse preemption argument and the scope of the term “law” as used in the general exemption. However, Humana, read together with preceding Supreme Court case law considering McCarran-Ferguson’s exemptions, makes it implicitly clear that an inverse preemption analysis is an inappropriate vehicle for considering the scope of the general exemption. It also becomes evident that to effectuate McCarran-Ferguson’s purpose, the term “law” as used in the general exemption must be interpreted broadly rather than narrowly.

This article reviews the major Supreme Court cases considering McCarran-Ferguson’s general exemption and then compares to them several appellate cases to demonstrate that some of the analytical limitations adopted by the lower courts are unwarranted under current Supreme Court law.

II. The McCarran-Ferguson Act
From very early on, courts assumed that “issuing a policy of insurance is not a transaction of commerce.” Paul v. Virginia, 75 U.S. 168, 183 (1868). Over time, however, as the nature of commercial life in this country changed, the Supreme Court held that various activities which had not previously been considered commercial transactions were in fact subject to federal regulation. E.g., Lottery Case, 188 U.S. 321 (1903) (lottery tickets); United States v. Simpson, 252 U.S. 564 (1920) (transport of whiskey across state lines in private automobile); Pensacola Tel. Co. v. Western Union Tel. Co., 96 U.S. 1 (1877) (transmission of electrical impulse over a wire between Alabama and Florida). Eventually, the Supreme Court again faced the question of the nature of insurance transactions, and decided, in United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944), that an insurance company that conducted a substantial part of its business across state lines was engaged in interstate commerce and thereby subject to federal antitrust laws.

Enacted in 1945, McCarran-Ferguson was Congress’ response to South-Eastern Underwriters. McCarran-Ferguson’s purpose is set forth in Section 1011:

Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

Congress effectuated that purpose through Section 1012, which states:

*

State regulation
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.
*

Federal regulation
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.

Shortly after McCarran-Ferguson was enacted, the Supreme Court discussed its purpose in Prudential Ins. Co. v Benjamin, 328 U.S. 408 (1946):

Obviously Congress’ purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance. This was done in two ways. One was by removing obstructions which might be thought to flow from its own power, whether dormant or exercised, except as otherwise expressly provided in the Act itself or in future legislation. The other was by declaring expressly and affirmatively that continued state regulation and taxation of this business is in the public interest and that the business and all who engage in it “shall be subject to” the laws of the several states in these respects.

Id. at 429-30 (footnotes omitted).

Section 1012(b) removes such obstructions by providing two separate exemptions from federal preemption: (1) the exemption for laws “enacted by any State for the purpose of regulating the business of insurance,” (the “general exemption”) and (2) the exemption from the federal antitrust laws to the extent “the business of insurance” is regulated by state law (the “antitrust exemption)). Both exemptions use the phrase “the business of insurance.”

III. Case Law
The Supreme Court has addressed the scope of the general exemption three times, first in SEC v. National Securities, Inc., 393 U.S. 453 (1969), next in United States v. Fabe, 508 U.S. 491 (1993), and most recently in Humana, Inc. v. Forsyth, 525 U.S. 299 (1999). In those cases, the Supreme Court made it clear that McCarran-Ferguson’s overall purpose is to protect the “business of insurance” from federal regulation, but that the phrase does not necessarily include every activity in which an insurance company might engage. Rather, McCarran-Ferguson’s focus is on protecting from federal regulation the relationship between the insurer and the insured, along with closely related activities. Thus, as detailed below, the analysis developed by the Supreme Court for construing the general exemption takes into account the broad, but not all encompassing, scope of McCarran-Ferguson, using the insurer-insured relationship as the touchstone for determining the extent of the general exemption’s scope.

The Supreme Court has addressed the scope of the antitrust exemption twice, in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979) and subsequently in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982). In Royal Drug and Pireno the Supreme Court made clear that the scope of the antitrust exemption is narrower than that of the general exemption, and, as a result, that the Royal Drug/Pireno analysis is not appropriately utilized in cases involving the general exemption.

Five cases decided after National Securities, but before Humana, demonstrate analytical problems that arose as a result of courts inappropriately utilizing a federal preemption analytical framework to analyze McCarran-Ferguson issues, and of courts adopting an overly narrow definition of the term “law” as used in the general exemption. Humana implicitly resolved those analytical problems. However, because the problems were not expressly addressed by Humana, issues may still arise concerning the appropriate analytical framework for the general exemption.

