TITLE:  Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance, B-304474, March 4, 2005
BNUMBER:  B-304474
DATE:  March 4, 2005
**********************************************************************
   B-304474

   March 4, 2005

   The Honorable Michael G. Oxley

   Chairman

   Committee on Financial Services

   House of Representatives

   Subject:    Legal Principles Defining the Scope of the Federal Antitrust
Exemption for Insurance

   Dear Mr. Chairman:

   The enclosed opinion responds to your request concerning the
McCarran-Ferguson Act's exemption from the federal antitrust laws for the
insurance industry.  In connection with the Committee's examination of the
possibility of comprehensive insurance regulatory reform, you asked us to
address three issues: (1) the evolution of the exemption and its
present-day scope as determined by the courts; (2) the types of
insurance-related activities being conducted today which might violate the
federal antitrust laws in the absence of the exemption; and (3) the types
of antitrust laws currently in effect in the States.  As agreed with your
staff, this opinion responds to the first question; we are responding to
the remaining questions by separate report.

   As summarized below, Part I of the opinion provides an overview of the
federal antitrust laws and the application of those laws to the insurance
industry prior to passage of the McCarran-Ferguson Act, 15 U.S.C. SS 1011
et seq., in 1945.  Part II of the opinion sets forth the Act's provisions
relating to the antitrust exemption for insurance activities, which
applies only to those practices that: (a) constitute the "business of
insurance"; (b) are "regulated by State law"; and (c) do not constitute
"an agreement to boycott, coerce, or intimidate, or [an] act of boycott,
coercion, or intimidation."  Part III of the opinion discusses the courts'
considerable narrowing of the exemption over the last 60 years, and
includes a detailed review of the key cases that have addressed whether
particular activities are the "business of insurance."  Courts consider
three factors in determining what constitutes the "business of insurance":
    (1) whether the activity has the effect of transferring or spreading a
policyholder's risk; (2) whether the activity is an integral part of the
policy relationship between insurer and insured; and (3) whether the
activity is limited to entities within the insurance industry.  Today,
only those activities directly tied to ratemaking and other functions at
the core of and unique to the insurance industry, and activities directly
related to the relationship between insurer and insured, are deemed to be
the business of insurance potentially immune from the federal antitrust
laws (provided they are also regulated by State law and do not constitute
an act of boycott, coercion, or intimidation).  Although many of the
earlier court decisions suggest that additional insurance-related
activities qualify for the exemption, it is unlikely that a court would
rule the same way today.  Attachment A to the opinion lists these
"business of insurance" cases from 1959 to the present. 

                                   Background

   Beginning in the late 19th century, Congress enacted a series of antitrust
laws whose purpose was to ensure a competitive business economy*the
Sherman Act, 15 U.S.C. SS 1-7, the Clayton Act, 15 U.S.C. SS 12-27, and
the Federal Trade Commission (FTC) Act, 15 U.S.C. SS 41-58.  The Sherman
Act declared contracts, combinations, and conspiracies in restraint of
interstate or foreign commerce, as well as monopolies or attempts to
monopolize interstate or foreign commerce, to be illegal under certain
circumstances.  The Clayton Act declared price discrimination, exclusive
dealings arrangements, corporate mergers, and interlocking directorates to
be illegal under certain circumstances.  Finally, the FTC Act created the
FTC and empowered it to enforce aspects of the antitrust laws, and
prohibited unfair methods of competition and unfair or deceptive acts or
practices in or affecting commerce. 

   This same period saw the growth of the fire insurance industry in America,
and the increasing tendency of the States to tax fire insurance companies
in order to obtain revenue, and to enact laws requiring deposits from
out-of-state insurers and imposing heavy taxes on their local operations. 
To address persistent concerns about insurer insolvency, companies began
to pool their loss experience data so they could formulate more accurate
and rational insurance rates, and states began to establish administrative
bodies to regulate the activities of the insurance industry.  After the
Civil War, insurers objected to state imposition of discriminatory taxes
and to state regulation as a whole, and unsuccessfully challenged the
States' authority to impose such requirements in the Supreme Court case of
Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1868).  The insurers in Paul
argued that Virginia's regulation of insurance was an unconstitutional
regulation of interstate commerce, but the Supreme Court disagreed,
finding that an insurance contract was not an article of commerce within
the meaning of the Constitution's Commerce Clause. 

   In the aftermath of Paul v. Virginia, courts, legislatures, and insurance
companies proceeded under the assumption that the insurance industry would
be regulated by the States.  States began to formally regulate the
industry, and many states encouraged collaborative rate-setting to prevent
future insurer insolvencies.  State regulators also attempted to achieve
uniformity of insurance regulation through a coalition of state insurance
commissioners, which today is known as the National Association of
Insurance Commissioners. 

   This framework of state regulation was shaken by the Supreme Court's
subsequent decision in United States v. South-Eastern Underwriters Ass'n,
322 U.S. 533 (1944).  Effectively overruling its decision in Paul v.
Virginia, the Supreme Court in South-Eastern Underwriters held that
insurance was, in fact, interstate commerce which Congress could regulate
under the Commerce Clause.    

   In the wake of South-Eastern Underwriters, entreaties to Congress by the
insurance industry, state regulators, and state legislators to clarify
whether and to what extent states could continue to tax and regulate
insurers resulted in quick action: Congress passed the McCarran-Ferguson
Act in 1945.  Although Congress had clear authority to regulate insurance,
it determined in McCarran-Ferguson that it would be beneficial, as a
matter of public policy, to allow the states to continue regulating and
taxing such business in most instances.  Consistent with this statutory
scheme, the Act also included a limited exemption from the federal
antitrust laws for certain insurance-related activities.    

         The McCarran-Ferguson Act's Antitrust Exemption for Insurance

   The McCarran-Ferguson Act gives the insurance industry a very limited
exemption from the federal antitrust laws.  To qualify for the exemption,
an activity must satisfy three prerequisites.  It must:  (a) constitute
the "business of insurance"; (b) be "regulated by State law"; and (c) not
constitute "an agreement to boycott, coerce, or intimidate, or [an] act of
boycott, coercion, or intimidation."  In determining whether a particular
activity qualifies as the "business of insurance," the Supreme Court has
developed three factors to be considered: (1) whether the activity has the
effect of transferring or spreading a policyholder's risk; (2) whether the
activity is an integral part of the policy relationship between insurer
and insured; and (3) whether the activity is limited to entities within
the insurance industry.  None of these criteria is dispositive in itself.

   Courts also have established parameters for the "regulated by State law"
prerequisite.  As a general matter, the requirement may be satisfied if an
insurer is subject to general regulatory standards, such as when a state
statute generally proscribes, permits, or authorizes certain conduct on
the part of insurers.  The availability of the exemption does not depend
on the quality of the state regulatory scheme or on its effective
enforcement.

   Finally, the Supreme Court has ruled that conduct constitutes a prohibited
"boycott" under the McCarran-Ferguson exemption where, in order to coerce
a target into certain terms on one transaction, parties refuse to engage
in unrelated or collateral transactions with the target.  With respect to
prohibited "coercion," this has been interpreted to exclude situations
where the allegedly coerced parties retain options to take other actions.

    Application of the "Business of Insurance" Test As It Evolved Over Time

   A review of cases addressing what constitutes the "business of insurance"
shows that the McCarran-Ferguson exemption has been judicially narrowed in
the 60 years since its enactment.  The cases are highly fact-specific,
however, and thus generalities about them are necessarily imprecise and
must be applied with caution.  Further, because the legal tests under the
Act have evolved over time, it is unlikely that all of the earlier rulings
would survive today and that a court would rule on the same facts in the
same way.  Greater reliance therefore should be placed on the most recent
cases.  With these caveats, the following general conclusions can be
drawn:

   .A A A A A A A  Courts tend to find that activities among insurers
involving cooperative  ratemaking and related functions constitute the
business of insurance.  Insurers may enter into agreements or arrangements
that do not involve such matters, but the more the arrangements involve
functions that are not unique to the insurance business, or whose primary
impact is not on the insurance market, the less likely courts are to apply
the exemption.

   For example, ratemaking and related activities deemed by courts to
constitute the business of insurance have included concerted actions among
insurers to set agent commission rates; to fix the rates of various types
of insurance pursuant to joint agreements and rating boards; to classify
and re-classify risks; to agree to pay damage claims on the basis of
agreed-upon labor rates; to limit or refuse to offer certain types of
coverage; and to jointly undertake activities to limit risks by, among
other things, revising policy language. 

   By contrast, activities that courts have determined do not constitute the
business of insurance include the merger of insurance companies;
interlocking directorates between banks or bank holding companies and
insurers; arrangements between prepaid healthcare insurers distinguishing
between services of different medical providers; competitive market
practices that are not limited to the insurance industry; and agreements
between insurers to allocate the insurance market in a geographic area.

   .A A A A A A A  Courts tend to find that activities between insurers and
agents involving the terms of their contracts or the termination of their
relationships constitute the business of insurance, provided that the
activities are closely linked to the insurer/insured relationship and
involve the agent's insurance dealings.

   For example, courts have found that the business of insurance includes
agency contracts requiring exclusive representation of named insurers;
optional agency contract provisions precluding an agent from engaging in
another business for remuneration without the insurer's consent; and the
termination of an agency contract because the agent would not comply with
a limitation on his sales practices.  In each of these cases, the courts
found that the restrictions were related to the agent's insurance dealings
as such.

   By contrast, a court has found that the termination of the contract of an
agent who serviced both insurance policies and securities, because he
refused to sell securities through the insurer's securities affiliate, was
not the business of insurance, viewing the practice as a restraint on
trading in securities.  In addition, activities that interfered with an
insurer's ability to do business, such as when one insurer induced the
agents of another insurer to stop selling its insurance policies and to
use its trade secrets and customer lists, or when an insurer "pirated" its
general agent's sub-agents, were found not to constitute the business of
insurance because they could be engaged in by any business.

   .A A A A A A A  Courts tend to find that activities involving the
relationship between insurer and insured constitute the business of
insurance.  If the activity does not involve risk-spreading, however, or
if its primary impact on competition is not in the insurance industry,
courts are less likely to apply the exemption.

   For example, courts have considered the business of insurance to include
"tying" of products, such as an auto insurer's requirement that
policyholders be members of a certain auto club; an insurer's refusal to
offer a health insurance policy that did not include a spouse; and an
agreement under which insurers offered medical malpractice insurance only
to members of a county medical association.  Courts also have considered
the business of insurance to include the setting of terms and conditions
of the policy, such as funeral service policies that offered smaller cash
payments if the family did not choose a designated funeral director; an
insurer's decision to reduce an insured's monthly disability benefits
pursuant to the policy's terms; a healthcare provider's requirement that
subscribers generally use its pharmacy to take advantage of their
prescription drug benefits; and a health insurer's introduction of its own
HMO and its institution of an adverse selection policy of pricing its
traditional insurance. 

   By contrast, a court has found that insurers' refusal to pay for services
rendered by psychologists unless they were billed through a physician were
not the business of insurance, because the decision was not whether to
underwrite the risk but merely who should be paid.  Another court has
found that a conspiracy between insured physicians and a medical
malpractice insurer to cancel the malpractice insurance of a competitor
physician was not the business of insurance, because the attempt to
restrain competition targeted the marketplace for maternity services, not
medical malpractice insurance.

   .A A A A A A A  Courts do not find activities involving arrangements
between insurers and third-party providers of non-insurance goods and
service to constitute the business of insurance, at least since the late
1970s when the current "business of insurance" test was formulated.

   For example, activities which do not constitute the business of insurance
include insurer's agreements with auto glass companies to fix the prices
to be paid for glass replacement; agreements between insurers and auto
repair shops to perform work at rates agreed upon in advance; activities
in private healthcare financing that affect entities beyond the business
of insurance; agreements between insurers and various types of medical
practitioners to provide services; insurers' agreements with health
planning agencies not to reimburse policyholders for CAT scans performed
outside of hospitals; and agreements between insurers and peer review
committees for the provision of consulting services.

   Please contact Susan D. Sawtelle, Associate General Counsel, at (202)
512-6417, Rachel M. DeMarcus, Assistant General Counsel, at (202)
512-4099, or Tania L. Calhoun, Senior Attorney, at (202) 512-8230, if
there are questions concerning this opinion.

   Sincerely yours,

   Anthony H. Gamboa
General Counsel

        Enclosure

               B-304474                                           
                                                               Enclosure

                   LEGAL PRINCIPLES DEFINING THE SCOPE OF THE

                   FEDERAL ANTITRUST EXEMPTION FOR INSURANCE

   INTRODUCTION AND SUMMARY OF CONCLUSIONS

   Under current federal law, the regulation of insurance is primarily the
responsibility of the States.  This arrangement results, in part, from
Congress's decision, in the McCarran-Ferguson Act, 15 U.S.C. SS 1011 et
seq., to exempt certain insurance-related activities from the federal
antitrust laws.  Congress is in the process of examining whether to
undertake comprehensive insurance regulatory reform.  As part of that
examination, Congress is reviewing the history of the McCarran-Ferguson
Act's antitrust exemption, as well as the elements of the exemption and
how it is applied in practice today.  To assist the Congress in its
review, this opinion discusses the historical and legal evolution of the
exemption and its present-day scope as determined by the courts. 

   As discussed in Part I below, a system of state regulation of the
insurance industry developed over the 19th and early 20th centuries. 
After a 1944 United States Supreme Court decision finding that the federal
government had constitutional authority to regulate the insurance industry
as "interstate commerce," Congress passed the McCarran-Ferguson Act
("McCarran-Ferguson" or "the Act") in 1945.  The Act reflected Congress's
judgment that, although the federal government has the authority to
regulate insurance, it was preferable, as a matter of public policy, to
permit the states to continue to do so in most instances.  The Act
therefore, among other things, exempts insurance activities from the
federal antitrust laws under certain circumstances.   

   The scope of the Act's antitrust exemption is narrow on its face, as
discussed in Part II.  The Act exempts only those activities that:  (a)
constitute the "business of insurance"; (b) are "regulated by State law";
and (c) do not constitute "an agreement to boycott, coerce, or intimidate,
or [an] act of boycott, coercion, or intimidation."  As discussed in Part
III, over time, the courts have limited the exemption even further,
principally by narrowing the first prerequisite*what constitutes the
"business of insurance."  Today, the courts apply a three-factor test in
ascertaining whether an activity is the "business of insurance":  (1)
whether the practice has the effect of transferring or spreading a
policyholder's risk; (2) whether the practice is an integral part of the
policy relationship between insurer and insured; and (3) whether the
practice is limited to entities within the insurance industry.  None of
these criteria is dispositive in itself.

   Applying these three factors, the courts have found that only activities
which are directly tied to ratemaking and other functions at the core of
and unique to the insurance industry, and activities directly related to
the relationship between the insurer and the policyholder, are immune from
the federal antitrust laws.  Although many of the earlier court decisions
suggest that additional insurance-related activities qualify for the
exemption, it is unlikely that a court would rule the same way today. 
Attachment A to this opinion lists the key "business of insurance" cases
from 1959 to the present.

   ANALYSIS

 I.A A A A A A A A A A A A A A A A A A A  Developments Leading to Enactment of
                           the McCarran-Ferguson Act

                                       A 

              A.        Overview of the Federal Antitrust Laws[1]

   The purpose of the federal antitrust laws is to ensure a "competitive
business economy."[2]  In the latter half of the 19th century, the power
to "fix prices, to restrict production, to crush small independent
traders, and to concentrate large power in the few to the detriment of the
many, were but some of the numerous evils ascribed to" trusts and
monopolies.[3]  To address these concerns, Congress enacted three statutes
which form the foundation of federal antitrust law:  the Sherman Act (in
1890), the Clayton Act (in 1914), and the Federal Trade Commission ("FTC")
Act (also in 1914).[4]  These laws are intended to preserve "free and
unfettered competition," and rest on the premise that "the unrestrained
interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices, the highest quality and the
greatest material progress . . . ."[5] 

   The first two sections of the Sherman Act[6] are its most important. 
Section 1 states, in relevant part, that:

   Every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several States, or
with foreign nations, is declared to be illegal.  Every person who shall
make any contract or engage in any combination or conspiracy hereby
declared to be illegal shall be deemed guilty of a felony . . . .

   Section 2 states, in relevant part, that:

   Every person who shall monopolize, or attempt to monopolize, or combine or
conspire with any other person or persons, to monopolize any part of the
trade or commerce among the several States, or with foreign nations, shall
be deemed guilty of a felony . . . .

   The focus of section 1 is on combinations and conspiracies to engage in
practices that restrain trade.  As such, section 1 requires at least two
actors working in concert.  The prohibition extends to nearly every type
of "horizontal" or "vertical" act or practice that may restrain
competition.[7]  In addition, as with any federal regulation of
"commerce," section 1 applies only to acts which restrain interstate
trade; regulation of purely intrastate trade is left to the states.[8] 
Finally, section 1 prohibits only those restraints found to be
unreasonable.[9] 

   The focus of Sherman Act section 2, by comparison, is on actions of a
single firm which has exercised its monopoly power, typically through acts
or practices subject to section 1.  Monopoly power is usually defined as
"the power to control prices or exclude competition."[10]  A prohibited
monopoly under section 2 has two elements:  the possession of monopoly
power in the relevant market and "the willful acquisition or maintenance
of that power . . . ."[11]       

   The Clayton Act[12] was enacted almost a quarter-century after the Sherman
Act, in response to that statute's perceived deficiencies.  The Clayton
Act declares four types of practices to be illegal under certain
circumstances:  direct and indirect price discrimination, exclusive
dealings arrangements, corporate mergers, and interlocking directorates. 
The illegality of the first three practices is premised on a finding that
the practice may lessen competition substantially or that it tends to
create a monopoly.[13]  As such, the Clayton Act tends to look to the
future, to predict the probable anticompetitive effect of a given activity
or practice, rather than to the past, to determine whether anticompetitive
effects already have occurred. 

