A Brief Chronicle of Insurance Regulation in the United States, Part I: From De Facto Judicial Regulation to South-Eastern Underwriters Ass'n

The U.S. insurance industry has been regulated primarily by the individual state governments, but federal challenges to that primacy go back to the infancy of insurance regulation in the U.S., and recently federal encroachment on the state-based system has become more prominent.
Historically, the insurance industry in the United States was regulated almost exclusively by the individual state governments. The first state commissioner of insurance was appointed in New Hampshire in 1851 and the state-based insurance regulatory system grew as quickly as the insurance industry itself.[1][2] Prior to this period, insurance was primarily regulated by corporate charter, state statutory law and de facto regulation by the courts in judicial decisions.[3]

Insurance regulation was born at the state government level primarily because, in the mid-1850s, there was very little in terms of infrastructure or resources at the federal government level.
Insurance regulation was born at the state government level primarily because, in the mid-1850s, there was very little in terms of infrastructure or resources at the federal government level. The state governments, on the other hand, were more developed and better equipped to handle the regulation of a burgeoning concern like the insurance industry.[4]

However, the first attempt at federal encroachment on the state-based regulatory scheme arose soon enough. As the various state governments each developed their own set of insurance regulations, insurance companies with multi-state business were hampered by the inconsistency of the dissimilar rules and requirements, as well as localism by the state regulators. These companies and their stakeholders joined a growing movement for federal insurance regulation – but, considering the lack of any significant federal regulatory framework, this movement may have been more about avoiding regulation rather than actually promoting federal superiority.[4]

Regardless, the efforts to increase federal regulation of insurance ultimately resulted in the seminal case of Paul v. Virginia in 1869.[3][4][5] In that case, the United States Supreme Court held that insurance was not commerce and that state insurance regulation did not violate the Privileges and Immunities Clause of the Fourteenth Amendment. The Court concluded, therefore, that state insurance regulation was not significantly constrained by the United States Constitution, and that there was no basis for federal regulation of insurance.[3][4][5]

In Paul v. Virginia, the United States Supreme Court held that insurance was not commerce and that state insurance regulation did not violate the U.S. Constitution.

After Paul v. Virginia, proponents continued to argue for federal regulation, but the state-based insurance regulatory scheme rose to primacy.[3][4] That same year, the State of New York appointed its own commissioner of insurance and created a state insurance department to move towards more comprehensive regulation of insurance at the state level.[3]

Even with the pro-state holding of Paul v. Virginia, the various state insurance regulators sought to bulwark their authority and almost immediately began to coordinate their activities and pool their resources. The National Association of Insurance Commissioners was formed in 1871 for this very purpose.[2]

The next challenge to the state insurance regulatory scheme came amidst the sweeping federalization of financial services regulation of the New Deal Era in the mid-1930s. The insurance industry avoided the layers of federal regulation that befell the banking and securities industries, primarily because the insurance industry had survived the Great Depression largely intact. The New Deal federalization arose from the failure of the state-based banking and securities regulators associated with the Great Depression, but the relatively healthy insurance industry showed little evidence of any similar faults on the part of the state-based insurance regulators.[3]

The insurance industry avoided the layers of federal regulation that befell the banking and securities industries, primarily because the insurance industry had survived the Great Depression largely intact.

In the early 1940s, the Supreme Court decided the case of United States v. South-Eastern Underwriters Association, finding that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution and overturning Paul v. Virginia.[6] Although the South-Eastern case focused primarily on the application of federal anti-trust legislation (the Sherman Act) to the insurance industry, some thought the decision opened the floodgates to widespread federal regulation of the insurance industry and signaled the demise of the state-based insurance regulatory system.[7]

Part II of this article will begin with the Congressional legislative response to South-Eastern and continue with the further history of insurance regulation in the United States.

 

1State Insurance Regulation: History, Purpose and Structure; National Association of Insurance Commissioners; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
2Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners; Susan Randall; Florida State University Law Review, Vol. 26:625, 1999; http://www.law.fsu.edu/journals/lawreview/downloads/263/rand.pdf.
3Stemple on Insurance Contracts; Jeffrey W. Stempel, Vol. 1, §2.07, 3rd Ed., 2007.
4The Case for Federal Regulation of Insurance: Should the Tobin Project’s Risk Group Care; Tom Baker, Tobin Project, 2006, http://www.tobinproject.org/downloads/RP_Federal_Regulation_of_Insurance.pdf.
5Paul vs. Virginia, 75 U.S. 168, 19 L.Ed. 357 (1868).
6United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
7. See, e.g., the dissenting opinion of Chief Justice Stone in South-Eastern, Id. (“…the immediate and only practical effect of the decision now rendered is to withdraw from the states, in large measure, the regulation of insurance, and to confer it on the national government…”)

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