A. National Securities
SEC v. National Securities, Inc., 393 U.S. 453 (1969), involved the merger of two insurance companies. The Arizona Director of Insurance approved the merger, after having determined, as required by state insurance law, that the merger (1) was not “‘inequitable to the stockholders of any domestic insurer’ and not otherwise ‘contrary to law,’” id. at 457, and (2) “would not ‘substantially reduce the security of and service to be rendered to policyholders.’” Id. at 462. The Securities and Exchange Commission (SEC) sued to unwind the merger, alleging that the merger solicitation papers contained material misstatements that violated federal securities law. At issue on appeal was whether the Arizona statutes pursuant to which the Director of Insurance had approved the merger were “laws enacted by any State for the purpose of regulating the business of insurance,” and thus protected by McCarran-Ferguson. In addressing that issue, the Court considered McCarran-Ferguson’s legislative history, and Congress’ purpose in enacting it, and concluded: “The McCarran-Ferguson Act was an attempt to turn back the clock, to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation.” Id. at 459. Its purpose was not to give states regulatory or taxing power they had not had before South-Eastern Underwriters. Id. The Court then enunciated the test for determining which insurance company activities constitute the business of insurance for purposes of the general exemption:

The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement—these were the core of the “business of insurance.” Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was—it was on the relationship between the insurance company and the policyholder.

Id. at 460. The Court then held: “Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws regulating the ‘business of insurance.’” Id.

The National Securities Court relied on these considerations to rule that the Arizona insurance statute protecting the rights of stockholders was not a statute enacted for the purpose of regulating the business of insurance, but that the state statute requiring the Director of Insurance to consider the rights of policyholders was. Id. at 460, 462. Having so ruled, the Court further had to determine whether the SEC’s attempt to unwind the merger would “invalidate, impair, or supersede” the Arizona statute. The Court decided that the SEC’s actions did not. The Court did not address the fact that if the SEC received the remedy it requested, i.e., unwinding the merger, the ruling in National Securities effectively gave federal law priority over state insurance law.

Thus, in National Securities the Supreme Court established the test for determining what insurance company activities constitutes the “business of insurance.” It also established that the scope of the general exemption was broad, but not all-inclusive, and that the relationship between the insurer and the insured was the touchstone for determining the general exemption's reach. Of note is that while National Securities held that state statutes aimed at protecting or regulating the insurer-insured relationship are clearly “enacted for the purpose of regulating the business of insurance,” it also held that other insurance company activities closely related to their status as reliable insurers may also be within the scope of the general exemption. Id. at 460.

B. Royal Drug/Pireno
After deciding National Securities in 1969, but before deciding Fabe in 1993, the Supreme Court twice considered the scope of McCarran-Ferguson’s antitrust exemption, in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979) and Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982). In Royal Drug the Supreme Court held that reimbursement agreements between an insurer and certain pharmacies were not the “business of insurance” for purposes of the antitrust exemption. Royal Drug, 440 U.S. at 233. In Pireno the Supreme Court held that an insurer’s use of an advisory committee to approve chiropractors’ charges to insureds was not the “business of insurance” for purposes of the antitrust exemption. Pireno, 458 U.S. at 126, 134.

The Royal Drug Court expressly held that the antitrust exemption has a more limited scope than the general exemption:

There is no question that the primary purpose of the McCarran-Ferguson Act was to preserve state regulation of the activities of insurance companies, as it existed before the South-Eastern Underwriters case. . . . The McCarran-Ferguson Act operates to assure that the States are free to regulate insurance companies without fear of Commerce Clause attack. . .

. . . .

In short, the McCarran-Ferguson Act freed the States to continue to regulate and tax the business of insurance companies, in spite of the Commerce Clause. It did not, however, exempt the business of insurance companies from the antitrust laws. It exempted only “the business of insurance.”

Id. at 219 n.18. The Royal Drug Court also made clear that while Congress may have intended to turn back the clock to pre-South-Eastern Underwriters for purposes of the general exemption, such was not the case for the antitrust exemption. Before South-Eastern Underwriters, insurance companies had a blanket exemption from the federal antitrust laws; after McCarran-Ferguson they had only a limited exemption. Id. at 220.