   The FTC Act,[14] a trade regulation law passed the same year as the
Clayton Act, created the FTC and empowered it to enforce certain portions
of the antitrust laws.[15]  Section 5(a)(1) of the Act prohibits "unfair
methods of competition in or affecting commerce, and unfair or deceptive
acts or practices in or affecting commerce."  Unfair methods of
competition include any conduct that would violate the Sherman Act.[16] 
The FTC Act defines unfair practices as those that "cause[] or [are]
likely to cause substantial injury to consumers which is not reasonably
avoidable by consumers themselves and not outweighed by countervailing
benefits to consumers or to competition."[17]

   The Department of Justice is responsible for enforcing the Sherman Act,
and shares responsibility with the FTC for enforcing the Clayton Act.  The
Department of Justice can seek an injunction or civil money damages under
either statute, and can seek criminal penalties for Sherman Act
violations.  Private parties may also enforce sections 1 and 2 of the
Sherman Act and may seek redress under the Clayton Act.  The FTC has
exclusive authority to enforce section 5 of the FTC Act, and can use
section 5 to take action against parties that violate the Sherman Act. 
The FTC typically acts administratively, through judicially enforceable
cease-and-desist and similar orders.       

                                       A 

B.        Applicability of the Antitrust Laws to the Insurance Industry Prior to
                           the McCarran-Ferguson Act

                                       A 

                1.         The Insurance Industry in the 1800's

   As one commentator has noted, the history of the relationship between the
federal government, the states, and the business of insurance is largely
the story of fire insurance in America.[18]  In the 1800's, the property
and casualty insurance industry was dominated, both economically and
politically, by fire insurance.[19]  As the 19th century progressed, and
the power and profitability of the fire insurance industry grew, state
governments began taxing fire insurance companies, as a means of obtaining
revenue, and enacting laws requiring deposits from out-of-state insurers
and imposing heavy taxes on their local operations, as a means of
protecting local insurers.[20]

   Concerns about the solvency of the fire insurance industry also arose
throughout the 19th century.  In years with few fires, insurers were
profitable and competitive, and could offer lower prices.  In years when
major fires occurred, many insurers had insufficient reserves to pay
losses.[21]  Insurers also competed vigorously for the business of
independent agents who sold their products, and these agents, who had no
incentive to avoid bad risks, competed with each other.  The resulting
price competition exacerbated the threat to insurer solvency.[22]  To
reduce these risks, insurers began to set agent commissions collectively
and to pool loss experience data, in order to obtain sufficient
information to determine rational and more accurate insurance rates.  This
was of particular benefit to smaller insurers, who had limited loss
experience data of their own.[23] 

   At the same time, states began to establish administrative bodies to
regulate the activities of the insurance industry.[24]  After the Civil
War, insurers began to object to the states' imposition of discriminatory
taxes and to state regulation generally, and in 1866, as discussed below,
they unsuccessfully challenged states' authority to impose such measures. 

2.         The Supreme Court's Decisions in Paul v. Virginia[25] and United
States v. South-Eastern Underwriters Association

   In 1866, the Virginia legislature passed a statute requiring insurance
companies not incorporated under Virginia law to obtain a license before
doing business in Virginia.  The license could be obtained only upon
payment of a bond.  A subsequent statute provided that no person without a
license could act as an agent for an out-of-state insurer, and anyone
offering to issue an insurance policy for an out-of-state insurer would be
considered an agent of that firm.  Samuel Paul, a Virginia resident, was
appointed as the agent for fire insurers incorporated in New York.  He
applied for a license to act as their agent in Virginia, and complied with
every requirement except for the bond.  His request for a license was
rejected, but he nonetheless issued an insurance policy to a citizen of
Virginia.  He was indicted and convicted for this offense, and the case
was ultimately appealed to the United States Supreme Court. 

   Mr. Paul's argument before the Supreme Court was rooted in the Commerce
Clause of the Constitution which, as noted above, authorizes Congress to
regulate interstate commerce.[26]  In arguing that insurance was
interstate commerce that could only be federally regulated, Mr. Paul
asserted that the term "commerce" was broad enough to include the
"business of insurance."  The fact that the New York corporations sent an
agent to Virginia made the transaction interstate commerce, he argued, and
thus the Virginia statute constituted improper state regulation of
interstate commerce. 

   The Supreme Court rejected this argument in Paul v. Virginia, 75 U.S. (8
Wall.) 168 (1868).  Focusing on the character of the insurance business,
the Court ruled that an insurance contract was not an article of
"commerce" within the meaning of the Commerce Clause:

   Issuing a policy of insurance is not a transaction of commerce.  The
policies are simple contracts of indemnity against loss by fire, entered
into between the corporations and the assured, for a consideration paid by
the latter.  These contracts are not articles of commerce in any proper
meaning of the word. . . . Such contracts are not inter-state
transactions, though the parties may be domiciled in different States. 
The policies do not take effect*are not executed contracts*until delivered
by the agent in Virginia.  They are, then, local transactions, and are
governed by the local law.  They do not constitute a part of the commerce
between the States any more than a contract for the purchase and sale of
goods in Virginia by a citizen of New York whilst in Virginia would
constitute a portion of such commerce.

   Id. at 183.

   In view of the Court's conclusion that insurance contracts were "local
transactions, governed by local law," courts, legislatures, and insurance
companies proceeded under the assumption that the insurance industry would
be regulated by the states, not the federal government.  As the Supreme
Court later observed, "on the rationalization that insurance was not
commerce, yet was business affected with a vast public interest, the
states developed comprehensive regulatory and taxing systems.  And
litigation of their validity came to be freed of commerce clause
objections . . . ."[27] 

   Meanwhile, beginning in the 1850s, states established boards and
administrative agencies to regulate the insurance business, with the scope
of regulation varying from state to state.  Many states encouraged
collaborative rate-setting for fire insurers, through rate-setting boards
or bureaus, to prevent insolvencies.  State regulators also attempted to
achieve uniformity of insurance regulation by forming a coalition of state
insurance commissioners.  This coalition ultimately became known as the
National Association of Insurance Commissioners ("NAIC").  For almost 75
years, the states relied on the NAIC's efforts in developing uniform
practices and model laws, and continued their regulatory practices without
federal intervention.[28] 

   Beginning in the 1920s, the state of Missouri attempted to address the
problem of rate-fixing combinations by fire insurers under its state laws,
with little success.  In 1942, apparently at the behest of the Missouri
Attorney General,[29] the Department of Justice indicted the South-Eastern
Underwriters Association and its membership of nearly 200 private fire
insurance companies, along with 27 individuals, for alleged violations of
the Sherman Act.  The indictment alleged two conspiracies.  The first, in
violation of Sherman Act section 1, was to restrain interstate trade and
commerce by fixing and maintaining arbitrary and non-competitive premium
rates on fire and other lines of insurance in several states.  The second,
in violation of Sherman Act section 2, was to monopolize trade and
commerce in the same lines of insurance in the same states.  The insurers'
defense was that the Sherman Act applied only to interstate commerce;
that, under Paul v. Virginia, insurance activity was not interstate
commerce; and that the Sherman Act therefore did not apply to them.

   The Supreme Court rejected this argument in United States v. South-Eastern
Underwriters Ass'n, 322 U.S. 533 (1944).  Effectively overruling its
decision in Paul v. Virginia, the South-Eastern Underwriters Court found
that the federal government did, in fact, have jurisdiction over the
insurers, because insurance clearly was "interstate commerce" which
Congress could regulate under the Commerce Clause.  Although Congress had
not specifically acted to regulate insurance, said the Court, it certainly
had the power to include insurers within the scope of the antitrust laws. 
Insurance should be treated no differently than any other business
affecting interstate commerce, the Court explained:

   No commercial enterprise of any kind which conducts its activities across
state lines has been held to be wholly beyond the regulatory power of
Congress under the Commerce Clause.  We cannot make an exception of the
business of insurance.

   Id.  at 553.

   The Court also rejected the argument that, in the Sherman Act, Congress
did not intend to exercise its power over interstate insurance.  As the
Court explained:

   Whether competition is a good thing for the insurance business is not for
us to consider.  Having power to enact the Sherman Act, Congress did so;
if exceptions are to be written into the Act, they must come from the
Congress, not this Court.

   Id. at 561.

   II.         The McCarran-Ferguson Act's Antitrust Exemption for Insurance
Activities

   The Supreme Court's South-Eastern Underwriters decision caused great
concern among insurers, state regulators, and state legislators, and
uncertainty about whether and to what extent states could tax or regulate
insurers.[30]  It was also unclear whether insurers could continue to
engage in cooperative activities such as ratemaking.  Entreaties to
Congress to clarify the matter resulted in quick action.  After rejecting
bills that would have completely exempted the insurance industry from the
Sherman and Clayton Acts, Congress adopted a variation of an approach
offered by the NAIC and enacted it as the McCarran-Ferguson Act.[31]  

   As articulated in its statement of policy, McCarran-Ferguson declared that
"the continued regulation and taxation by the several States of the
business of insurance is in the public interest, and . . . 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."  15 U.S.C.
S 1011.  The remaining sections of the Act implement that policy, by
generally allowing the States to regulate insurance and, where States have
acted, by partially exempting insurance from the federal antitrust laws:

   .A A A A A A A  Section 2(a) ensures that the absence of federal
regulation of interstate insurance transactions shall not be construed as
barring State regulation, by providing that the business of insurance is
subject to the laws of the States relating to the regulation or taxation
of such business:

   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.

         15 U.S.C. S 1012(a).

   .A A A A A A A  The so-called "first clause" of section 2(b) addresses the
concern that other federal statutes might be read to displace state
insurance regulation, by providing that no Act of Congress shall
invalidate State laws regulating or taxing the business of insurance
unless it specifically relates to the business of insurance.  This
"reverse preemption" of state law over federal law provides:

   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 . . . . 

         15 U.S.C. S 1012(b).

   .A A A A A A A  The so-called "second clause" of section 2(b) supports
this reverse preemption, by exempting the "business of insurance" from the
federal antitrust laws beginning three years after enactment,[32] but only
where States have regulated.  The second clause provides:

   . . . Provided, That after June 30, 1948, the . . . Sherman Act, and the .
. . Clayton Act, and the . . . Federal Trade Commission Act, . . . shall
be applicable to the business of insurance to the extent that such
business is not regulated by State Law.  

   15 U.S.C. S 1012(b).[33]

   .A A A A A A A  Finally, section 3(b) limits the scope of section 2(b)'s
antitrust exemption even further, by providing that the Sherman Act's
boycott, coercion, and intimidation provisions continue to apply to
insurance activities:

   Nothing contained in this chapter shall render the said Sherman Act
inapplicable to any agreement to boycott, coerce, or intimidate, or act of
boycott, coercion, or intimidation.  

         15 U.S.C. S 1013(b).

   After passage of the McCarran-Ferguson Act, the NAIC developed a model
state law on insurance rating to implement the Act's "reverse preemption"
of federal law.  Within a year, 37 states had enacted statutes patterned
on the NAIC's model, and by 1951, all states had enacted laws to regulate
property-casualty insurance rates.  In 1947, the NAIC proposed a model law
intended to preempt application of the FTC Act to the business of
insurance; every state eventually adopted this model act.[34] 

   III.       The Courts' Interpretation of the McCarran-Ferguson's Antitrust
Exemption

   As is clear from the above-quoted provisions, McCarran-Ferguson gives the
insurance industry only a limited exemption from the federal antitrust
laws.[35]  To qualify for the exemption, an activity must satisfy three
prerequisites.  It must:  (a) constitute the "business of insurance"; (b)
be "regulated by State law";  and (c) not constitute "an agreement to
boycott, coerce, or intimidate, or [an] act of boycott, coercion, or
intimidation." Moreover, like all exemptions from the antitrust laws, this
exemption is to be construed narrowly.[36]  It is important to remember,
however, that non-exempt insurance activities do not necessarily violate
the antitrust laws; it is "'axiomatic that conduct which is not exempt
from the antitrust laws may nevertheless be perfectly legal.'"  Pireno,
footnote 36 above, 458 U.S. at 126, citing Royal Drug, footnote 33 above,
440 U.S. at 210 n.5. 

   The courts' interpretation of these prerequisites is discussed in the
remainder of this opinion.  Because the vast majority of cases have
focused on the "business of insurance" prerequisite, it is given the most
extensive treatment here and, for organizational purposes, is discussed
last.  The other two prerequisites are discussed first. 

A.        The Activity Must Be "Regulated by State Law"

   The Act exempts the business of insurance from the federal antitrust laws
only to the extent such business is "regulated by State law," but the
statute does not define this term.  It has been left to the courts to
ascertain the parameters. 

   In order to find that an insurance activity is regulated by state law, the
courts have not required uniformity of regulation among states.  As the
Supreme Court concluded in Prudential Ins. Co. v. Benjamin, above, 328
U.S. at 430, in enacting McCarran-Ferguson, Congress must have known that
state systems of regulation differed greatly in scope and character, and
its purpose was "evidently to throw the whole weight of its power behind
the state systems, notwithstanding these variations."  See also Ohio
AFL-CIO v. Ins. Rating Bd., 451 F.2d 1178, 1183 (6th Cir. 1971), cert.
denied, 409 U.S. 917 (1972) ("We are confident that Congress in enacting
the McCarran Act did not intend to impose a uniform standard of regulation
upon all of the states.  It is our view that the congressional intent was
to leave to the judgment of each state the specifics of regulation which
it should see fit to adopt.").

   Thus, early on, the Supreme Court suggested the "state law" requirement
would be satisfied if the insurer were subject to general regulatory
standards.  In FTC v. National Casualty Co., 357 U.S. 560 (1958), the FTC
sought to stop insurers in several states from engaging in unfair and
deceptive acts and practices.  The Court found that the FTC's authority to
regulate these practices had been withdrawn by McCarran-Ferguson in states
that were regulating the practices under their own laws, and rejected the
FTC's argument that it had regulatory authority where these state laws
were ineffective or general:

   Each State in question has enacted prohibitory legislation which
proscribes unfair insurance advertising and authorizes enforcement through
a scheme of administrative supervision.  [The FTC] does not argue that the
statutory provisions here under review were mere pretense.  Rather, it
urges that a general prohibition designed to guarantee certain standards
of conduct is too "inchoate" to be "regulation" until that prohibition has
been crystallized into "administrative elaboration of these standards and
application in individual cases."  However, . . . nothing in the language
of [the McCarran-Ferguson Act] or its legislative history supports the
distinctions drawn by [the FTC]."

   Id. at 564-65.[37]

   Since National Casualty, courts have generally found "state law" to exist
if there is a state regulatory scheme and minimal indicia of supervision. 
For example, the court in California League of Independent Ins. Producers
v. Aetna Cas. & Surety Co., 175 F. Supp. 857, 860 (N.D. Cal. 1959), found
that a state "regulates the business of insurance . . . when a State
statute generally proscribes . . . or permits or authorizes certain
conduct on the part of the insurance companies."  (Citation omitted.)[38]

   The availability of the antitrust exemption does not depend on the quality
of a state's regulatory scheme, or its effective enforcement.  Rather, a
court is only to determine "whether the State . . . has regulated the
business of . . . insurance, and not to determine whether this regulation
could be better and more effectively done."  Mitgang v. Western Title Ins.
Co., 1974-2 Trade Cas. (CCH) P 75,322 (N.D. Cal. 1974), citing Commander
Leasing Co. v. Transamerica Title Ins. Co., 477 F.2d 77, 84 (10th Cir.
1973); Ohio AFL-CIO v. Ins. Rating Bd., above, 451 F.2d at 1184 (nothing
in McCarran-Ferguson or its legislative history supports the thesis that
the Act does not apply when a state's scheme of regulation has not been
effectively enforced).  Moreover, at least one court has even found it
unnecessary to find a state statute expressly approving a particular
practice; "it is sufficient that a state regulatory scheme possess
jurisdiction over the challenged practice."  Feinstein v. Nettleship Co.
of Los Angeles, 714 F.2d 928, 933 (9th Cir. 1983), cert. denied, 466 U.S.
972 (1984).[39]

   Finally, the courts have ruled that insurers' "state law"-based immunity
extends only as far as the borders of the regulating state.  If an insurer
also acts in a non-regulating state, those activities remain subject to
antitrust scrutiny.  Thus in FTC v. Travelers Health Ass'n, 362 U.S. 293
(1960), a Nebraska insurer conducted business by mail with residents of
every state.  The FTC sought to prohibit the insurer from making certain
statements in its mailings, and the question was whether a Nebraska state
regulation was sufficient "state law" to bar the FTC from acting in states
other than Nebraska.  Noting that it had left this issue undecided in
National Casualty, the Supreme Court in Travelers Health Ass'n ruled that
Nebraska law was not the "protective legislation" of the other states
whose citizens were the targets of the advertising practices, and thus did
not bar the FTC from acting in these other states.  As the Court
explained, "[i]n our opinion the state regulation which Congress provided
should operate to displace this federal law means regulation by the State
in which the deception is practiced and has its impact."  Id. at
298-99.[40] 

B.        The Activity Cannot Constitute an Agreement to Boycott, Coerce, or
Intimidate, or an Act of Boycott, Coercion, or Intimidation

   The second prerequisite to insurance immunity from the federal antitrust
laws under McCarran-Ferguson is that the activity may not constitute an
"agreement to boycott, coerce or intimidate," or an "act of boycott,
coercion or intimidation."[41]  The "generic concept of boycott refers to
a method of pressuring a party with whom one has a dispute by withholding,
or enlisting others to withhold, patronage or services from the target." 
St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 541 (1978). 
McCarran-Ferguson's legislative history shows that the boycott exception
was seen as an "important safeguard against the danger that insurance
companies might take advantage of purely permissive state legislation to
establish monopolies and enter into restrictive agreements falling outside
the realm of state-supervised cooperative action."  Id. at 547.