The Royal Drug Court then examined the reimbursement agreements to determine whether they constituted the “business of insurance” within the limited scope of the antitrust exemption. Subsequently, the Pireno ruling summarized the Royal Drug analysis in what has become the benchmark analysis for determining what constitutes the “business of insurance” under the antitrust exemption:

In sum, Royal Drug identified three criteria relevant in determining whether a particular practice is part of the “business of insurance” exempted from the antitrust laws by § 2(b): first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.

Pireno, 458 U.S. at 129.

C. Fabe
After Royal Drug and Pireno, the Supreme Court again considered the general exemption in United States v. Fabe, 508 U.S. 491 (1993). The Court held that the federal priority statute, 31 U.S.C. § 3713, which grants the United States first priority in bankruptcy distributions, did not preempt Ohio’s insurance insolvency statute, which granted fifth-priority to the United States, to the extent that the Ohio statute operated to protect policyholders. Id. at 493. Fabe noted that the priority statute at issue there was “part of a complex and specialized administrative structure for the regulation of insurance companies from inception to dissolution,” and then considered the entirety of Ohio’s insurance supervision, rehabilitation, and liquidation statute to determine the purpose of the state priority statute. Fabe, 508 U.S. at 494. Both the district court and the appellate court had applied Pireno’s antitrust exemption analysis and had arrived at different conclusions, the district court holding that the Ohio statute did constitute the business of insurance, the appellate court holding that it did not.[i] Id. at 498-99. The Supreme Court rejected the petitioners’ urging that it also apply Royal Drug and Pireno, noting that the Royal Drug and Pireno criteria were of limited, if any, applicability, as they concerned the antitrust exemption. Id. at 502-504. Instead, the Fabe Court relied on the wording of the general exemption and National Securities, the only previous Supreme Court opinion construing the general exemption. Id. at 501. As to the scope of the general exemption, the Fabe Court noted the contextual difference between the use of “business of insurance” in each of the exemptions: “The broad category of laws enacted ‘for the purpose of regulating the business of insurance’ . . . necessarily encompasses more than just the ‘business of insurance.’” Id. at 505. Rather than rely on the Royal Drug and Pireno criteria, the Fabe Court turned to the actual language of the general exemption, which requires determination of whether: (1) the federal statute specifically relates to the business of insurance; (2) the state statute was “enacted for the purpose of regulating the business of insurance”; and (3) the federal statute would “invalidate, impair, or supersede” the state statute.

The parties in Fabe agreed that the federal priority statute would invalidate, impair, or supersede the state statute, and that the federal statute did not specifically relate to the business of insurance. Thus, the only question before the Fabe Court was whether Ohio’s priority statute was a law enacted “for the purpose of regulating the business of insurance.” Id. at 500-501.

The Fabe Court rejected the notion that the “business of insurance” included only the writing of insurance contracts, holding that the term also included, at the very least, the performance of insurance contracts. Id. at 504. The Fabe Court explained that Royal Drug and Pireno, rather than defining what constituted the universe of the “business of insurance,” only established that certain “ancillary activities” were outside that universe for purposes of the antitrust exemption. Id. at 503. The Court held that Ohio’s priority statute was integrally related to the performance of insurance contracts after insolvency, and therefore was protected from preemption by McCarran-Ferguson’s general exemption. Id. at 504.

Thus, in Fabe the Supreme Court reiterated the breadth of the general exemption. It also made clear that the antitrust exemption analysis of Royal Drug and Pireno was not to be used in analyzing general exemption issues because the general exemption’s scope included more than just the business of insurance. Finally, by considering the entire Ohio insurance supervision, rehabilitation and liquidation act to determine the purpose of Ohio’s priority statute, it established that the term “law” as used in the general exemption was to be interpreted broadly, albeit not so broadly that the existence of any state regulation of insurance companies would suffice to trigger McCarran-Ferguson.

D. Appellate Cases Holding that McCarran-Ferguson Does not Preclude the Application of Federal Law
Four decisions issued between National Securities and Humana demonstrate the unduly limited scope some appellate courts have given the general exemption. In Mackey v. Nationwide Ins. Cos., 724 F.2d 419 (4th Cir. 1984), NAACP v. American Family Mut. Ins. Co., 978 F.2d 287 (7th Cir. 1992), Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351 (6th Cir. 1995), and Merchants Home Delivery Serv., Inc. v. Reliance Group Holdings, Inc., 50 F.3d 1486 (9th Cir. 1995), ignoring the analytical framework announced by the Supreme Court, appellate courts construed the general exemption very narrowly so as to permit application of either the federal Fair Housing Act, 42 U.S.C. §§ 3601-19 (“FHA”), or the Racketeer Influenced and Corrupt Organizations Act, 8 U.S.C. §§ 1961-1968 (“RICO”), to insurance companies.

In Mackey v. Nationwide Ins. Co., 724 F.2d 419 (45h Cir. 1984), the plaintiff alleged that Nationwide had engaged in redlining in violation of the Sherman Act, 15 U.S.C. § 1 et seq.; the Civil Rights Acts of 1866 and 1871, 42 U.S.C. §§ 1981, 1982 and 1985(3); and the FHA.[ii] The Mackey Court held that McCarran-Ferguson precluded the plaintiff’s Sherman Act claim, but not his FHA and Civil Rights Acts redlining claims. Although the Mackey court cited Royal Drug and Pireno for the proposition that the primary purpose of McCarran-Ferguson was to reserve taxation and regulation of insurance companies generally to the states, and only secondarily to provide insurance companies a limited exemption to federal antitrust laws, the Mackey court in fact held that the antitrust exemption was much broader than the general exemption. The court held that McCarran-Ferguson failed to preclude federal antitrust claims only in states which did not regulate insurance at all. Thus, for the Mackey court, there was no need for a specific state statute to conflict with the Sherman Act; the fact that insurance was regulated at all by the state was enough to trigger the antitrust exemption. Id. at 421.

The court did not reach the same conclusion as to the plaintiff’s FHA and Civil Rights Acts claims, however. For the general exemption, the court held that McCarran-Ferguson did not preclude federal legislation from applying to insurance companies unless a specific state statute was “impaired” by the federal legislation. The existence of a general regulatory scheme was insufficient to trigger the general exemption. Id. at 421. The Mackey court determined that as it had not been pointed to any specific section of the insurance code that was arguably invalidated, impaired, or superseded by application of the FHA, there was no possible impairment. Id.

Thus, Mackey arrived at two conclusions that do not comport with Supreme Court general exemption law, even as it existed at the time of the Mackey decision: that the antitrust exemption is broader than the general exemption, and that a federal statute must impact a specific state insurance statute before McCarran-Ferguson is triggered.

NAACP v. American Family Mut. Ins. Co., 978 F.2d 287 (7th Cir. 1992), built upon Mackey’s mistaken foundation. NAACP also involved allegations of redlining in violation of the FHA. As in Mackey, the defendant in NAACP asserted that McCarran-Ferguson precluded the plaintiffs’ FHA claims. The NAACP court examined the language of the general exemption, and determined that it required consideration of the same three questions later endorsed in Fabe: whether (1) the federal statute specifically relates to the business of insurance; (2) the state statute was “enacted for the purpose of regulating the business of insurance”; and (3) the federal statute would “invalidate, impair, or supersede” the state statute. Id. at 295.

Considering these questions, the NAACP court acknowledged that the FHA is a federal law that neither mentions nor relates to insurance. The court assumed that the two state insurance statutes that the defendant argued would be adversely affected by application of the FHA were statutes “enacted for the purpose of regulating the business of insurance.” As to the third question, the NAACP court reached the same conclusion the Mackey court had: for McCarran-Ferguson to protect state insurance statutes from preemption by the FHA, the FHA had to “invalidate, impair, or supersede” a specific section of the state insurance code.