   Before 1978, the lower courts disagreed as to whether the boycott
exception extended beyond targets in the insurance industry*such as
insurers and insurance agents*to include policyholders.  For example, in
Meicler v. Aetna Cas. and Surety Co., 372 F. Supp. 509 (S.D. Tex. 1974),
aff'd, 506 F.2d 732 (5th Cir. 1975), the court rejected the argument that
insurance companies were illegally refusing to issue policyholders a
policy unless they submitted to a reclassification of their risk.  The
court found that the boycott exception was designed primarily to deal with
conspiracies of insurers or agents to boycott other insurers or
agents.[42]  By contrast, the court in General Glass Co. v. Globe Glass
and Trim Co., 1978-1 Trade Cas. (CCH) P 61,998 (N.D. Ill. 1978), read the
exception more narrowly, potentially covering third-party provider glass
replacement shops as boycott targets.[43] 

   The Supreme Court resolved this question in its 1978 decision in St. Paul
Fire & Marine Ins. Co. v. Barry, above.  In Barry, physician-policyholders
and their patients alleged that three of four firms who wrote medical
malpractice insurance in their state had engaged in a prohibited boycott,
by refusing to deal with policyholders of the fourth insurer as a way to
compel them to submit to that insurer's preferred ground rules.  The Court
noted that when Congress used the term "boycott" in McCarran-Ferguson, it
evoked the meaning of the same term as used in Sherman Act decisions.[44] 
The Court reviewed the legislative history of McCarran-Ferguson and found
that if Congress had intended to limit the scope of the exception to
boycotts of competing insurance companies or agents, and to preclude all
Sherman Act protection for policyholders, it would have said so
explicitly.  Thus the term boycott was "not limited to concerted activity
against insurance companies or agents or, more generally, against
competitors of members of the boycotting group," but extended to customers
of some or all of those engaged in the boycott.  Id. at 552.  Applying
that statutory interpretation to the facts, the Barry Court concluded
there was a prohibited boycott.

   Noting that boycotts are not a "'unitary phenomenon,'" id. at 543, the
Barry Court had offered a variety of definitions for this term.  Fifteen
years later, however, the Supreme Court narrowed the concept of a
prohibited boycott in Hartford Fire Ins. Co. v. California, 509 U.S. 764
(1993).  In that case, the Court ruled there might be a boycott where
primary insurers, reinsurers, and trade associations conspired to force
certain other primary insurers to change the terms of their standard
domestic commercial generally liability policies to conform with policies
they wanted to sell.  The Court explained that a boycott exists where, in
order to coerce a target into certain terms on one transaction, parties
refuse to engage in a second, unrelated or collateral, transaction with
the target.  "It is this expansion of the refusal to deal beyond the
targeted transaction that gives great coercive force to a commercial
boycott:  unrelated transactions are used as leverage to achieve the terms
desired."  Id. at 802-03. 

   Applying this test in two cases decided since Hartford, the Eleventh
Circuit has found no boycott.  In Uniforce Temporary Personnel, Inc. v.
National Council on Compensation Ins., Inc., 87 F.3d 1296 (11th Cir.
1996), temporary-employment firms alleged that a conspiracy of workers
compensation insurers, a rating organization, and a reinsurance pool acted
to "boycott, coerce, and intimidate" them in order to deprive the industry
of access to the voluntary market for such insurance.  Citing Hartford's
boycott definition, the Uniforce court found the primary transaction to be
the purchase of workers' compensation insurance, and there was no
allegation that the insurers refused to deal with the firms in a
collateral transaction, such as the purchase of health insurance, in order
to coerce the terms of its purchase of workers' compensation insurance. 
Similarly, in Slagle v. ITT Hartford, 102 F.3d 494 (11th Cir. 1996), a
Florida resident argued that insurers conspired to foreclose the windstorm
insurance market by boycotting and refusing to deal with customers in
certain Florida counties.  Relying on Hartford's boycott definition, the
Slagle court concluded that the conditions of the insurers' refusal to
deal related directly to the terms of the purchase of windstorm insurance,
the primary transaction, and thus again, found there was no prohibited
boycott.

        A 

        C.        The Activity Must Constitute the "Business of Insurance"[45]

   The final prerequisite to antitrust protection under McCarran-Ferguson is
that the
activity must constitute the "business of insurance"*another undefined
term in the Act.  Before 1969, courts construed the term to encompass
"virtually all activities engaged in by insurance companies."[46]  When an
action was brought against an insurer, courts simply inquired, under the
Act's other two prerequisites, whether the state "had entered the field"
and whether the activity constituted an act of boycott, coercion, or
intimidation.[47]  The courts apparently assumed the challenged activities
satisfied the third prerequisite, "the business of insurance."[48]  After
1969, as discussed below, the courts turned their attention to this final
prong.

   1.         The Supreme Court's Development of the "Business of Insurance"
Test

   In 1969, the Supreme Court narrowed the "business of insurance" provision
by distinguishing the "business of insurance" from the "business of
insurance companies" and clarifying that McCarran-Ferguson exempts only
the former.  In SEC v. National Securities, Inc., 393 U.S. 453, 459-60
(1969), the Court explained:

   The statute did not purport to make the States supreme in regulating all
the activities of insurance companies; its language refers not to the
persons or companies who are subject to state regulation, but to laws
"regulating the business of insurance."  Insurance companies may do many
things which are subject to paramount federal regulation; only when they
are engaged in the "business of insurance" does the statute apply. 

   (Emphasis in original.)

   After the National Securities decision, therefore, courts began to focus
on activities that were unique to the insurance industry.  Over time, and
relying on several of its prior decisions, the Supreme Court ultimately
developed three factors to be considered in deciding whether a particular
activity constitutes the "business of insurance."  As most recently
articulated by the Supreme Court, these factors are:

   [F]irst, 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.

   Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 at 129 (1982) (emphasis
in original).  These factors evolved in part from Group Life & Health Ins.
Co. v. Royal Drug Co., 440 U.S. 205 (1979) ("Royal Drug"), which built on
principles the Supreme Court had previously set forth in two of its "first
clause" decisions, SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65
(1959),[49] and SEC v. National Securities, Inc., above.  The basic
parameters of the three individual business-of-insurance factors are set
forth below, followed by a detailed discussion of how the courts have
applied them. 

   Factor #1:       The practice has the effect of transferring or spreading
a policyholder's risk

   Variable Annuity Life was one of the earliest Supreme Court decisions to
emphasize the core idea of risk-spreading in defining the "business of
insurance."  In that case, the SEC sought to enjoin several insurers from
offering their annuity contracts to the public without registering them
under the Securities Act of 1933 and complying with the Investment Company
Act of 1940.  The insurers argued that because the contracts were
regulated by state insurance commissioners, McCarran-Ferguson exempted
them from the federal securities laws.  The Court rejected this argument,
reasoning that, absent some guarantee of fixed income, variable annuity
contracts placed all investment risk on the annuitant and none on the
issuing company.  By contrast, the Court found that insurance involves
some risk-taking by the insurer.  The Court concluded:

   The companies that issue these annuities take the risk of failure.  But
they guarantee nothing to the annuitant except an interest in a portfolio
of common stocks or other equities*an interest that has a ceiling but no
floor.  There is no true underwriting of risks, the one earmark of
insurance as it has commonly been conceived of in popular understanding
and usage.

   Id. at 71-73.

   In its subsequent McCarran-Ferguson decisions, the Supreme Court has
continued to underscore the indispensability of risk-spreading as a core
characteristic unique to insurance.  See, e.g., Union Labor Life Ins. Co.
v. Pireno, above, 458 U.S. 119 at 127, citing Group Life & Health Ins. Co.
v. Royal Drug Co., above, 440 U.S. 205 at 211-12.  As discussed below, the
lower courts have applied this factor in a number of different contexts.

   Factor #2:       The practice is an integral part of the policy
relationship between insurer and insured

   The meaning of the second business-of-insurance factor is illustrated by
SEC v. National Securities, Inc., above, 393 U.S. 453,  which raised
questions about the SEC's power to regulate activities of insurance
companies and persons engaged in the insurance business.  In National
Securities, an insurer allegedly engaged in a fraudulent scheme centering
on a merger of insurance companies, and the SEC sought to invalidate the
merger*which shareholders and the state insurance director had
approved*under the Securities and Exchange Act of 1934.  The insurers
argued that McCarran-Ferguson exempted their actions from the federal
securities laws, because the state director of insurance found the merger
was not inequitable to the stockholders and not otherwise contrary to law,
in accordance with the state insurance laws.  If the securities laws
applied, the insurers asserted, they would improperly preempt the state
insurance laws.

   The question before the Supreme Court was whether the state statute was a
law enacted for the purpose of regulating the "business of insurance"
within the meaning of McCarran-Ferguson, and the Court ruled it was not. 
As the Court explained, a statute aimed at protecting the interests of
insurance company stockholders did not come "within the sweep of the
McCarran-Ferguson Act.  Such a statute is not a state attempt to regulate
*the business of insurance,' as that phrase was used in the Act."  Id. at
457.  The Court continued:

   Congress was concerned with the type of state regulation that centers
around the contract of insurance, the transaction which Paul v. Virginia
held was not "commerce."  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.  Statutes aimed at protecting or regulating
this relationship, directly or indirectly, are laws regulating the
"business of insurance."

   Id. at 460.

   Factor #3:       The practice is limited to entities within the insurance
industry

   The third business-of-insurance factor was developed by the Supreme Court
in its decision in Royal Drug.  In Royal Drug, Group Life & Health, known
as Blue Shield of Texas, offered health insurance policies that included a
prescription drug benefit.  Separately, Blue Shield offered to enter into
pharmacy agreements with every pharmacy in Texas, and had such agreements
with many of them.  If the selected pharmacy had an agreement, the insured
would pay a fixed price for every drug and Blue Shield would pay the
remaining cost to the pharmacy.  If the selected pharmacy did not have an
agreement, the insured would pay the full price charged by the pharmacy
and obtain reimbursement from Blue Shield for 75 percent of the
difference.  Independent pharmacists who declined to enter into these
agreements brought an antitrust action; the question before the Supreme
Court was whether the agreements were part of the "business of
insurance."  The Court applied the two factors it had identified
previously and created a third.

   First, the Court said that its decision in Variable Annuity Life
recognized the significance of underwriting or spreading of risk as an
"indispensable characteristic of insurance."[50]  The Court distinguished
between Blue Shield's obligations under its insurance policies*which
insure against the risk that policyholders will be unable to pay for
prescription drugs during the coverage period*and Blue Shield's pharmacy
agreements*which serve only to minimize its costs in fulfilling its
underwriting obligations.   The Court found that the agreements were
merely arrangements for Blue Shield to purchase goods and services, and
held that, while such cost-savings arrangements may be a good business
practice and may inure to the benefit of policyholders in the form of
lower premiums, they were not the business of insurance. 

   Second, citing its decision in SEC v. National Securities, the Court noted
that another "commonly understood aspect of the business of insurance
relates to the contract between the insurer and the insured."[51]  The
Court found that the pharmacy agreements were not between insurer and
insured, but were separate contractual arrangements between Blue Shield
and pharmacies that sold and distributed goods and services other than
insurance.  At most, the Court declared, the agreements resulted in cost
savings to Blue Shield that might be reflected in lower premiums if they
were passed on to policyholders.  Referring to National Securities'
statement that activities closely related to an insurer's status as a
reliable insurer might be placed in the same class, the Court explained,
"in that sense, every business decision made by an insurance company has
some impact on its reliability, its ratemaking, and its status as a
reliable insurer."[52]  To take such a broad interpretation would, the
Court concluded, bring almost every business decision of an insurer into
the scope of the "business of insurance," a result plainly contrary to the
statutory language of the McCarran-Ferguson Act.

   Finally, the Royal Drug Court introduced a third factor to the analysis. 
After a lengthy review of McCarran-Ferguson's legislative history, the
Court stated that one of Congress's chief concerns was that insurance
companies be allowed to continue to engage in "intra-industry" cooperative
or concerted activities which would otherwise be subject to the antitrust
laws, such as those carried out for statistical and ratemaking
purposes.[53]  The Court found, however, that there was not the "slightest
suggestion" Congress contemplated that arrangements involving the mass
purchase of goods and services from entities outside the insurance
industry, as was the case in Royal Drug, were the business of
insurance.[54]  As the Court concluded:

   If agreements between an insurer and retail pharmacists are the "business
of insurance" because they reduce the insurer's costs, then so are all
other agreements insurers may make to keep their costs under control . . .
.  Such agreements would be exempt from the antitrust laws if Congress had
extended the coverage of the McCarran-Ferguson Act to the "business of
insurance companies."  But that is precisely what Congress did not do.

   Id. at 232-33.

   In sum, in cases decided prior to Royal Drug, "'an expansive perception of
the *business of insurance' requirement prevailed in a majority of the
circuit courts of appeals.'"[55]  Although the influence of Royal Drug can
be seen most clearly in cases involving relationships between insurers and
non-insurance entities, as discussed below, its impact is evident in
almost all subsequent cases where courts have considered whether an
activity is the "business of insurance."

   The Royal Drug criteria were reinforced and refined three years later in
Union Labor Life Ins. Co. v. Pireno, above.  In Pireno, some of an
insurer's health insurance policies limited the company's liability for
chiropractic treatments to reasonable charges for necessary medical care
and services.  To determine what charges were reasonable and what care was
necessary, the insurer consulted with the state chiropractic association's
peer review committee.  Because the committee occasionally found
treatments unnecessary or charges unreasonable, one chiropractor argued
that the consultation arrangement enabled the insurer to fix the prices
that chiropractors could charge.  Citing Royal Drug, the Supreme Court
found that this activity did not constitute the business of insurance:

   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 S 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.  None of these criteria
is necessarily determinative in itself . . . .

   Pireno, 458 U.S. at 129 (emphasis in original). 

   The Pireno Court elaborated on Royal Drug's third criterion (which in fact
had not been made explicit in that decision).  The Pireno Court stated
that challenged practices were not necessarily disqualified from the
McCarran-Ferguson exemption solely because they involved parties outside
the insurance industry.  The involvement of such parties, however, even if
not dispositive, was part of the inquiry mandated by Royal Drug.  "As the
Court noted [in Royal Drug], S 2(b) was intended primarily to protect
*intra-industry cooperation' in the underwriting of risks."  Pireno, 458
U.S. at 133 (emphasis in original).  The Pireno Court continued:

   Arrangements between insurance companies and parties outside the insurance
industry can hardly be said to lie at the center of that legislative
concern.  More importantly, such arrangements may prove contrary to the
spirit as well as the letter of S 2(b), because they have the potential to
restrain competition in noninsurance markets.  Indeed, the peer review
practices challenged in the present cases assertedly realize precisely
this potential:  Respondent's claim is that the practices restrain
competition in a provider market*the market for chiropractic
services*rather than in an insurance market.

   Id.

   In Hartford Fire Ins. Co. v. California, above, 509 U.S. 764, the Supreme
Court expanded on Pireno; the issue according to Hartford was whether "a
particular practice" is part of the business of insurance exempted from
the antitrust laws.  As the Hartford Court explained:

   While "business" may mean "[a] commercial or industrial establishment or
enterprise," . . . the definite article before "business" in S 2(b) shows
that the word is not used in that sense, the phrase "the business of
insurance" obviously not being meant to refer to a single entity.  Rather,
"business" as used in S 2(b) is most naturally read to refer to
"[m]ercantile transactions; buying and selling; [and] traffic." . . .

   The cases confirm that "the business of insurance" should be read to
single out one activity from others, not to distinguish one entity from
another.

   Id.  at 781.

   2.         Application of the "Business of Insurance" Test As It Evolved
Over Time

   The remainder of this opinion discusses the courts' application of the
McCarran-Ferguson Act's test, as it evolved over time, for deciding when
an activity constitutes the "business of insurance" exempt from federal
antitrust liability (provided the activity is also "regulated by State
law" and does not constitute an act of boycott, coercion, or
intimidation).  For ease of reference, the cases are discussed according
to the relationships at issue:  (a) relationships among insurers; (b)
relationships between insurers and agents; (c) relationships between
insurers and insureds; and

   (d) relationships between insurers and other third parties.  The results
of these cases are all highly fact-specific, and thus generalities about
them are necessarily imprecise and must be applied with caution.[56]  
Further, because the legal tests under the Act have evolved over time, it
is unlikely that all of the earlier rulings would survive today and that a
court would rule on the same facts in the same way.  Greater reliance
therefore should be placed on the most recent cases.  With these caveats,
the following general conclusions can be drawn:

   .A A A A A A A  Courts tend to find that activities among insurers
involving cooperative ratemaking and related functions constitute the
business of insurance.  Insurers may enter into agreements or arrangements
that do not involve such matters, but the more these activities extend to
functions that are not unique to the insurance business, or whose primary
impact is not on the insurance market, the less likely courts are to apply
the exemption.

   .A A A A A A A  Courts tend to find that activities between insurers and
agents involving the terms of their contracts or the termination of their
relationships constitute the business of insurance, provided the
activities are closely linked to the insurer/insured relationship and
involve the agent's insurance dealings.