Unlike the defendant in Mackey, however, the defendant in NAACP had cited specific provisions of the state insurance code that potentially would be affected by application of the FHA. The NAACP court therefore considered whether the FHA would “invalidate, impair, or supersede” the state statutes cited by the defendants. Id. at 295. It did so by lumping the three concepts, “invalidate, impair, or supersede,” together, and defining them to require actual conflict, i.e., the state statute must permit a specific activity actually forbidden by federal law or vice versa. The example given by the NAACP court to illustrate this proposition was striking: “If Wisconsin wants to authorize redlining, it need only say so; if it does, any challenge to that practice under the auspices of the Fair Housing Act becomes untenable.” Id. at 297. Using this constricted scope of “invalidate, impair, or supersede, the NAACP court determined that there was no direct conflict between the identified state insurance statutes and the FHA. Id. The court so held at the same time it acknowledged that general overlap between state and federal legislation “undoubtedly” would upset a balance struck by one of the two legislatures. NAACP, 978 F.2d at 295. Nevertheless, the NAACP court insisted that only direct conflict with a specific state statute would bring the general exemption into play. This reasoning resulted in an interpretation of the general exemption that was narrower than that contemplated by Fabe and Royal Drug.

A third case involving redlining allegations, Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351 (6th Cir. 1995), surprisingly mentioned neither Fabe nor National Securities. Rather, it simply followed NAACP’s McCarran-Ferguson analysis. The Nationwide court did little more than adopt the NAACP court’s conclusion that a general state regulatory scheme was insufficient to trigger the general exemption. Nationwide, 52 F.3d at 1363. Based on that, the Nationwide court held that the availability of additional remedies under the FHA would not invalidate, impair, or supersede Ohio’s insurance law; therefore, McCarran-Ferguson did not exempt Nationwide from the strictures of the FHA.

In Merchants Home Delivery Serv., Inc. v. Reliance Group Holdings, Inc., 50 F.3d 1486 (9th Cir. 1995), a case alleging RICO violations, the court also concluded that McCarran-Ferguson did not bar application of RICO. Inexplicably, as Merchants involved the general exemption rather than the antitrust exemption, the court applied Pireno and Royal Drug’s four-part antitrust exemption analysis to analyze the impact of McCarran-Ferguson. The parties did not dispute that the federal statute did not relate to the business of insurance or that the state had enacted a law regulating the challenged acts. At issue were only whether the defendant’s alleged activities were the “business of insurance,” and whether the application of RICO to those activities would “invalidate, impair, or supersede” California’s laws regulating those activities. Id. at 1489.

The Merchants court determined that overbilling of premiums for actual insurance policies was the business of insurance, but that billing for nonexistent policies and claims was not. In defining the “business of insurance,” the court rejected the defendants’ proposition that if a party transacted the business of insurance in general, all of its activities were protected. Likewise, however, it also rejected the plaintiff’s proposition that the relevant consideration was the specific practice forbidden by federal law (i.e., fraud under RICO, discrimination under the FHA). Rather, the court held that the proper focus was whether the specific activity being challenged was a part of the business of insurance. Id. at 1489-90. Examining the challenged activities under National Securities’ three-part analysis (although the court attributed that test to Pireno rather than National Securities), the court determined that only the overbilling allegations were the business of insurance. Id. at 1490. The defendants argued that the National Securities/Pireno test was only to be applied in considering the antitrust exemption, as the “business of insurance” is defined more narrowly under that exemption. The court acknowledged that the antitrust exemption was narrower than the general exemption, but applied the National Securities test anyway, saying the difference between the analyses for the two exemptions was a “matter of degree, rather than a wholesale change in the inquiry.” Id. at 1490.

Because it had determined that the overbilling allegations were the business of insurance, the Merchants court had to determine whether the application of RICO would invalidate, impair, or supersede California state insurance law. The defendant insurers argued for a very broad definition of “impair” that would have precluded application of federal law if a state had regulated, or chosen not to regulate, the insurance industry. The plaintiff, on the other hand, argued that application of federal law should only be precluded where it expressly prohibited activities expressly permitted by state law, or vice versa. Id. at 1491-92. Here, rather than finding middle ground as it had done with analysis for the “business of insurance,” the court adopted the “direct conflict” definition of “invalidate, impair, or supersede” that the Supreme Court had implicitly rejected in Fabe, and concluded that McCarran-Ferguson did not preclude any of the plaintiff’s RICO claims. Id. at 1492. Thus, despite the direction provided by National Securities and Fabe, the Merchants court applied the antitrust exemption analysis, and adopted the “direct conflict” definition of impair, invalidate, or supersede” championed by NAACP, despite the fact that the Supreme Court had implicitly adopted a much broader definition in Fabe.