   .A A A A A A A  Courts tend to find that activities involving the
relationship between the insurer and insured, such as disputes over the
tying of products and the terms and conditions of the policy, constitute
the business of insurance.  If the activity does not involve
risk-spreading, however, or if its primary impact on competition is not on
the insurance industry, courts are less likely to apply the exemption.

   .A A A A A A A  Courts have not found activities involving arrangements
between insurers and third-party providers of non-insurance goods and
services, such as medical practitioners and hospitals, to constitute the
business of insurance at least since the late 1970s, when the current
"business of insurance" test was formulated.

               a.         Relationships Among Insurers

   As noted above, in Royal Drug, the Supreme Court concluded that,
"[b]ecause . . . it is very difficult to underwrite risks in an informed
and responsible way without intra-industry cooperation, the primary
concern of both representatives of the insurance industry and the Congress
was that cooperative ratemaking efforts be exempt from the antitrust
laws."  Royal Drug, 440 U.S. at 221; see also SEC v. Nat'l Securities, 393
U.S. at 460 ("[c]ertainly the fixing of rates is part of this business [of
insurance].").  The concern for informed ratemaking was most acute for
smaller enterprises and insurers.  Accordingly, as detailed below, courts
tend to find that activities among insurers involving cooperative
ratemaking and related functions constitute the business of insurance. 

   (i)        Ratemaking and Related Functions

   One early case concluded that insurers acting in concert to agree on the
rate of agent commissions was the business of insurance; "[i]t is common
knowledge that the rate of commission paid to agents is a vital factor in
the ratemaking structure." California League of Indep. Ins. Prods. v.
Aetna Cas. & Sur. Co., 175 F. Supp. 857, 860 (N.D. Cal. 1959).[57]  Courts
have also found that the business of insurance encompasses concerted
actions among insurers to set market prices for life insurance, Steingart
v. Equitable Life Assurance Soc'y of the United States, 366 F. Supp. 790
(S.D.N.Y. 1973); concerted actions among auto insurers to reclassify their
insureds' risks, Meicler v. Aetna Cas. and Sur. Co., 372 F. Supp. 509
(S.D. Tex. 1974), aff'd, 506 F.2d 732 (5th Cir. 1975); and the increase of
auto insurance rates by a state insurance rating board and its members
without state approval or regulation, Ohio AFL-CIO v. Ins. Rating Bd., 451
F.2d 1178 (6th Cir. 1971), cert. denied, 409 U.S. 917 (1972).

   More recently, the fixing of rates for workers' compensation insurance was
found to be the business of insurance.  In In re Workers' Compensation
Ins. Antitrust Litigation, 867 F.2d 1552 (8th Cir.), cert. denied, 492
U.S. 920 (1989), employers complained that underwriters and a rating
association agreed not to charge less than the maximum rate set by the
insurance commissioner.  The Eighth Circuit found such rate-fixing to be
integral to the price charged to policyholders and to their contractual
relationship; "[a]lthough a price fixing agreement may maximize profit, it
is axiomatic that the fixing of rates is central to transferring and
spreading the insurance risk."  Id. at 1556.[58]  Similarly, in the
context of medical malpractice insurance, the Third Circuit found that
joint rate-setting and risk classification through a rating association
were the business of insurance.  See Owens v. Aetna Life & Cas. Co., 654
F.2d 218 (3d Cir.), cert. denied, 454 U.S. 1092 (1981).[59]

   A variation on the ratemaking-as-business of insurance cases is Proctor v.
State Farm Mutual Automobile Ins. Co., 675 F.2d 308 (D.C. Cir.), cert.
denied, 459 U.S. 839 (1982), a case influenced by Royal Drug.  In Proctor,
auto repair shops alleged that insurers improperly agreed to pay damage
claims on the basis of an agreed-upon hourly labor rate.  The D.C. Circuit
rejected this argument, relying on Royal Drug's references to the
intra-industry concerns that formed a basis for the McCarran-Ferguson
Act.  The court thought that Congress intended the exemption to cover data
sharing on the rate of past losses, as well as information on the
probability that particular losses would occur.  Insurers also had to
factor into their premiums the magnitude of their payment if the loss
occurred, the court reasoned, and the magnitude of the loss included the
cost of repairing the car.  Because the court did not believe that
Congress intended to allow concerted action to determine the rate of past
losses and probability of future losses, but not allow similar combined
efforts to calculate the expected magnitude of loss*the current cost of
repair*it held the latter to be covered as well.  The court recognized
that not everything affecting premium levels constitutes the business of
insurance, but stressed that the cost of repairs was directly related to
the calculation of premiums and virtually a part of the ratemaking
process.[60] 

   In the most recent reported case on this issue, Gilchrist v. State Farm
Mutual Automobile Ins. Co., 390 F.3d 1327  (11th Cir.  2004),
policyholders alleged that their insurers conspired to limit coverage for
certain auto body repairs to the cost of less expensive and possibly lower
quality parts.  Although the policyholders characterized their challenge
as an attack on insurers' cost-cutting arrangements with third parties,
the court found that the allegations actually attacked the insurers'
premium-setting practices and the performance of their contractual
obligations to policyholders*matters involving the "heart of the
relationship" between insurer and insured.  The court found, therefore,
the activities to be exempted. 

   A unique set of facts was presented in Grant v. Erie Ins. Exchange, 542 F.
Supp. 457 (M.D. Pa. 1982), aff'd, 716 F. 2d 890 (3d Cir.), cert. denied,
464 U.S. 938 (1983).  An issue of statutory interpretation arose as to
whether a deceased victim could receive work loss benefits under a state
no-fault motor vehicle insurance act; the insurers had allegedly refused
to pay such benefits and consulted with each other in making their
coverage determinations.  The representatives of deceased victims
challenged these activities under the antitrust laws, but the court ruled
they were exempt under McCarran-Ferguson.  The court found no distinction
between, on the one hand, cooperating to collect statistical data and set
rates and, on the other hand, joint undertakings to interpret the
existence and extent of coverage.  The court also found the insurers'
meetings to discuss common litigation strategy and other combined efforts
to avoid paying benefits to deceased victims to be the business of
insurance.  "Since these activities are necessary to carry out any
agreement concerning the extent of insurance coverage and type of policy,
they fall within the language of the

   statute. . . ."  542 F. Supp. at 463.

   Another court has found that collective action among insurers and
reinsurers to reduce their exposure under commercial general liability
policies by changing standard policy language, and avoiding the
underwriting or reinsuring of risks written on disfavored policy terms, to
be the business of insurance.  See In re Insurance Antitrust Litigation,
723 F. Supp. 464 (N.D. Cal. 1989), rev'd in part and remanded, 938 F. 2d
919 (9th Cir. 1991).  The court concluded that both reinsurance and
retrocessional insurance (insurance for reinsurers) were the business of
insurance.[61]

   The area of title insurance has spawned a number of "business of
insurance" cases whose holdings have shifted since Royal Drug and Pireno. 
In Commander Leasing Co. v. Transamerica Title Ins. Co., 477 F.2d 77 (10th
Cir. 1973), decided before these cases, purchasers of title insurance
alleged that the title insurers had conspired to obtain a monopoly. 
Although part of the title insurance fee was a service charge for
procuring and examining evidence of title, not for the premium, the Tenth
Circuit held that title insurance was insurance for purposes of
McCarran-Ferguson.  Relying on National Securities, the court then found
that examination of evidence of title preparatory to issuance of a title
insurance policy was an activity related so closely to the insurers'
status as reliable insurers that it constituted the business of
insurance.  Id. at 83; see also Schwartz v. Commonwealth Land Title Ins.
Co., 374 F. Supp. 564 (E.D. Pa. 1974) (conspiracy among insurers and
rating association to impose uniform seller charges for title insurance is
the business of insurance).[62]

   The result was different, however, in United States v. Title Ins. Rating
Bureau of Arizona, Inc., 700 F.2d 1247 (9th Cir. 1983), cert. denied, 467
U.S. 1240 (1984), decided after Royal Drug and Pireno.  In Arizona, title
insurers relied on the Commander and Schwartz decisions to argue that
their provision of escrow services was the business of insurance.  The
Ninth Circuit found neither case persuasive because both pre-dated Royal
Drug.  Applying the Royal Drug/Pireno criteria, the Arizona court found
the services were not the business of insurance because the escrow process
did not spread or underwrite risk.  The court noted also that non-insurers
performed escrow services, so "immunizing price-setting by insurance
companies who perform escrow services would distort competition by those
who are not insurance companies."  Id. at 1252.[63]

   (ii)       Other Activities Among Insurers

   Courts are less inclined to find that insurer practices not involving
cooperative ratemaking and related activities constitute the business of
insurance.  The merger of two insurers was held not to be the business of
insurance in American General Ins. Co. v. FTC, 359 F. Supp. 887 (S.D. Tex.
1973), aff'd, 496 F.2d 197 (5th Cir. 1974), for example.  The court
explained that the relationships there were between individual companies
and between companies seeking to merge and the industry as a whole, and
that the competitive aspects of the mergers were "far removed" from the
relationship between insurer and insured contemplated by National
Securities.[64]

   Other types of concerted insurer activity held not to be the business of
insurance involve actions designed to harm another insurer's business. 
DeVoto v. Pacific Fidelity Life Ins. Co., 354 F. Supp. 874 (N.D. Cal.
1973), rev'd on other grounds, 516 F.2d 1 (9th Cir. 1975), for example,
involved two insurers vying for the customer list of a mortgage lender for
the sale of mortgage protection insurance.  The unsuccessful insurer
alleged that its successful competitor and the lender had violated the
Sherman Act, and the competitor and lender responded that their activities
were protected under McCarran-Ferguson.  The court found that the activity
was peripheral to the insurance business and thus immunity did not
attach.  In a post-Royal Drug decision, Escrow Disbursement Ins. Agency,
Inc. v. American Title and Ins. Co., 550 F. Supp. 1192 (S.D. Fl. 1982), an
insurance agency marketed a policy to cover the gap in title insurance
coverage between the time of title search and recording of the mortgage or
deed of conveyance.  The agency alleged that title insurers conspired to
cut off this business by sending letters to customers that spread false
information about the firm and its policy.  Applying the Pireno criteria,
the court ruled that sending such letters might not constitute the
business of insurance.  It reasoned that the letters did not spread risk;
that it was unclear whether the letters related to the contractual
relationship between insurer and insured; and that it was unclear whether
the practice of issuing these letters was limited to the title insurance
industry.   

   Antitrust immunity under McCarran-Ferguson was also denied in the context
of agreements between two prepaid healthcare insurers, in Hahn v. Oregon
Physicians Service, 689 F.2d 840 (9th Cir. 1982), cert. denied, 462 U.S.
1133 (1983).  In Hahn, podiatrists alleged that the insurers violated the
antitrust laws by agreeing to require insureds to obtain certain podiatric
services only from medical doctors; refusing to reimburse insureds for
treatment by a podiatrist unless referred by a medical doctor; and
refusing to permit podiatrists to become members of their healthcare
associations. Noting that Royal Drug limited the scope of the McCarran
exemption, the Hahn court found no evidence of bona fide risk-related
reasons for an insurer to distinguish between the services of medical
doctors and podiatrists, "much less that such a distinction is at the core
of what is commonly understood to be the *business of insurance.'"  Id. at
843.  The court analogized the facts to those in Pireno and concluded that
arrangements whose primary impact was on competition in markets other than
that for insurance, as was the case both in Pireno and here, do not fall
within the exemption.

   Finally, courts have denied antitrust immunity in cases involving
agreements between insurers to allocate markets.  In Garot Anderson
Marketing, Inc. v. Blue Cross and Blue Shield United of Wisconsin, 772 F.
Supp. 1054 (N.D.Ill 1990), insurance agents alleged that, in terminating a
health insurance plan, the insurers conspired to monopolize group health
insurance in a certain geographic area.  The court found the insurers'
conduct did not constitute the business of insurance, because, while it
involved two insurers, there was no shifting of risk between insurer and
insured (only between two insurers), and the termination of the plan was
not an integral part of the policy relationship between the subscribers
and either insurer.  Likewise, in State of Maryland v. Blue Cross and Blue
Shield Ass'n, 620 F. Supp. 907 (D.Md. 1985), Maryland alleged that
insurers had violated the antitrust laws by agreeing to allocate the
insurance market in the state.  In finding that there were material
factual issues on the question whether the market allocation was "the
business of insurance," and thus that summary judgment was inappropriate,
the court declared that, to meet the first Pireno requirement, the
insurers had to show that exclusive geographic territories directly
facilitated risk-spreading.[65]  

b.         Relationships Between Insurers and Agents

   Courts tend to exempt activities that involve relationships between
insurers and agents involving the terms of their contracts and the
termination of their relationships, provided the activity is closely
linked to the insurer/insured relationship and involves the agent's
insurance dealings as such.  As the Tenth Circuit explained in Commander
Leasing Co. v. Trans-America Title Ins. Co., above, 477 F.2d at 86, "[i]n
applying the McCarran Act, we see no reason to distinguish between a
principal insurer and its agent.  It would appear to us that an insurance
agent, as well as an insurance company, is engaged in the *business of
insurance.'"  Nevertheless, the Supreme Court has left unresolved whether
"transactions between an insurer and its agents, including independent
agents, are *the business of insurance.'"  See Royal Drug, 440 U.S. at 224
n. 32. 

   (i)        Terms of Agency Contracts and Termination of Relationships

   Insurer-agent contracts that require exclusive representation of the named
insurers have been found to be the business of insurance.  In Black v.
Nationwide Mutual Ins. Co., 429 F. Supp. 458, 463 (W.D. Pa. 1977), aff'd,
571 F.2d 571 (3rd Cir. 1978), the court found the agent's relationship
with the insurers "so closely connected to the *core of the insurance
business', the *relationship between insurer and insured, the type of
policy which could be issued, its reliability, interpretation and
enforcement' as to come within the scope of the *business of insurance'"
as defined in National Securities.[66]  In Thompson v. New York Life Ins.
Co., 644 F.2d 439 (5th Cir. 1981), a separate and optional agency contract
provision that had additional benefits, but precluded an agent from
engaging in another business for remuneration or profit without the
insurer's consent, was found to constitute the business of insurance. 
While the court noted that "not all provisions that could be placed in an
agency contract, nor all dealings between insurance companies and their
agents are exempted by the McCarran-Ferguson Act," id. at 444, the court
concluded that the restrictions did not force the agent to engage in
activities unrelated to insurance*they were incentives to encourage him to
focus his skills on selling insurance*and found this distinction
"significant and dispositive."  Id.[67]

   The termination of an agency relationship was at issue in Hopping v.
Standard Life Ins. Co. v.  Blue Cross, 1984-1 Trade Cas. (CCH) P 65,814
(N.D. Miss. 1983).  A life insurer teamed with a healthcare insurer to
sell their policies as a package or independently.  The life insurer
informed one of its pre-existing agents that he could work for the firm on
a contract basis if he agreed not to replace the healthcare policy part of
the packages with competing policies.  The agent would not accept the
limitation and was terminated.  The court found this transaction to be
between an insurer and its agent, resulting from the relationship between
this insurer and the second insurer.  The court ruled that the proper
focus in determining whether such transactions were the business of
insurance was on the impact of the challenged activity or restriction on
the insurer/insured relationship.  The appropriate test to be applied was
whether the agent's participation in the scheme concerned his insurance
dealings as such.  The Hopping court stated that because transactions
between an insurer and its agents related to the insurer's methods of
inducing people to become policyholders, they pertained to the
policyholder relationship and were an integral part of the business of
insurance.   

   The outcome was the opposite in Zelson v. Phoenix Mutual Life Ins. Co.,
549 F.2d 62 (8th Cir. 1977).  In Zelson, an agent sold and serviced both
insurance policies and securities, and the insurer terminated its agency
contract after the agent refused to sell securities through the firm's
securities affiliate.  The court focused on the fact that the agent acted
as both an insurance agent and a securities broker, and that the
activities involved the supervisory control of an insurance agent by its
principal, but noted that the activity "'impinges upon the competition
within the securities industry, not upon the competitive forces within the
insurance industry.'"  Id. at 66.  The court concluded that, in such
cases, whether the agent's participation in the activity concerned his
insurance dealings was a strong indication whether the activity had a
bearing on the core relationship between insurer and insured.  Because the
court found that the substance of the activity in Zelson was a restraint
on trading in securities, not a restraint on insurance trade, it held the
activities were not the business of insurance.

   (ii)       Other Activities

   Several cases have found that activities interfering with the ability to
conduct insurance business are not the business of insurance.  American
Family Life Assurance Co. v. Planned Marketing Assocs., Inc., 389 F. Supp.
1141 (E.D. Va. 1974), for example, involved two cancer insurers.  One
insurer alleged that the second induced its agents to stop selling its
insurance in favor of the second insurer's policies, to use its trade
secrets and customer lists, and to switch its policyholders to policies
issued by the second insurer.  The court concluded that these facts did
not involve the business of insurance.  The activities did not bear on the
unique relationship between an insurer and the insured; "the activities
complained of could easily be employed by one stock brokerage firm against
another as by one insurance company against another."[68]

   In a similar case, Allied Financial Services, Inc. v. Foremost Ins. Co.,
418 F. Supp. 157 (D. Neb. 1976), an insurer's general agent employed
sub-agents to sell mobile home physical damage insurance.  The insurer was
alleged to have breached the agency contract by "pirating" the sub-agents
and circumventing the general agency.  The court declined to extend the
McCarran exemption to "a dispute which should have little or no effect on
the interests of policyholders and which primarily involves an agency
agreement, not the *contract of insurance.'"  Id. at 161.  The court found
that the alleged interference with contract relations and other
anticompetitive behavior involve insurance only peripherally.[69] 

   An allegation that insurers were conspiring to exclude an agent from the
marketplace was not shielded from antitrust scrutiny in King v. G.D. Van
Wagenen Co., 1987-1 Trade Cas. (CCH) P 67,534 (D. Minn. 1987).  The court
found the underlying activity*the marketing of a collateral protection
program and a "payment shaver" program*had insurance features as ancillary
elements, but application of the Royal Drug/Pireno factors showed they
were not the business of insurance.  The court rejected the argument that
the determining factor should be the existence of a relationship between
agent and insurer, finding that agent-insurer disputes were not per se
within the exemption.

   Finally, in a more recent case involving an insurer's limitations on
agents, Bogan v. Northwestern Mutual Life Ins. Co., 953 F. Supp. 532
(S.D.N.Y. 1997), Bogan, the agent, contested his termination as a district
agent for an insurer that marketed its products through a tiered agency
system.  General agents were assigned territories and contracted with
district agents and special agents, who in turn contracted with sales
agents.  Bogan claimed this system prevented district agents terminated
for cause from working for another general agent.  Applying Pireno, the
court found the restrictions were not the business of insurance, because
the system did not further McCarran-Ferguson's purpose of allowing
insurers to coordinate their policy structures to facilitate
risk-spreading. 

        c.A A A A A A A A A A A A A A A A A  Relationships Between Insurers and
        Insureds

   As noted above, the "core" of the business of insurance is "[t]he
relationship between insurer and insured, the type of policy which could
be issued, its reliability, interpretation, and enforcement."  SEC v.
National Securities, Inc., above, 393 U.S. at 461.  Courts therefore
generally exempt from antitrust liability activities that involve the
insurer-insured relationship, including the tying of products and the
terms and conditions of the policy.  If the activity does not involve
risk-spreading, however, or if its primary impact on competition is not in
the insurance industry, courts are less likely to apply the exemption.

   (i)        Tying of Products

   Royal Drug's most obvious influence is seen in a series of cases involving
the tying of insurance to a loan product.  The pre-Royal Drug case of
Addrisi v. Equitable Life Assurance Society of the United States, 503 F.2d
725 (9th Cir. 1974), cert. denied, 420 U.S. 929 (1975), for example,
involved an insurer who made loans for the purpose of financing
residential real property sites.  The insurer's agent also acted as the
loan agent and, as a "tie-in," the prospective borrower was required to
purchase a cash value life insurance policy.  In finding the tie-in
practice to be the business of insurance, the Ninth Circuit concluded that
the activity concerned the "relationship between [the insurer] and its
insureds and the issuance of life policies."  Id. at 728.  Similarly, in
McIlhenny v. American Title Ins. Co., 418 F. Supp. 364 (E.D. Pa 1976),
title insurers required purchasers of newly constructed homes to buy
mechanic's lien insurance as part of their services.  The court stated
that "[m]atters of rate, extent of coverage, and policy provisions go to
the very heart of the relationship between the insurance company and the
policyholder and therefore clearly fall within the National Securities
definition of the business of insurance."  Id. at 369.[70]

   After Royal Drug, the courts addressed similar facts differently.  In FTC
v. Dixie Finance Co., 695 F.2d 926 (5th Cir.), cert. denied, 461 U.S. 928
(1983), the FTC launched an investigation into whether finance companies
and auto dealerships were misrepresenting to consumers that they could
only obtain credit if they purchased credit insurance.  The firms argued
that their activity was protected from antitrust review because they sold
insurance as an incident of their lending activities.  The Fifth Circuit
found that under Royal Drug, the focus must be on the particular activity
under attack*here, not the sale of the insurance policies but the possible
misrepresentation that the purchase of credit insurance is a prerequisite
to the extension of credit.  Because the lending activities were separate
from any insurance activities the firm might engage in, the court
concluded that the relationship was not one between insurer and insured
and thus was not protected.  The court added, "the business of insurance
intrudes upon the business of financing only at the point at which the
borrower or his lender deal with the insurer regarding the particulars of
the policy being purchased."  Id. at 930.[71] 

   Another tying case preceding Royal Drug is Mathis v. Automobile Club
Inter-Ins. Exchange, 410 F. Supp. 1037 (W.D. Mo. 1976).  Mathis involved
an auto insurer that required its policyholders to join a certain
automobile club, on the theory that club members were better drivers than
the general public.  Relying on National Securities, the court found this
arrangement to constitute the business of insurance.  Likewise, in Anglin
v. Blue Shield of Virginia, 693 F.2d 315 (4th Cir. 1982), the insurer
refused to offer a prospective policyholder a policy that did not include
his wife.  The court found the practice concerned the firm's relations
with policyholders, involved the "very essence" of the relationship
between insurer and policyholder, and was protected as the business of
insurance. 

   A variation on this theme, with an emphasis on risk spreading, is
Feinstein v. Nettleship Co. of Los Angeles, 714 F.2d 928 (9th Cir. 1983),
cert. denied, 466 U.S. 972 (1984).  In Feinstein, a county medical
association entered into an agreement with medical malpractice insurers
under which the insurers offered malpractice insurance only to association
members, even those in high-risk practices.  Association members could
purchase malpractice insurance elsewhere, but only association members
could purchase malpractice insurance through these insurers.  After the
insurers increased their market share and substantially increased their
rates, non-member physicians challenged the agreement.  Applying Pireno,
the Ninth Circuit found the practice was related to the allocation and
spreading of risk, because it defined a pool of insureds over which risk
was spread, and thus was protected under McCarran-Ferguson.  The court
rejected the argument that the association was neither the insured nor the
insurers, concluding that the only role of the non-insurer association was
in negotiating the terms of the policy relationship between insurer and
insured.

   Still other aspects of an insurer's requirements imposed upon an insured
have been determined to be exempted under McCarran.  Klamath-Lake
Pharmaceutical Ass'n v. Klamath Medical Service Bureau, 701 F. 2d 1276
(9th Cir.), cert. denied, 464 U.S. 822 (1983), involved a healthcare
insurer that distributed drugs only through a designated pharmacy.  The
insurer ultimately established its own pharmacy and generally required
policyholders to use this pharmacy in order to take advantage of their
prescription drug benefit.  Other pharmacies alleged that the insurer
improperly tied a health care contract and a prescription drug benefit. 
Applying Royal Drug and Pireno, the Ninth Circuit found the arrangement
came within the exemption.  As the court explained, "[t]he insurer-insured
agreement embodied in both the basic health care contract and the
supplemental pharmacy benefit settles the distribution of risk that
insureds will need medical goods and services, including prescription
drugs.  It defines the relationship between insurer and insured.  And it
is limited to these two traditional actors in the insurance industry." 
Id. at 1286.

   (ii)       Terms and Conditions of Insurance Policies

   Cases involving the terms of insurance policies are likely to be
encompassed within the business of insurance.  In Mulhearn v. Rose-Neath
Funeral Home, Inc., 512 F. Supp. 747 (W.D. La. 1981), insurers issued
funeral service policies that stated a face value for the service and
designated a funeral director to provide the service.  Each policy
provided that if an insured's family did not want to use the services of
the designated funeral director, the family would receive a smaller cash
payment.  The court found this practice exempt because it concerned the
issuance of policies and their provisions.[72]  Likewise, an insurer's
decision to reduce an insured's monthly benefits pursuant to a group term
policy issued to her employer was the business of insurance in Freier v.
New York Life Ins. Co., 679 F.2d 780, 782 (9th Cir. 1982).[73]

   A health insurer's introduction of a health maintenance organization (HMO)
option, and its institution of an "adverse selection" policy of pricing
for its traditional insurance, were also deemed to be the business of
insurance in Ocean State Physicians Health Plan, Inc. v. Blue Cross and
Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), cert. denied,
494 U.S. 1027 (1990).  In Ocean  State, Blue Cross purchased health
services from physicians and other healthcare providers on behalf of its
subscribers.  Ocean State was a for-profit HMO that contracted with
physicians to provide medical care to its subscribers and paid them on a
fee-for-service basis.  Physicians could contract with either or both.  To
compete with Ocean State, Blue Cross launched its own HMO and instituted
an "adverse selection" policy of pricing its traditional insurance based
on characteristics of the insured group.[74]  The court found both
practices to be the business of insurance under Royal Drug/Pireno:  both
involved risk-spreading; both directly involved the relationship between
insurer and insured; and the policies were limited to entities in the
insurance industry as broadly construed.  

   Two different results were reached in cases where the insurer acted to
exclude or otherwise limit the services offered to subscribers by certain
medical practitioners.  In Virginia Academy of Clinical Psychologists v.
Blue Shield of Virginia, 624 F.2d 476 (4th Cir. 1980), cert. denied, 450
U.S. 916 (1981), psychologists challenged two insurers' policies of
refusing to pay for their services unless billed through a physician.  In
finding that this practice was not the business of insurance, the Fourth
Circuit explained that the insurers had been paying claims for the
underlying disorders for years, so the decision was not whether to
underwrite the risk but merely who would be paid.  However, the Eighth
Circuit in Health Care Equalization Comm. of the Iowa Chiropractic Society
v. Iowa Medical Society, 851 F.2d 1020 (8th Cir. 1988), found that
insurers' exclusion of chiropractic services from its subscriber contracts
was the business of insurance.  The court found that the activity involved
the contractual relationship between insurers and insureds, and concluded
that the contracts, and the extent to which the insurers may have attained
a dominant position in the market, were an integral part of the business
of insurance.[75]

   Finally, applying Pireno and other decisions, the court in Nurse Midwifery
Assocs. v. Hibbett, 549 F. Supp. 1185 (M.D.Tn. 1982), found that a
conspiracy between insured physicians and a medical malpractice insurer to
cancel the malpractice insurance of a competitor physician was not the
business of insurance.  In Hibbett, certified nurse midwives who joined
with an obstetrician to form a maternity practice alleged that other
physicians combined to prevent the midwives from competing with them by
having the first physician's malpractice insurance canceled.  Relying on
Pireno's language that the involvement of third parties outside the
insurance industry had the potential to restrain competition in
non-insurance markets, the court found the targeted marketplace was that
of maternity services, not medical malpractice insurance, and thus the
McCarran exemption did not apply.

d.         Relationships Between Insurers and Other Third Parties

   Since the Supreme Court's decisions in Royal Drug and Pireno, activities
that involve relationships between insurers and third-party providers of
non-insurance goods and services have not been exempted as the business of
insurance.  The following discussion provides examples of both pre- and
post-Royal Drug decisions as illustrations of how the courts have narrowed
the McCarran exemption.

   (i)        Agreements Between Automobile Insurers and Providers of Repair
Services

   The influence of Royal Drug can be seen clearly in cases concerning
agreements between auto liability insurers and auto glass dealers and
installers.  Before Royal Drug, the court in General Glass v. Globe Glass
and Trim Co., 1978-1 Trade Cas. (CCH) P 61,998 (N.D.Ill. 1978), ruled that
an insurer's agreements with certain auto glass replacement firms,
relating to prices and billing procedures for glass replacements for
insureds, might be the business of insurance.  Rejecting the lower court's
decision in Royal Drug (prior to the Supreme Court's Royal Drug decision),
the court found that the mere fact that a non-insurance service company
was involved in the claims settlement process did not preclude a
conclusion that the business of insurance embraced these types of
arrangements.  

   The result was different a year later, after the Supreme Court had decided
Royal Drug.  In Liberty Glass Co., Inc. v. Allstate Ins. Co., 607 F.2d 135
(5th Cir. 1979), auto glass companies alleged that insurers had agreed
with certain other auto glass companies to fix the prices to be paid for
glass replacement in cars covered by the insurers, in order to effect a
territorial allocation of the market, discriminate in price, and eliminate
competition.  The district court concluded the activity fell within the
McCarran exemption as the business of insurance, but the Fifth Circuit
reversed on the basis of the intervening Royal Drug decision.  The Fifth
Circuit noted Royal Drug's holding that the business of insurance did not
encompass agreements between insurers and third-party providers of goods
and services where, as in Liberty Glass, they were merely arrangements for
the purchase of goods and services by the insurer resulting in cost
savings.[76] 

   (ii)       Agreements Between Insurers and Hospitals

   Several mid-1970s cases involving agreements between insurers and
hospitals arrived at similar conclusions*that the agreements constituted
the business of insurance.  In Travelers Ins. Co. v. Blue Cross of Western
Pennsylvania, 481 F.2d 80 (3d Cir. 1973), cert. denied, 414 U.S. 1093
(1973), a private insurer objected to a Blue Cross contract with area
hospitals specifying the amount and terms under which it would pay for
services rendered its subscribers.  Relying on decisions holding that
ratemaking constituted the business of insurance, the Third Circuit found
"the interrelationship of hospital payments and subscribers' rates was
such that Blue Cross' arrangement with hospitals should be considered part
of the *business of insurance.'"  Id. at 83.[77]  In Nankin Hospital v.
Michigan Hospital Service, 361 F. Supp. 1199 (E.D. Mich. 1973), a hospital
complained that a hospital service corporation terminated its contract as
a participating hospital in connection with a state statute defining
hospitals with which the corporation could contract.  The court held that
Blue Cross's basic function of providing pre-paid hospital care was the
business of insurance; the negotiation of contracts with nonprofits as
regulated by state law constituted "acts in the conduct" of such business;
and enforcement of the qualification standards under state law was an "act
in the conduct" of Blue Cross's insurance business.  Id. at 1210.    

   However, in Reazin v. Blue Cross and Blue Shield of Kansas, 663 F. Supp.
1360 (D. Kan. 1987), the court analyzed Royal Drug in connection with a
hospital's complaint that Blue Cross improperly terminated its contractor
provider agreement, and declined to apply the McCarran exemption to
restraints involving an agreement with firms outside the insurance
industry that did not involve risk-spreading.  The court rejected the
argument that an insurer's practices involving third parties acquires the
exemption when its practices restrain trade in the insurance market alone;
"[t]he three criteria for determining whether the *business of insurance'
requirement is met are stated by the Court [in Pireno] in the conjunctive
(*and'), not the disjunctive.  All three must be satisfied to bring a
particular practice or activity within the [McCarran] S 2(b) exemption." 
Id. at 1408.

   (iii)      Agreements Between Insurers and Medical Practitioners

   Most post-Royal Drug cases concerning the relationships insurers have with
medical practitioners have concluded that they do not involve the business
of insurance.  In a pre-Royal Drug decision, Manasen v. California Dental
Services, 424 F. Supp. 657 (N.D.Cal. 1976), rev'd on other grounds, 683
F.2d 1152 (9th Cir. 1979), dentists charged that the activities of a
prepaid dental care insurer in establishing benefits as between
participating and non-participating dentists excluded non-participating
dentists from the market.  The court found that dentists' fees were a
major factor in determining premiums; the payment arrangements to service
providers were critical elements in the insurer's contractual agreements
with its subscribers; these arrangements were intimately related to the
interpretation and implementation of the insurer's policies and its
reliability as an insurer; and thus the McCarran exemption applied.

   The results were different after Royal Drug.  In Hoffman v. Delta Dental
Plan of Minnesota, 517 F. Supp. 564 (D. Mn. 1981), a nonprofit dental
service plan corporation entered into subscriber agreements that provided
for a payment differential between participating and non-participating
dentists.  The court found the case indistinguishable from Royal Drug in
that the provider agreements incorporated the terms of the subscriber
contracts that described the payment differential.  As in Royal Drug, the
court held that the agreements were not the business of insurance,
reasoning that if mere inclusion of this type of provision in a subscriber
contract resulted in an exemption, form would improperly be exalted over
substance.  Moreover, the Delta Dental court concluded that the payment
differential did not spread risk; at most, the insurer was minimizing its
costs in fulfilling its underwriting obligations.[78]   

   In another variation on third-party agreement cases, Trident Neuro-Imaging
Laboratory v. Blue Cross and Blue Shield of South Carolina, 568 F. Supp.
1474 (D.S.C. 1983), involved physician-directed private clinics and
patients who alleged that insurers conspired with health planning agencies
to restrain trade by not reimbursing policyholders for CAT scans performed
outside of hospitals.  Applying the Royal Drug/Pireno factors, the court
concluded the arrangement was not the business of insurance.  It reasoned
that the insurer's decision not to reimburse for physician-owned scanners
was a cost reduction decision, not an underwriting one; the practice did
not affect the benefit conferred on the policyholder; and the practice
inevitably involved third parties wholly outside the insurance
industry*neurologists.   

   (iv)      Agreements Between Insurers and the Pharmaceutical Industry

   In a case involving arrangements between insurers and the pharmaceutical
industry, Portland Retail Druggists Ass'n v. Kaiser Foundation Health
Plan, 662 F.2d 641 (9th Cir. 1981), pharmacists challenged the contractual
arrangements by which an HMO acquired drugs from manufacturers,
wholesalers, and distributors.  The court found the situation conceptually
identical to that in Royal Drug and characterized the allegation of
improper tying as a challenge to conditions the insurer may or may not
place on its relationships with members.  The court remanded the case for
further factual developments to determine "[w]hether those conditions
sufficiently partake of the *indispensable characteristic of insurance'
*spreading of risk,' recognized in Royal Drug as essential" for the
exemption.  Id. at 647.