E. Ambrose: McCarran-Ferguson Precludes The Application Of Federal Law
In Ambrose v. Blue Cross & Blue Shield of Va., Inc., 891 F. Supp. 1153 (E.D. Va. 1995), aff’d, 1996 U.S. App. LEXIS 22035 (4th Cir. Aug. 27, 1996), which, like Merchants, involved allegations of RICO violations, the court arrived at a different conclusion as to the effect of McCarran-Ferguson. The defendants asserted that McCarran-Ferguson precluded the plaintiffs’ RICO claims. Based on its analysis and application of Fabe to the facts at hand, the Ambrose court ruled in favor of the defendants. Because only the general exemption was implicated, the court applied Fabe’s three-part test, considering whether: (1) the federal statute specifically related to the business of insurance; (2) the state statute was “enacted for the purpose of regulating the business of insurance”; and (3) the federal statute would “invalidate, impair, or supersede” the state statute. Id. at 1158. The court did not address the first prong of that test as the parties agreed that RICO did not specifically relate to the business of insurance.

As to the second Fabe inquiry, the Ambrose Court held that the Virginia Unfair Trade Practices Act, three sections of which the defendants claimed precluded the application of RICO, was enacted for the purpose of regulating the business of insurance. The court found that the Virginia Unfair Trade Practices Act was part of a law (1) the clearly stated purpose of which was to “regulate trade practices in the business of insurance,” (2) which provided no private right of action, and (3) the plain meaning of which was to regulate the performance of insurance contracts. Ambrose, 891 F. Supp. at 1162.

As to the third Fabe inquiry, the court used ordinary dictionary definitions of “supersede,” “impair,” and “invalidate,” because those words are not defined in McCarran-Ferguson. The Ambrose court determined that state law would be impaired, invalidated, or superseded by the application of RICO in the circumstances of the case because of the disparity in severity of remedies, along with the fact that RICO provided a private right of action and the state statute did not. Id. at 1165-67. Although it did not expressly so state, the Ambrose court implicitly followed Fabe in using a broader definition of “law” than did the courts that ruled in the redlining cases.

The Ambrose court expressly rejected the “inverse preemption” analytical model adopted by the NAACP, Nationwide, and Merchants courts. Id. at 1167. The Ambrose court disagreed with the use of that model on the grounds that preemption analysis under the Supremacy Clause of the United States Constitution (U.S. Const. Art. VI) deals with the relative status of two complete bodies of law, whereas McCarran-Ferguson analysis requires consideration of the impact of a specific federal law on state insurance law. Id. at 1167. The Supremacy Clause provides that the federal laws shall “be the supreme law of the land,” as further discussed in Section IV below.

The Ambrose court reconciled its holding with Mackey, prior Fourth Circuit precedent, by explaining that Mackey, like Ambrose, did not hold that an actual conflict was needed to bring McCarran-Ferguson into play. Rather, Ambrose said, Mackey simply held that a comprehensive regulatory scheme in and of itself was not sufficient to trigger McCarran-Ferguson, and that McCarran-Ferguson had not been triggered in the Mackey case only because the court had not been pointed to any state law that would be impaired by the application of the FHA or the Civil Rights Acts. Ambrose, 891 F. Supp. at 1168. Thus, Ambrose came to a different conclusion from Merchants and the redlining cases, primarily based on its application of its definitions of “invalidate,” “impair,” and “supersede,” and its rejection of the inverse preemption analysis and narrow definition of the term “law” as used in the general exemption, which together had supported the “direct conflict” requirement advocated by Merchants and the redlining courts.

F. Humana v. Forsyth
Because of the differing analytical approaches and results of the various courts of appeals, the Supreme Court again considered McCarran-Ferguson’s general exemption in Humana, Inc. v. Forsyth, 525 U.S. 299 (1999). Humana significantly clarified some of the conflicts that had arisen in addressing general exemption issues. While its failure to expressly address some of those conflicts leaves room for additional confusion, Humana implicitly holds that an inverse preemption analysis is inappropriate for McCarran-Ferguson general exemption issues and that the definition of “law” as used in the general exemption must be broad.