   (v)       Agreements Between Insurers and Peer Review Organizations

   Finally, in a case decided after Royal Drug and Pireno addressing the
practice of using peer review committees, Ratino v. Medical Service of the
District of Columbia, 718 F. 2d 1260 (4th Cir. 1983), a nonparticipating
physician alleged that the insurer's "usual, customary, and reasonable"
insurance plan, which involved provider agreements and peer review
committees, constituted an illegal price fixing arrangement.  Applying
Pireno and Royal Drug, the Fourth Circuit found the activities could not
be characterized as the business of insurance.  The court reasoned that
the peer review activities were indistinguishable from those in Pireno
and, thus, that the practice was not exempt under McCarran-Ferguson.

   CONCLUSION

   The McCarran-Ferguson Act's antitrust exemption for insurance activities
is limited by its own terms and has been further narrowed by the courts in
the 60 years since the Act's passage.  Pursuant to the Supreme Court's
three-factor test as articulated in Royal Drug and Pireno, courts closely
scrutinize the nature of an insurance activity in determining whether it
constitutes the "business of insurance."  Under this test, only those
limited activities at the core of and unique to the insurance industry are
potentially eligible for the antitrust exemption.  Exempt activities also
must be "regulated by State law" and not run afoul of the Sherman Act's
boycott, coercion, and intimidation prohibitions.

   March 4, 2005

   Attachment

   Attachment A

                SUMMARY OF CASES ON THE "BUSINESS OF INSURANCE"

   This is a summary of court decisions addressing whether a particular
activity constitutes the "business of insurance."  Under the
McCarran-Ferguson Act, activities deemed to be the business of insurance
are exempt from the federal antitrust laws if they also are "regulated by
State law" and do not constitute "an agreement to boycott, coerce, or
intimidate, or [an] act of boycott, coercion, or intimidation."  15 U.S.C.
SS 1012(b), 1013(b). 

   Note:  The results of these cases are highly fact-specific, and thus
generalities about them are necessarily imprecise and must be applied with
caution.  Further, because the legal tests under the Act have evolved over
time, it is unlikely that all of the earlier rulings would survive today
and that a court would rule on the same facts in the same way.  Greater
reliance therefore should be placed on the most recent cases.

                          Relationships Among Insurers

   Courts have determined that the following activities or practices are the
"business of insurance":

   .A A A A A A A  Concerted action by insurers to agree on the rate of
commission paid to automobile insurance agents*California League of Indep.
Ins. Prods. v. Aetna Cas. & Sur. Co., 175 F. Supp. 857 (N.D. Cal. 1959). 
But see Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 224
n. 32 (1979) ("It is clear from the legislative history that the fixing of
rates is the *business of insurance.'  The same conclusion does not so
clearly emerge with respect to the fixing of agents' commissions.").

   .A A A A A A A  Concerted action by insurers to set prices for life
insurance*Steingart v. Equitable Life Assurance Soc'y of the United
States, 366 F. Supp. 790 (S.D.N.Y. 1973)

   .A A A A A A A  Concerted action by insurers to reclassify risks for
automobile insurance*Meicler v. Aetna Cas. and Sur. Co., 372 F. Supp. 509
(S.D. Tex. 1974), aff'd, 506 F.2d 732, 734 (5th Cir. 1975)

   .A A A A A A A  Agreement by insurance rating board and its members to fix
prices of automobile insurance premiums*Ohio AFL-CIO v. Ins. Rating Bd.,
451 F.2d 1178 (6th Cir. 1971), cert. denied, 409 U.S. 917 (1972)

   .A A A A A A A  Cooperative agreements between insurers and a rating
association to set workers' compensation insurance rates*In re Workers'
Comp. Ins. Antitrust Litigation, 867 F.2d 1552 (8th Cir.), cert. denied,
492 U.S. 920 (1989)

   .A A A A A A A  Arrangements among insurers, a rating organization, and a
workers' compensation reinsurance pool to compute premiums by combining
loss experiences*Uniforce Temporary Personnel, Inc. v. Nat'l Council on
Comp. Ins., Inc., 87 F.3d 1296 (11th Cir. 1996)

   .A A A A A A A  Arrangements among an insurer, a loss control services
firm, and a rating organization for issuance of workers' compensation
insurance to establish

   rates*Calico Trailer Mfg. Co. v. Ins. Co. of North America, 1995-1 Trade
Cas. (CCH) P 71,022 (E.D. Ark. 1994)

   .A A A A A A A  Insurer's refusal to deal in windstorm insurance on open
market and fixing of higher rate through state-created joint underwriting
association*Slagle v. ITT Hartford, 102 F.3d 494 (11th Cir. 1996)

   .A A A A A A A  Jointly setting rates and classifying risks through a
rating association*Owens v. Aetna Life & Cas. Co., 654 F. 2d 218 (3rd
Cir.), cert. denied, 454 U.S. 1092 (1981)

   .A A A A A A A  Horizontal price fixing among automobile insurers through
joint use of a reimbursement formula for insurance claims*Proctor v. State
Farm Mut. Auto. Ins. Co., 675 F.2d 308, 318-25 (D.C. Cir.), cert. denied,
459 U.S. 839 (1982); see also Quality Auto Body, Inc. v. Allstate Ins.
Co., 660 F.2d 1195, 1201 n. 4 (7th Cir. 1981), cert. denied, 455 U.S. 1020
(1982); Workman v. State Farm Mut. Auto. Ins. Co., 520 F. Supp. 610,
615-16 n. 7 (N.D. Cal. 1981)

   .A A A A A A A  Agreement among insurers to limit insurance coverage for
certain external auto body repairs to the cost of less expensive
parts*Gilchrist v. State Farm Mut. Auto. Ins. Co., 390 F.2d 1327 (11th
Cir. 2004)

   .A A A A A A A  Alleged agreements among insurers to refuse to offer
insurance coverage with respect to work loss benefits of deceased victims
of motor vehicle accidents, and to provide a joint and uniform defense to
claims for such benefits*Grant v. Erie Ins. Exchange, 542 F. Supp. 457
(M.D. Pa. 1982), aff'd, 716 F.2d 890 (3d Cir.), cert. denied, 464 U.S. 938
(1983)

   .A A A A A A A  Collective action among insurers and reinsurers to reduce
their exposure under commercial general liability policies by changing
standard policy language and avoiding underwriting or reinsuring risks
written on disfavored policy terms; reinsurance and retrocessional
insurance are insurance for McCarran-Ferguson Act purposes*In re Ins.
Antitrust Litigation, 723 F. Supp. 464 (N.D. Cal. 1989), rev'd in part and
remanded, 938 F.2d 919 (9th Cir. 1991)

   .A A A A A A A  Alleged conspiracy by insurers to change the types of
policies offered*UNR Indus., Inc. v. Continental Ins. Co., 607 F. Supp.
855 (N.D. Ill. 1984)

   .A A A A A A A  Engaging in racial "redlining"*Mackey v. Nationwide Ins.
Cos., 724 F.2d 419 (4th Cir. 1984) (but the court found that
McCarran-Ferguson did not foreclose claim under the Fair Housing Act or
Civil Rights Acts)

   .A A A A A A A  Agreements by title insurance companies to fix prices for
title examination and insurance*Commander Leasing Co. v. Transamerica
Title Ins. Co., 477 F.2d 77 (10th Cir. 1973); see also Schwartz v.
Commonwealth Land Title Ins. Co., 374 F. Supp. 564 (E.D. Pa. 1974);
Mitgang v. Western Title Ins. Co., 1974-2 Trade Cas. (CCH) P 75,322 (N.D.
Cal. 1974).  But see United States v. Title Ins. Rating Bur. of Arizona,
Inc., 700 F. 2d 1247 (9th Cir. 1983) (provision of escrow services by
title insurance companies is not the business of insurance) and Ticor
Title Ins. Co. v. FTC, 998 F. 2d 1129 (3d. Cir. 1993), cert. denied, 510
U.S. 1190 (1994) (title search and examination services are not the
business of insurance).

   .A A A A A A A  Alleged attempts by title insurance companies to enforce
state law requiring title insurance policies to be signed by an
abstracter*First Am. Title Co. of South Dakota v. South Dakota Land Title
Ass'n, 541 F. Supp. 1147 (D.S.D. 1982); aff'd, 714 F.2d 1439 (8th Cir.),
cert. denied, 464 U.S. 1042 (1984)

   Courts have determined that the following activities or practices are not,
or may not be, the "business of insurance":

   .A A A A A A A  Alleged agreements by title insurers, abstracters, and the
abstracter's board of examiners to fix fees for countersignatures to be
provided by abstracters on title insurance policies*First Am. Title Co. of
South Dakota v. South Dakota Land Title Ass'n, 541 F. Supp. 1147 (D.S.D.
1982), aff'd, 714 F.2d 1439 (8th Cir.), cert. denied, 464 U.S. 1042 (1984)

   .A A A A A A A  Provision of escrow services by title insurance
companies*United States v. Title Ins. Rating Bureau of Arizona, Inc., 700
F.2d 1247 (9th Cir. 1983), cert. denied, 467 U.S. 1240 (1984)

   .A A A A A A A  Collective setting of uniform rates for title search and
examination services by title insurers*Ticor Title Ins. Co. v. FTC, 998
F.2d 1129 (3rd Cir. 1993), cert. denied, 510 U.S. 1190 (1994)

   .A A A A A A A  The merger of two insurance companies*Am. Gen. Ins. Co. v.
FTC, 359 F. Supp. 887 (S.D. Tex. 1973), aff'd, 496 F.2d 197 (5th Cir.
1974)

   .A A A A A A A  Challenged overlapping directorates between banks and
insurance companies and between bank holding companies and insurance
companies*United States v. Crocker Nat'l Corp., 422 F. Supp. 686 (N.D.
Cal. 1976), rev'd on other grounds, 656 F.2d 428 (9th Cir. 1981)

   .A A A A A A A  Attempt by first insurer to induce lender to breach
agreement with second insurer in the context of a competition for the
lender's customer list*DeVoto v. Pacific Fid. Ins. Co., 354 F. Supp. 874
(N.D. Ca. 1973), rev'd on other grounds, 516 F.2d 1 (9th Cir. 1975)

   .A A A A A A A  Title insurers' issuance of "gap letters" to customers
concerning the underwriter's responsibility for the acts of the
independent title agent or approved attorney might not be the business of
insurance*Escrow Disbursement Ins. Agency, Inc. v. Am. Title and Ins. Co.,
550 F. Supp. 1192 (S.D. Fl. 1982)

   .A A A A A A A  Alleged activities on the part of providers of prepaid
health insurance in requiring insureds to obtain certain podiatric
services only from medical doctors, refusing to reimburse insureds for
treatment by a podiatrist unless they are referred by a medical doctor,
and not allowing podiatrists to be members of healthcare associations*Hahn
v. Oregon Physicians Service, 689 F.2d 840 (9th Cir. 1982), cert. denied,
462 U.S. 1133 (1983)

   .A A A A A A A  Alleged market allocation by insurers accomplished by
termination of health plan*Garot Anderson Mktg., Inc. v. Blue Cross and
Blue Shield United of Wisconsin, 772 F. Supp. 1054 (N.D.Ill 1990)

   .A A A A A A A  Insurers' exclusive marketing areas policy may not be the
business of insurance*State of Maryland v. Blue Cross and Blue Shield
Ass'n, 620 F. Supp. 907 (D.Md. 1985)

                   Relationships Between Insurers and Agents

   Courts have determined that the following activities or practices are the
"business of insurance":

   .A A A A A A A  An insurance agent, as well as an insurance company, is
engaged in the business of insurance*Commander Leasing Co. v.
Trans-America Title Ins. Co., 477 F.2d 77 (10th Cir. 1973).  But see Group
Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. at 224 n. 32
(suggesting that transactions between an insurer and its agents may not be
the business of insurance).

   .A A A A A A A  The authorizing of agents to solicit individual or group
policies*Owens v. Aetna Life & Cas. Co., 654 F.2d 218 (3rd Cir.), cert.
denied, 454 U.S. 1092 (1981)

   .A A A A A A A  An agency contract that requires exclusive representation
of the named insurers*Black v. Nationwide Mut. Ins. Co., 429 F. Supp. 458
(W.D. Pa. 1977), aff'd, 571 F.2d 571 (3rd Cir. 1978).  But see Ray v.
United Family Life Ins. Co., Inc., 430 F Supp 1353 (W.D. N.C. 1977) (an
insurer's coercion of an agent to cease selling for competitors is not the
business of insurance).

   .A A A A A A A  An agency contract that ties the general agency to the
requirement of full-line sales*Steinberg v. Guardian Life Ins. Co., 486 F.
Supp 122 (E.D. Pa. 1980)

   .A A A A A A A  An agency contract provision that precludes an agent from
engaging in any other business or occupation for remuneration or profit
without the consent of the insurer*Thompson v. New York Life Ins. Co., 644
F.2d 439 (5th Cir. 1981)

   .A A A A A A A  Agency contract provisions that require agents to return
records to insurer upon termination, limit categories of persons to whom
policies may be sold, and prohibit agents from brokering business with
other insurers until their contractual obligations are fulfilled within
their territory*Gribbin v. Southern Farm Bur. Life Ins. Co., 1984-1 Trade
Cas. (CCH) P 65,798 (W.D. La. 1984)

   .A A A A A A A  Termination of agent who would not accept a limitation on
the policies he could offer*Hopping v. Standard Life Ins. Co. v. Blue
Cross, 1984-1 Trade Cas. (CCH)

   P 65,814 (N.D. Miss. 1983)

   Courts have determined that the following activities or practices are not,
or may not be, the "business of insurance":

   .A A A A A A A  Requiring agents to provide securities services in a
particular manner in order to continue selling and servicing its insurance
policies may not be the business of insurance*Zelson v. Phoenix Mut. Life
Ins. Co., 549 F.2d 62 (8th Cir. 1977)

   .A A A A A A A  Conspiracy between first insurer and second insurer's
agents to induce second insurer's agents to switch principals*Am. Family
Life Assurance Co. v. Planned Mktg. Assocs., Inc., 389 F. Supp. 1141 (E.D.
Va. 1974); see also Am. Standard Life & Accident Ins. Co. v. U.R.L., Inc.,
701 F. Supp. 527 (M.D.Pa. 1988).  But see Lawyer's Realty Corp. v.
Peninsular Title Ins. Co., 428 F. Supp. 1288 (E.D. La. 1977) (alleged
conspiracy between two title insurers and an agent to exclude another
agent from the title insurance business is the business of insurance).

   .A A A A A A A  Alleged pirating of agent's sub-agents by insurer*Allied
Financial Servs., Inc. v. Foremost Ins. Co., 418 F. Supp. 157 (D. Neb.
1976) 

   .A A A A A A A  Insurer's conspiracy to pirate agency's trade secrets and
confidential information*Center Ins. Agency v. Byers, 1976-1 Trade Cas.
(CCH) P 60,940 (N.D. Ill. E.D. 1976)

   .A A A A A A A  Conspiracy among insurers to restrict the sale of
collateral protection programs in a state to one agent was not the
business of insurance; the programs at issue were not the business of
insurance and agent-carrier disputes are not per se within the
exemption*King  v. G.D. Van Wagenen Co., 1987-1 Trade Cas. (CCH) P 67,534
(D. Minn. 1987)

   .A A A A A A A  Insurer's restrictions on the transfer of subordinate
agents*Bogan v. Northwestern Mut. Life Ins. Co., 953 F. Supp. 532
(S.D.N.Y. 1997)

               Relationships Between the Insurer and the Insured

   Courts have determined that the following activities or practices are the
"business of insurance":

   .A A A A A A A  Mortgage and residential real property loans that are
conditioned on the purchase of life insurance*Addrisi v. Equitable Life
Assurance Soc'y of the United States, 503 F.2d 725 (9th Cir. 1974), cert.
denied, 420 U.S. 929 (1975); Dexter v. Equitable Life Assurance Soc'y, 527
F.2d 233 (2nd Cir. 1975)

   .A A A A A A A  Requirements by title insurance companies that purchasers
of newly constructed homes buy mechanic's lien insurance as part of their
services*McIlhenny v. Am. Title Ins. Co., 418 F. Supp. 364 (E.D. Pa 1976)

   .A A A A A A A  Requirement by issuer of automobile insurance that
purchasers also join an automobile club as a condition to being
insured*Mathis v. Auto. Club Inter-Ins. Exchange, 410 F. Supp. 1037 (W.D.
Mo. 1976)

   .A A A A A A A  Insurer's refusal to offer individual a policy that did
not include his spouse*Anglin v. Blue Shield of Virginia, 693 F.2d 315
(4th Cir. 1982)

   .A A A A A A A  Agreement between a county medical association and medical
malpractice insurers under which insurers offer malpractice insurance only
to association members*Feinstein v. Nettleship Co. of Los Angeles, 714
F.2d 928 (9th Cir. 1983), cert. denied, 466 U.S. 972 (1984)

   .A A A A A A A  Funeral service policy that designates an authorized
funeral director and provides for an lower benefits if his services are
not used*Mulhearn v. Rose-Neath Funeral Home, Inc., 512 F. Supp. 747 (W.D.
La. 1981).  But see Battle v. Liberty Nat'l Life Ins. Co., 493 F.2d 39
(5th Cir. 1974) (insurer issuing burial coverage who contracted with
funeral homes company to furnish merchandise and services required by
policies as intermediary with authorized funeral directors might have
exceeded the business of insurance and encroached on the business of
providing funeral services). 

   .A A A A A A A  Funeral insurance policy that ties purchase of a casket to
the provision of the funeral services*Chatelain v. Mothe Funeral Homes,
Inc., 1998 WESTLAW 166212 (E.D. La. 1998)

   .A A A A A A A  Insurer's decision to reduce insured's monthly benefits
pursuant to group term policy issued to employer*Freier v. New York Life
Ins. Co., 679 F.2d 780, 782 (9th Cir. 1982)

   .A A A A A A A  Automobile insurers' policies that limited the
reimbursement of policyholders to the reasonable or competitive cost of
repairs*Custom Auto Body, Inc. v. Aetna Cas. and Sur.  Co., 1983-2 Trade
Cas. (CCH) P 65,629 (D.R.I. 1983)

   .A A A A A A A  Health care provider's requirement that insureds fill
their prescriptions through its pharmacy, and its denial of reimbursement
under the insurance contract for certain prescriptions filled at other
pharmacies*Klamath-Lake Pharm. Ass'n v. Klamath Medical Serv. Bur., 701
F.2d 1276 (9th Cir.), cert. denied, 464 U.S. 822 (1983)

   .A A A A A A A  Health insurer's introduction of health maintenance
organization option, and its institution of an "adverse selection" policy
of pricing for its traditional insurance based upon characteristics of the
insured group*Ocean State Physicians Health Plan, Inc. v. Blue Cross and
Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), cert. denied,
494 U.S. 1027 (1990)

   .A A A A A A A  Non-profit health care service corporations' exclusion of
chiropractic services from subscriber contracts*Health Care Equalization
Comm. of the Iowa Chiropractic Soc'y v. Iowa Medical Soc'y, 851 F.2d 1020
(8th Cir. 1988)

   Courts have determined that the following activities or practices are not,
or may not be, the "business of insurance":

   .A A A A A A A  Misrepresenting that the purchase of credit insurance is a
prerequisite to the extension of credit*FTC v. Dixie Finance Co., Inc.,
695 F.2d 926 (5th Cir.), cert. denied, 461 U.S. 928 (1983); FTC v. Mfrs.
Hanover Consumer Servs., Inc., 567 F. Supp. 992 (E.D. Pa. 1983) 

   .A A A A A A A  Insurers' policy of refusing to pay for services of
clinical psychologists unless they were billed through a
physician*Virginia Acad. of Clinical Psychologists v. Blue Shield of
Virginia, 624 F.2d 476 (4th Cir. 1980)

   .A A A A A A A  Insurers' decision not to include certain chiropractor in
its panel of providers*Rozema v. Marshfield Clinic, 1997-1 Trade Cas.
(CCH) P 71,796 (W.D. Wis. 1997)

   .A A A A A A A  Conspiracy between insured physicians and medical
malpractice insurer to cancel medical malpractice insurance of a
competitor physician*Nurse Midwifery Assocs. v. Hibbett, 549 F. Supp. 1185
(M.D. Tn. 1982)

           Relationships Between Insurers and Non-Insurance Entities

   Courts have determined that the following activities or practices are the
"business of insurance":

   .A A A A A A A  Automobile insurer's practice of entering into agreements
with certain auto glass replacement firms relating to prices and billing
procedures for glass replacement for insureds*Gen. Glass v. Globe Glass
and Trim Co., 1978-1 Trade Cas. (CCH) P 61,998 (N.D.Ill. 1978) 

   .A A A A A A A  Nonprofit hospitalization insurer's contract with
hospitals which prescribes the amounts and terms under which it would pay
for services rendered its subscribers*Travelers Ins. Co. v. Blue Cross of
Western Pennsylvania, 481 F.2d 80 (3d Cir. 1973), cert. denied, 414 U.S.
1093 (1973); Frankford Hosp. v. Blue Cross of Greater Philadelphia, 417 F.
Supp. 1104 (E.D. Pa. 1976), aff'd, 554 F.2d 1253 (3d Cir.), cert. denied,
434 U.S. 860 (1977)

   .A A A A A A A  Hospital service corporation's negotiation of contracts
with nonprofit hospitals, and enforcement of qualification
standards*Nankin Hosp. v. Michigan Hosp. Serv., 361 F. Supp. 1199 (E.D.
Mich. 1973)

   .A A A A A A A  Establishment of fee schedules and reimbursement policies
to dentists by nonprofit corporation engaged in the administration and
operation of prepaid dental care plans*Manasen v. California Dental
Servs., 424 F. Supp. 657 (N.D. Cal. 1976), rev'd on other grounds, 683
F.2d 1152 (9th Cir. 1979)

   Courts have determined that the following activities are not, or may not
be, the "business of insurance":

   .A A A A A A A  Automobile liability insurer's securing for particular
glass dealers the sales and installation jobs required by insurer's
claimants*Hill v. Nat'l Auto Glass Co., 293 F. Supp. 295 (N.D. Cal. 1968)

   .A A A A A A A  Mere arrangements for the purchase of goods and services
by the insurer, enabling the insurer to minimize costs and maximize
profits, but where the agreements did not involve underwriting or
spreading of risk*Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S.
205 (1979)  

   .A A A A A A A  Agreement between insurers and glass installers to fix
prices to be paid for automobile glass replacement in automobiles covered
by insurers*Liberty Glass Co. v. Allstate Ins. Co., 607 F.2d 135 (5th Cir.
1979) 

   .A A A A A A A  Agreements entered into by auto insurance companies with
certain preferred repair shops that agreed in advance to do repair work at
fixed prices, generally in exchange for assurances of referrals*Proctor v.
State Farm Mut. Auto. Ins. Co., 675 F.2d 308 (D.C. Cir.), cert. denied,
459 U.S. 839 (1982); Quality Auto Body, Inc. v. Allstate Ins. Co., 660
F.2d 1195 (7th Cir. 1981), cert. denied, 455 U.S. 1020 (1982); Workman v.
State Farm Mut. Auto. Ins. Co., 520 F. Supp. 610 (N.D. Cal.1981)

   .A A A A A A A  Functioning as a third-party administrator for
self-insured plans, and activities in private health care financing that
affect entities beyond the business of insurance*Reazin v. Blue Cross and
Blue Shield of Kansas, Inc., 663 F. Supp. 1360 (D. Kan. 1987), aff'd, 899
F.2d 951 (10th Cir. 1990)

   .A A A A A A A  Dental insurer's contracts with its subscribers and
participating dentists that provide for a payment differential between
participating and non-participating dentists*Hoffman v. Delta Dental Plan
of Minnesota, 517 F. Supp. 564 (D. Mn. 1981)

   .A A A A A A A  Insurer's practice of banning "balanced billing"*Kartell
v. Blue Shield of Massachusetts, 542 F. Supp. 782 (D. Mass. 1982)

   .A A A A A A A  Insurer's decision not to reimburse policyholders for
physician-owned CAT scanners*Trident Neuro-Imaging Lab. v. Blue Cross and
Blue Shield of South Carolina, 568 F. Supp. 1474 (D.S.C. 1983) 

   .A A A A A A A  Arrangements between insurers and the pharmaceutical
industry concerning the cost of pharmaceuticals may not be the business of
insurance*Portland Retail Druggists Ass'n v. Kaiser Found. Health Plan,
662 F.2d 641 (9th Cir. 1981)

   .A A A A A A A  Health insurer's use of the professional association's
peer review committee to examine chiropractor's statements and charges and
render an opinion on necessity for treatments and reasonableness of
charges*Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982)

   .A A A A A A A  Design and implementation of "usual, customary, and
reasonable" insurance plan offered by insurer, with provision for peer
review of medical charges*Ratino v. Medical Serv. of the District of
Columbia, 718 F. 2d 1260 (4th Cir. 1983)

   ------------------------

   [1] In addition to the federal antitrust laws, many states have enacted
their own legislation prohibiting restraints on competition.

   [2] United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 559
(1944).

   [3]  Id. at 553-54.

   [4] The most important amendments to these laws have been the
Robinson-Patman Act of 1936 (which rewrote and amended section 2 of the
Clayton Act, dealing with price discrimination); the Celler-Kefauver Act
of 1950 (which amended section 7 of the Clayton Act, dealing with mergers
and acquisitions); and the Hart-Scott-Rodino Antitrust Improvement Act of
1976 (which expanded the power of the Justice Department to investigate
antitrust violations, required pre-merger notification and a waiting
period by parties to certain mergers, and authorized and established
procedures for state attorneys general to sue, as parens patriae, for
antitrust violations causing injury to state citizens).  Many other
federal antitrust statutes target specific industries; these are not
addressed in this opinion.

   [5] Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4 (1958).

   [6] July 2, 1890, ch. 647, 26 Stat. 209, codified as amended at 15 U.S.C.
SS 1-7.

   [7] "Horizontal" restraints are agreements among rivals, and include
cartels and agreements to exclude rivals.  "Vertical" restraints are
agreements between purchaser and supplier, and include resale price
fixing, territorial restrictions, exclusive dealing contracts, reciprocal
dealing contracts, and tying arrangements.  II Joseph P. Bauer & William
H. Page, Kintner, Federal Antitrust Law, S 9.2 at 4 (2002).  A tying
arrangement is an "agreement by a party to sell one product but only on
the condition that the buyer also purchase a different (or tied) product,
or at least agrees that he will not purchase that product from any other
supplier."  Northern Pacific Railway Co. v. United States, footnote 5
above, at 5-6.

   [8] The Commerce Clause of the Constitution authorizes Congress only "[t]o
regulate Commerce with foreign Nations, and among the several States, and
with Indian tribes . . . . "  U.S. Const., Art. I, S 8, cl. 3.

   [9]  The "unreasonableness" requirement stems from the Supreme Court's
decision in Standard Oil Co. of New Jersey v. United States, 221 U.S. 1,
60 (1911).  Except for certain classes of restraints considered to be per
se unreasonable, the "rule of reason" requires consideration of the
relevant circumstances to ascertain whether the conduct, taken as a whole,
promotes or suppresses competition.  See, e.g., Board of Trade of the City
of Chicago v. United States, 246 U.S. 231, 238 (1918).

   [10] United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391
(1956).

   [11] United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

   [12] Oct. 15, 1914, ch. 323, 38 Stat. 730, codified as amended at 15
U.S.C. SS 12-27.

   [13] 15 U.S.C. SS 13, 14, 18.

   [14] Sept. 26, 1914, ch. 311, 38 Stat. 717, codified as amended at 15
U.S.C. SS 41-58.

   [15] While the FTC may use its authority to examine antitrust actions of
insurers that do not fall under the McCarran-Ferguson Act's exemption,
under section 5 of the FTC Improvements Act of 1980, Pub. L. No. 96-252,
94 Stat. 374 (1980), the FTC may study an insurance issue only upon a
specific request by a majority of either the Senate or House Commerce
Committees.  Congress imposed this limitation on the FTC because it
believed the Commission was misconstruing its jurisdictional limitations
set forth in the McCarran-Ferguson Act with respect to the business of
insurance.  S. Rep. No. 96-500, at 13 (1980), reprinted in 1980
U.S.C.C.A.N. 1073, 1114.

   [16] See FTC v. Cement Institute, 333 U.S. 683, 689-94 (1948).

   [17] 15 U.S.C. S 45(n).

   [18] Richard A. Wiley, Pups, Plants and Package Policies*Or The Insurance
Antitrust Exemption Re-Examined, 6 Vill. L. Rev. 281, 286 (1961).

   [19] Kenneth J. Meier, The Political Economy of Regulation:  The Case of
Insurance 50 (1988).  Most marine underwriting was done by foreign firms
prior to World War I; life insurance was a separate industry; and health
insurance was a minor portion of the industry at the time.  Id.

   [20] Id.

   [21] Id. at 51-52; see also Spencer L. Kimball and Ronald L. Boyce, The
Adequacy of State Insurance Rate Regulation:  The McCarran-Ferguson Act in
Historical Perspective, 56 Mich. L. Rev. 545, 547-49 (1958). 

   [22] D.T. Armentaro, Antitrust and Insurance:  Should the McCarran Act Be
Repealed?, Cato Journal, Winter 1989, at 729, 730; Meir, footnote 19
above, at 52.

   [23] See Armentaro, footnote 22 above, at 730, 736.

   [24] Meir, footnote 19 above, at 51-52.

   [25] A full discussion of the background of this decision is contained in
Peter R. Nehemkis, Jr., Paul v. Virginia:  The Need for Re-Examination, 27
Geo. L. J. 519 (1939).

   [26] See footnote 8 above.

   [27]  Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 415-16 (1946).  The
Supreme Court followed Paul v. Virginia in several subsequent cases.  See
Hooper v. California, 155 U.S. 648, 655 (1895) ("The business of insurance
is not commerce.  The contract of insurance is not an instrumentality of
commerce."); New York Life Ins. Co. v. Deer Lodge County, 231 U.S. 495,
510 (1913) ("contracts of insurance are not commerce at all, neither state
not interstate."). 

   [28] See Meier, footnote 19 above, at 54-61.

   [29]  Wiley, footnote 18 above, at 288 n.23.

   [30] Chief Justice Stone's dissent in United States v. South-Eastern
Underwriters was one expression of these concerns.  As Justice Stone
stated, "[c]ertainly there cannot but be serious doubt as to the validity
of state taxes which may now be thought to discriminate against the
interstate commerce, . . . ; or the extent to which conditions may be
imposed on the right of insurance companies to do business within a state;
or in general the extent to which the state may regulate whatever aspects
of the business are now for the first time to be regarded as interstate
commerce."  322 U.S. at 581-82.

   [31] Pub. L. No. 79-15, ch. 20, 59 Stat. 33, codified as amended at 15
U.S.C. SS 1011-1015.  An extensive discussion of the legislative history
of the McCarran-Ferguson Act can be found in Charles D. Weller, The
McCarran-Ferguson Act's Antitrust Exemption for Insurance:  Language,
History and Policy, 1978 Duke L.J. 587, 589-98 (1978).

   [32] Section 3(a) provides that "[u]ntil June 30, 1948, the . . . Sherman
Act, and the . . . Clayton Act, and the . . . Federal Trade Commission Act
. . . and the . . . Robinson-Patman Anti-Discrimination Act, shall not
apply to the business of insurance or to acts in the conduct thereof."  15
U.S.C. S 1013(a).  A 1947 amendment, July 25, 1947, c. 326, 61 Stat. 448,
substituted "June 30, 1948" for "January 1, 1948" in sections 2(b) and
3(a). 

   [33] Your request and this opinion focus on section 2(b)'s "second clause"
antitrust exemption.  Our opinion does not address section 2(b)'s "first
clause" reverse preemption, which concerns issues beyond antitrust and
which is "not so narrowly circumscribed."  United States Dep't of Treasury
v. Fabe, 508 U.S. 491, 504 (1993); see also Group Life & Health Ins. Co.
v. Royal Drug Co., 440 U.S. 205, 218 n. 18 (1979) ("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 quite different secondary purpose . . . [was]
to give insurance companies only a limited exemption from the antitrust
laws.") (emphasis in original).

   [34] Meier, footnote 19 above, at 75-76.  Since the Act's passage,
Congress has exercised its authority to regulate insurance in certain
areas:  healthcare insurance, liability insurance, flood insurance, crop
insurance, and terrorism risk insurance.  See generally Optional Federal
Chartering for Insurers:  History and Background of Insurance Regulation
(Congressional Research Service CRS RL31982, June 3, 2003), at CRS-13 to
CRS-15.

   [35] Two doctrines beyond the scope of this opinion can also affect the
antitrust liability of insurers.  First, under the state action doctrine
of Parker v. Brown, 317 U.S. 341 (1943), a state's decision that
competition should yield to some sort of regulation or control will, in
certain circumstances, result in immunity from antitrust prosecution. 
Second, under the Noerr-Pennington doctrine, the Sherman Act does not
apply to joint efforts by groups seeking to exercise their First Amendment
right to petition the government.  See Eastern Railroad Presidents
Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine
Workers of America v. Pennington, 381 U.S. 657 (1965); California Motor
Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972).

   [36] See, e.g., Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 126
(1982).

   [37]  In National Casualty, the insurers shipped their advertising
material in bulk to independent agents in various states who distributed
the material locally.  The FTC argued that McCarran-Ferguson should be
construed to authorize federal regulation in these cases because there
were territorial limitations on the power of the states to regulate an
interstate business and Congress could not have intended, in
McCarran-Ferguson, to foreclose federal regulation of interstate insurance
as a supplement to state action.  However, the court found that the
insurers' advertising programs required distribution by their local
agents, and there was no question but that the states had ample means to
regulate this advertising within their respective boundaries.  357 U.S. at
564.

   [38] See also Ocean State Physicians Health Plans, Inc. v. Blue Cross &
Blue Shield of Rhode Island, 883 F.2d 1101, 1109 (1st Cir. 1989), cert.
denied, 494 U.S. 1027 (1990) ("'A body of state law which proscribes
unfair insurance practices and provides for administrative supervision and
enforcement satisfies the state regulation requirement of the
exemption.'") (quoting Mackey v. Nationwide Ins. Cos., 724 F.2d 419, 421
(4th Cir. 1984)).  However, the court in Escrow Disbursement Ins. Agency,
Inc. v. American Title and Ins. Co., 550 F. Supp. 1192 (S.D. Fl. 1982),
was troubled by the notion that the requirement could be summarily
satisfied.  The court cited the dissent in Crawford v. American Title Ins.
Co., 518 F.2d 217 (5th Cir. 1975), which reviewed the legislative history
and found that "the Act was never intended to preempt federal antitrust
laws in the face of superficial, ineffective state regulation."  Id. at
1198 (emphasis in original) (citing Crawford v. American Title Ins. Co.,
518 F.2d at 235-36).  Referring to the Supreme Court's statement in FTC v.
National Casualty Co. that the FTC had not argued "the statutory
provisions . . . under review were mere pretense," id. at 560, the Escrow
court said this "strongly suggests that some sort of inquiry into the
adequacy of the state regulation is appropriate."  550 F. Supp. at 1198.