Humana involved RICO claims similar to those in Ambrose. The Court applied the three-part Fabe analysis, examining whether (1) the federal statute specifically related to the business of insurance; (2) the state statute was enacted “for the purpose of regulating the business of insurance”; and (3) the federal statute would “invalidate, impair, or supersede” the state statute. Id. Because RICO is not a law that specifically relates to insurance, and the state laws at issue regulated insurance, the Court considered only whether the application of RICO would “invalidate, impair, or supersede” state insurance law. Id. at 307. The Court used ordinary dictionary definitions for all three words: “invalidate” meant “to render ineffective, generally without providing a replacement rule or law”; “supersede” meant “to displace (and thus render ineffective) while providing a substitute rule”; and “impair” meant “to weaken, to make worse, to lessen in power, diminish, or relax, or otherwise affect in an injurious manner.” Id. at 307-308, 309-310.

Under those definitions, the Court held that the existence of parallel state and federal remedy regimes for the activities at issue in Humana would not invalidate or supersede state insurance law because application of RICO would neither render state insurance law ineffective nor displace it. As to whether the parallel federal and state regimes would “impair” the state insurance law, the plaintiffs advocated that the three words should be held to be interchangeable and to require a direct conflict, as they had been in NAACP and Merchants. The defendants, on the other hand, urged that “impair” be defined so as to trigger McCarran-Ferguson if a state has regulated, or chosen not to regulate, insurance in any manner. The Court rejected the defendants’ proposed definition based on the wording of McCarran-Ferguson itself. It also, however, rejected the direct conflict approach advocated by the plaintiffs and taken by NAACP and Merchants. Id. at 309-310.

Instead, the Court formulated a new analytical guideline derived directly from the wording of the general exemption: “When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State’s administrative regime, the McCarran-Ferguson Act does not preclude its application.” Id. at 310. Applying that standard, the Court held that a RICO action would not impair Nevada’s Unfair Insurance Practices Act in that it would not frustrate any declared state policy. Id. at 311. The Court did not consider whether allowing RICO claims would interfere with Nevada’s insurance administrative regime.

Thus, while the Humana Court mirrored Ambrose’s rejection of an inverse preemption analysis and of a direct conflict requirement, it did not join the Ambrose court in holding that such rejection resulted in McCarran-Ferguson precluding the application of federal law.

IV. Discussion

A. Preemption
Preemption is the doctrine through which courts give effect to the Supremacy clause contained in Article VI of the United States Constitution, which provides that the laws of the United States “shall be the supreme law of the land . . .” U.S. Const. Art. VI. Under the doctrine, unless Congress expressly commands otherwise, a state law is preempted if it actually conflicts with federal law, or if federal law so thoroughly occupies a legislative field that it is reasonable to infer that Congress left no room for the States to also legislate in that field. Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516 (1992). “Thus, the concept of preemption (whether “direct” or “inverse”) requires a determination whether there exists a direct conflict between federal and state law or whether state and federal law can co-exist.” Ambrose, 891 F. Supp. at 1167.

The NAACP court concluded that a direct conflict between federal law and state insurance law was required to trigger McCarran-Ferguson’s general exemption. The court rationalized this conclusion by comparing the operation of McCarran-Ferguson to federal preemption, stating: “The McCarran-Ferguson Act is a form of inverse preemption, so principles defining when state remedies conflict with (and so are preempted by) federal law are pertinent in deciding when federal rules ‘invalidate, impair, or supersede’ state rules.” NAACP, 978 F.2d at 296. Nationwide and Merchants adopted this theory wholesale. Nationwide, 52 F.3d at 1363; Merchants, 50 F.3d at 1492.

As the Humana Court made clear, however, a direct conflict is not required to trigger McCarran-Ferguson. McCarran-Ferguson comes into play if a federal law that does not specifically relate to insurance invalidates, impairs, or supersedes a state insurance statute, not just when such a federal statute conflicts with such a state statute. Thus, preemption analysis, which requires a direct conflict, or a determination that state and federal law cannot coexist, is not helpful in determining whether a state statute has been invalidated, impaired, or superseded. Without expressly rejecting the “inverse preemption” concept, the Supreme Court confirmed in Humana that a preemption analysis is not helpful when the Court defined “invalidate,” “supersede,” and “impair,” and then announced a new standard, wholly separate from preemption analysis, for assessing the interplay of state insurance law and federal law under the general exemption. The Humana Court ruled: “When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State’s administrative regime, the McCarran-Ferguson Act does not preclude its application.” Humana, 525 U.S. at 310.