   [39] A variation on the "state law" requirement can be found in In re
Workers' Compensation Ins. Antitrust Litigation, 867 F.2d 1552 (8th Cir.),
cert. denied, 492 U.S. 920 (1989).  It was argued there that an amendment
to state law withdrew regulation of rate-fixing by stopping uniform
rate-setting by the state insurance commissioner.  The court concluded
that because the commissioner retained the general power to regulate
rates, the regulatory scheme passed muster under McCarran-Ferguson. 

   [40] See also Travelers Health Ass'n v. FTC, 298 F.2d 820, 823 (8th Cir.
1962) (on remand from FTC v. Travelers Health Ass'n, above) (to the extent
a state must depend on the provisions of another state, the activity
cannot be held to be "regulated by state law").  Cf. Hartford Fire Ins.
Co. v. California, 509 U.S. 764, 784 (1993) (domestic insurers not
stripped of McCarran antitrust protection simply because they agreed or
acted with foreign reinsurers that presumably were "'not regulated by
State Law.'").

   [41] Most case law focuses on the boycott, not the coercion or
intimidation component of the exemption.  Ocean State Physicians Health
Plan, Inc. v. Blue Cross and Blue Shield of Rhode Island, above, 883 F. 2d
at 1109 n.9.  As a general matter, coercion does not occur where the
allegedly coerced parties have retained options, "even though such options
may have been made more expensive."  Id., citing Klamath-Lake Pharm. Ass'n
v. Klamath Medical Servs. Bur., 701 F.2d 1276 (9th Cir.), cert. denied,
464 U.S. 822 (1983); Feinstein v. Nettleship Co. of Los Angeles, above,
714 F.2d 928. 

   [42] See also, e.g., Frankford Hosp. v. Blue Cross of Greater
Philadelphia, 417 F. Supp. 1104 (E.D. Pa. 1976), aff'd, 554 F.2d 1253 (3d
Cir.), cert. denied, 434 U.S. 860 (1977); Black v. Nationwide Mut. Ins.
Co., 429 F. Supp. 458 (W.D. Pa. 1977), aff'd, 571 F. 2d 571 (3d Cir.
1978).  Some decisions have read the exception more narrowly, limiting it
specifically to insurance company "blacklisting" of agents and other
insurers.  See, e.g., Transnat'l Ins. Co. v. Rosenlund, 261 F. Supp. 12,
26-27 (D. Or. 1966).

   [43] See also, e.g., Ballard v. Blue Shield of Southern West Virginia,
Inc., 543 F.2d 1075, 1078 (4th Cir. 1976), cert. denied, 430 U.S. 922
(1977); Monarch Life Ins. Co. v. Loyal Protective Life Ins. Co., 326 F.2d
841, 846 (2d Cir. 1963), cert. denied, 376 U.S. 952 (1964).

   [44] The ordinary Sherman Act meaning of boycott is seen as "a concerted
refusal to deal."  See, e.g., Barry v. St. Paul Fire & Marine Ins. Co.,
555 F.2d 3, 7 (1st Cir. 1977) (the lower court decision that was affirmed
in the Supreme Court's Barry decision).  Today, the majority of group
boycotts are subject to the rule of reason, and are not illegal per se. 
See FTC v. Indiana Fed. of Dentists, 476 U.S. 447, 458 (1986) (per se
boycott classification not to be "expanded indiscriminately.").

   [45] Until recently, decisions construing the Employee Retirement Income
Security Act of 1974 (ERISA) and its savings clause (under which state
laws regulating insurance, banking, and securities are saved from
preemption by ERISA) relied, to varying degrees, on cases interpreting the
"business of insurance" under the McCarran-Ferguson Act.  However, in
Kentucky Ass'n of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003), the
Supreme Court made a "clean break" from the McCarran-Ferguson factors in
the ERISA context, noting that the statutory language of ERISA's savings
clause differed substantially from that of McCarran-Ferguson, and that the
McCarran-Ferguson factors were developed in cases that characterize
conduct by private actors, not state laws.  Because the statutory contexts
of the cases differ, the ERISA cases are not discussed further here. 

   [46] Am. Family Life Assurance Co. of Columbus v. Planned Mktg. Assocs.,
389 F. Supp. 1141, 1144-45 (E.D. Va. 1974).

   [47] Id.

   [48] See, e.g., FTC v. Nat'l Cas. Co., above, 357 U.S. 560; Transnat'l
Ins. Co. v. Rosenlund, above, 261 F. Supp. 12; Miley v. John Hancock Mut.
Life Ins. Co., 148 F. Supp. 299 (D. Ma.), cert. denied, 355 U.S. 828
(1957).

   [49] The Variable Annuity Life decision also established that the meaning
of insurance under the McCarran-Ferguson Act is a federal question, that
is, a matter for determination by the federal courts, not the state
courts.

   [50] Royal Drug, 440 U.S. at 212.   Among other things, the Court found
that references to the meaning of the "business of insurance" in the
legislative history of McCarran-Ferguson "strongly" suggested that
Congress understood the business of insurance to be the underwriting and
spreading of risk.  Id. at 220-21.

   [51] Id. at 215.

   [52] Id. at 216-17.

   [53] "Because of the widespread view that it is very difficult to
underwrite risks in an informed and responsible way without intra-industry
cooperation, the primary concern of both representatives of the insurance
industry and the Congress was that cooperative ratemaking efforts be
exempt from the antitrust laws."  Id. at 212-22.   

   [54] Id. at 224.

   [55] United States v. Title Ins. Rating Bureau of Arizona, Inc., 700 F.2d
1247, 1251 (9th Cir. 1983), cert. denied, 467 U.S. 1240 (1984), citing
Portland Retail Druggists Ass'n v. Kaiser Found. Health Plan, 662 F.2d
641, 647 (9th Cir. 1981).  See also Proctor v. State Farm Mut. Auto. Ins.
Co., 675 F.2d 308, 318 (D.C. Cir.), cert. denied, 459 U.S. 839 (1982)
("Courts and commentators have generally agreed that the articulation and
application of these criteria in Royal Drug significantly narrowed the
scope of the term *business of insurance.'"). 

   [56] "Courts have carefully defined the *business of insurance'
requirement to effect the limited congressional purposes behind the act,
and for the same reasons consistently use a fact-based conduct analysis to
determine whether that requirement is met in a particular case." 
Centennial Sch. Dist, v. Independence Blue Cross, 1994-1 Trade Cas. (CCH)
P 70,526 (E.D. Pa.).  See also FTC Staff Advisory Opinion of Aug. 19,
2003, in response to inquiry by Stonebridge Life Insurance Company
(stating that whether an activity is exempt under McCarran-Ferguson*an
"activity-based" exemption*requires a factual analysis of the activities
in question).

   [57] But see Royal Drug, 440 U.S. 205 at 224-25 n. 32 ("It is clear from
the legislative history that the fixing of rates is the *business of
insurance.'  The same conclusion does not so clearly emerge with respect
to the fixing of agents' commissions.").

   [58] See also Uniforce Temporary Personnel, Inc. v. Nat'l Council on Comp.
Ins., 87 F.3d 1296 (11th Cir. 1996) (alleged conspiracy among insurers and
rating organization to make temporary employee firms pay higher workers'
compensation insurance rates was business of insurance).  In Calico
Trailer Mfg. Co. v. Ins. Co. of North America, 1995-1 Trade Cas. (CCH) P
71,022 (E.D. Ark. 1994), an insured alleged that an insurer, a loss
control services firm, and a rating organization conspired to coerce it to
pay excessive workers' compensation insurance premiums.  The firm argued
this was not the business of insurance because the loss control services
firm was not in the insurance industry.  The court found the fixing of
rates to be the business of insurance, and loss control services to be
essential to fixing rates.  Because loss control services were "intimately
related" to insurers, and regulated by state insurance authorities, the
court found the firm was part of the insurance industry.   

   [59] An insurer's alleged fixing of windstorm insurance rates through a
state-created joint underwriting association is also the business of
insurance.  Slagle v. ITT Hartford, 102 F.3d 494 (11th Cir. 1996).  

   [60] See also Quality Auto Body, Inc. v. Allstate Ins. Co., 660 F.2d 1195,
1201 n. 4 (7th Cir. 1981), cert. denied, 455 U.S. 1020 (1982); Workman v.
State Farm Mut. Auto. Ins. Co., 520 F. Supp. 610, 615-16 n. 7 (N.D. Cal.
1981).  The Proctor court recognized the agreement it was reviewing might
not, strictly speaking, involve the spreading or underwriting of risk, but
noted that Royal Drug did not make clear whether this was an exclusive or
dispositive test.  Proctor v. State Farm Mut. Auto. Ins. Co., 675 F.2d at 
    324. 

   [61] See also UNR Indus., Inc. v. Continental Ins. Co., 607 F. Supp. 855
(N.D. Ill. 1984) (alleged conspiracy by insurers to change types of
policies offered was business of insurance).  In a case involving a
different kind of risk avoidance associated with an insurer's unilateral
action, a former agent alleged that the insurer engaged in "redlining,"
the arbitrary refusal to underwrite the risks of persons residing in
predominantly black neighborhoods.  Mackey v. Nationwide Ins. Cos., 724
F.2d 419 (4th Cir. 1984).  The court found that the activity fell within
the antitrust exemption, but that McCarran-Ferguson did not foreclose a
claim under the Fair Housing Act or Civil Rights Acts.

   [62] See also Mitgang v. Western Title Ins. Co., 1974-2 Trade Cas. (CCH) P
75,322 (N.D. Cal. 1974) (conspiracy among title insurers to fix rates is
business of insurance); First American Title Co. of South Dakota v. South
Dakota Land Title Ass'n, 541 F. Supp. 1147 (D.S.D. 1982), aff'd, 714 F.2d
1439 (8th Cir.), cert. denied, 464 U.S. 1042 (1984) (attempts by insurers
to enforce state law requiring policies to be signed by abstracter was
business of insurance; agreements by insurers, abstracters, and board of
examiners to fix fees for abstracter countersignatures on policies was not
business of insurance).

   [63] Moreover, in Ticor Title Ins. Co. v. FTC, 998 F.2d 1129 (3d Cir.
1993), cert. denied, 510 U.S. 1190 (1994), the FTC claimed title insurers
were unfairly agreeing to set uniform rates for title search and
examination services.  The court held the activities did not constituted
protected "business of insurance" because the services were analogous to
the peer review process in Pireno and the insurer-pharmacy reimbursement
process in Royal Drug, and thus had nothing to do with the actual
performance of the title insurance contract. 

   [64] Am. Gen. Ins. Co., 359 F. Supp. at 897.  Another court has found
overlapping directorates between banks and insurers and between bank
holding companies and insurers not to be the business of insurance. 
United States v. Crocker Nat'l Corp., 422 F. Supp. 686 (N.D. Cal. 1976).

   [65] The Blue Cross court also found the insurers' decision not to market
at all in a particular geographic area was one step removed from the
aspects of the insured/insurer relationship that lie at the core of the
business of insurance.  The court referenced the dissent in Owens v. Aetna
Life and Cas. Co., above, 654 F.2d 218, in which the dissenting judge
found that market allocation agreements among insurers were generally not
the business of insurance; pooling agreements between insurers contribute
to risk spreading, while agreements to divide markets would appear to have
the opposite result.

   [66] See also Steinberg v. Guardian Life Ins. Co., 486 F. Supp. 122 (E.D.
Pa. 1980) (contract that ties general agency to requirement of full-line
sales is the business of insurance).  But see Ray v. United Family Life
Ins., 430 F. Supp. 1353 (W.D.N.C. 1977) (funeral home operator who sold
burial insurance alleged one insurer coerced him into ending his
agreements with competitors; the court analyzed the facts as involving the
relationship of agency and company, not policyholder and company, and
found no indication in McCarran that Congress wanted insurance agents to
be treated differently from other kinds of agents in relation to their
companies).  

   [67] Similarly, in Gribbin v. Southern Farm Bur. Life Ins. Co., 1984-1
Trade Cas. (CCH) P 65,798 (W.D. La. 1984), the court found three
restrictions in agency contracts to be the business of insurance.  First,
the requirement to return rate books and files upon termination was the
business of insurance because insurers were ensuring that existing
contracts would remain in force.  Second, insurers' instructions not to
sell policies to certain racial or ethnic groups or to attorneys were
directly related to their relationship with prospective policyholders. 
Third, prohibiting agents from brokering business with other insurers
until their obligations were fulfilled in their territory was the business
of insurance; the provision was designed to motivate agents to focus their
efforts on selling insurance under the terms of their contracts.

   [68] Id. at 1147.  In Am. Standard Life & Accident Ins. Co. v. U.R.L.,
Inc., 701 F. Supp. 527 (M.D. Pa. 1988), an insurer alleged that, after it
purchased blocks of insurance business from a second insurer, former
agents of the second insurer used information gained from their prior
relationship to induce the second insurer's policyholders to replace their
policies with those from competing insurers.  The court held this was not
the business of insurance.  But see Lawyer's Realty Corp. v. Peninsular
Title Ins. Co., 428 F. Supp. 1288 (E.D. La. 1977) (alleged conspiracy
between two title insurers and an agent to exclude another agent from the
title insurance business is the business of insurance). 

   [69] See also Center Ins. Agency v. Byers, 1976-1 Trade Cas. (CCH) P
60,940 (N.D. Ill. 1976) (alleged conspiracy to pirate trade secrets and
confidential information pertaining to policy and marketing is not the
business of insurance).  

   [70] See also Dexter v. Equitable Life Assurance Soc'y, 527 F. 2d 233, 235
(2nd Cir. 1975) ("Forcing people to buy insurance may well be an
undesirable practice*and we do not suggest that we approve of it*but it is
part of the *business of insurance.' . . . An insurance company's methods
of inducing people to become policyholders pertain to the
company-policyholder relationship, and thus constitute an integral part of
*the business of insurance.'"). 

   [71] See also FTC v. Mfg. Hanover Consumer Servs., Inc., 567 F. Supp. 992
(E.D. Pa. 1983).  The Dixie Finance court found the decisions in Addrisi
and Dexter had "lost their viability and were distinguishable in light" of
Royal Drug, where the emphasis was placed on the particular activity being
questioned.  Dixie Finance, 695 F.2d at 931.  Moreover, the court in
Zelson v. Phoenix Mut. Life Ins. Co., above, 549 F.2d at 67, noted that
these cases "do not support a conclusion that using insurance as a
coercive lever or tying device in order to compel certain dealings in a
non-insurance product is the business of insurance."   

   [72] See also Chatelain v. Mothe Funeral Home, Inc., 1998 WESTLAW 166212
(E.D. La. 1998) (funeral policy that tied purchase of casket to agreement
to provide funeral services is business of insurance).  But see Battle v.
Liberty Nat'l Life Ins. Co., 493 F.2d 39 (5th Cir. 1974) (burial insurer
that contracted with funeral home to furnish merchandise and services
required by the policies as an intermediary with authorized funeral
directors might go beyond business of insurance).

   [73] At least one court has found that auto insurers' practices of
limiting the reimbursement of policyholders to the reasonable or
competitive cost of repairs is the business of insurance.  Custom Auto
Body, Inc. v. Aetna Cas. and Sur.  Co., 1983-2 Trade Cas. (CCH) P 65,629
(D.R.I. 1983). 

   [74] Blue Cross also instituted a policy of not paying a physician more
for any service than that physician was accepting from any other
healthcare provider, which caused many Ocean State physicians to resign to
avoid reducing their fees.  The court found that this activity, which
involved Blue Cross's relationships with its provider physicians, not its
subscribers, was not the business of insurance.

   [75] But see Rozema v. Marshfield Clinic, 1997-1 Trade Cas. (CCH) P 71,796
(W.D. Wis. 1997) (insured's allegation that insurer improperly eliminated
competition by deciding not to include a certain chiropractor in its panel
of providers is not the business of insurers; the termination of the
chiropractor may have had an indirect effect on the contract between
insurer and insured, but the allegations related primarily to the
relationship between the insurers and the chiropractor). 

   [76] In a variation, Proctor v. State Farm Mut. Auto. Ins. Co., above, 675
F.2d 308, concerned allegations by auto repair shops that insurers
conspired to fix prices by entering into agreements with certain repair
shops to perform work at rates agreed upon in advance.  The court found
such arrangements were similar to those in Royal Drug and were not the
business of insurance, because the agreements were for the purchase of
goods and services outside the insurance industry.  See also Quality Auto
Body v. Allstate Ins., 660 F.2d 1195 (7th Cir. 1981), cert. denied, 455
U.S. 1020 (1982); Workman v. State Farm Mut. Auto. Ins., 520 F. Supp. 610
(N.D. Cal. 1981).

   [77] See also Frankford Hosp. v. Blue Cross of Greater Philadelphia, 417
F. Supp. 1104, 1109 (E.D. Pa. 1976), aff'd, 554 F.2d 1253 (3rd. Cir.),
cert. denied, 434 U.S. 860 (1977). 

   [78] Similarly, in Kartell v. Blue Shield of Massachusetts, 542 F. Supp.
782 (D. Mass. 1982), physicians alleged that insurer's agreements with
participating physicians that prohibited balance billing (recovering from
subscribers any amount in excess of what the insurer has agreed to pay)
was price fixing.  The court found that the agreements were the same as
those in Royal Drug except that participating physicians agreed to be
compensated for their services on a pro rata basis if Blue Shield could
not fully compensate them because of a depletion of its funds.  The court
agreed with the insurer that this placed some risk on a participating
physician, but this level of risk was not enough to satisfy the first test
of Royal Drug*absent the physicians' agreement to carry this risk, Blue
Shield would carry this risk.  Thus the Kartell court found the agreements
were not the business of insurance.