The distinction between the “direct conflict” requirement of federal preemption analysis and the “invalidate, impair, or supersede” requirement of McCarran-Ferguson will become increasingly important as insurers, regulators, and courts work to determine the proper interrelation of McCarran-Ferguson and specific federal statutes.

B. Definitions of ‘Law’
None of the cases discussed in this article expressly addressed the scope or the definition of the term “law” as used in McCarran-Ferguson’s general exemption. Nevertheless, it is evident that the outcomes in the lower court cases were influenced by the respective court’s implicit interpretation of that term, and that the lower courts’ implicit interpretations were narrower than those of the Supreme Court. In looking at state law, the Humana Court examined not only the whole of Nevada’s Unfair Insurance Practices Act, but also its common law remedies for the practices at issue, expressly noting that the Nevada Unfair Insurance Practices Act was “a comprehensive administrative scheme.” Humana, 525 U.S. at 311. Fabe likewise considered the fact that the Ohio priority statute at issue there was part of a comprehensive and specialized administrative structure for regulating insurance companies. Fabe, 508 U.S. at 494.

The redlining cases, however, operated with a much narrower interpretation. Mackey expressly stated that “the presence of a general regulatory scheme does not show that any particular state law would be invalidated, impaired or superseded by the application of the Fair Housing Act . . . .” Mackey, 724 F.2d at 421. Both NAACP and Nationwide quoted and relied upon this language. NAACP, 978 F.2d at 296; Nationwide, 53 F.3d at 1363. NAACP dismissed as unimportant the fact that overlap between federal and state regulatory schemes would most likely have a negative impact on one or the other of those schemes, thus indicating that in its eyes an administrative scheme was not what Congress meant by its use of the term “law” in the general exemption. NAACP, 978 F.2d at 295. Further, NAACP evidenced its reliance on a very narrow interpretation with its example of a situation where McCarran-Ferguson would preempt the FHA: “If Wisconsin wants to authorize redlining, it need only say so; if it does, any challenge to that practice under the auspices of the Fair Housing Act becomes untenable.” NAACP, 978 F.2d at 297. Nationwide also used the narrow definition. Nationwide, 52 F.3d at 1363.

The “direct conflict” approach adopted by NAACP and Merchants turns on a very narrow definition of “law.” The more narrowly the term “law” is defined, however, the more the resulting opinion tends to undermine the broad purpose of the general exemption, which is to reserve regulation of the business of insurance to the states. Humana thus rejected the direct conflict approach, implicitly ruling that the term “law” as used in the general exemption was to be defined more broadly than it had been in the redlining cases and Merchants. Certainly neither Fabe nor Humana supports a narrow scope for the term “law” as used in the general exemption. Humana considered Nevada’s overall statutory and common law scheme relating to insurance company misrepresentations in assessing whether there was an impairment in that case. Humana, 525 U.S. at 311-313.

V. Conclusion
The purpose of McCarran-Ferguson’s general exemption is to address what should happen in the event of an overlap between a state insurance regulatory scheme and a federal law. The point of McCarran-Ferguson was to provide that in the event of such an overlap, state insurance law, not federal law, would be the statutory scheme that remained unaffected. The Supreme Court, in both Royal Drug and Fabe, held that the scope of the general exemption was broad, and that McCarran-Ferguson’s purpose was to reserve regulation and taxation of insurance companies to the states. Interpreting McCarran-Ferguson to require a focused conflict between, or impairment of, a single state statute defeats the purpose of McCarran-Ferguson. Humana recognized this when it focused the analysis on whether the federal statute (1) frustrated any declared state policy, or (2) interfered with a state’s administrative regime. Humana, 525 U.S. at 310.

Neither an inverse preemption analytical construct nor a narrow definition of the term “law” as used in the general exemption, both of which in essence mandate a direct conflict to trigger McCarran-Ferguson, are useful in addressing general exemption issue. Humana has directed that the appropriate analytical focus is on frustration of state policy or interference with a state administrative regime.
Endnotes:

* Interestingly, one appellate judge dissented, also relying on Pireno. Id. at 498-99.
* Redlining was defined as “the arbitrary refusal to underwrite the risks of persons residing in predominantly black neighborhoods.” Mackey, 724 F.2d a