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[Vol. 29:315 agreed with the company's arguments and indicated that the business of insurance has "a reach of influence and consequences beyond and different from that of ordinary businesses in the commercial world."43 Stressing the unique importance of insurance to the public interest, the Court inferred that the business of insurance must be regulated for the common good. 44 Therefore, liberty of contract was held not to preclude state regulation. Subsequent to 1914, the insurance industry became subject to increasing state regulation. Simultaneous federal regulation did not occur, however, because ance transactions were considered to be solely matters of intrastate commerce. 46 In 1944, a revolutionary decision by the Supreme Court brought the federal government into the business of insurance for the first time. In United States v. South-Eastern Underwriters Association, 47 a case in which a number of insurance companies were found to have conspired to fix rates to drive other insurers out of business, the Court determined that insurance is interstate commerce subject to federal regulation, including federal antitrust laws. 48 The Court implied that Congress might exempt insurance from the antitrust laws, however, if it deemed such action to be appropriate. The following year, Congress, in response to SouthEastern Underwriters, passed what is popularly known as the McCarranFerguson Act, 50 Under that Act, insurance companies are exempt from federal antitrust laws to the extent that they are regulated by state law. 51

43. Id. at 414.

44. Id. at 413.

45. Id.

49

46. H.R. REP. No. 143, 79th Cong., 1st Sess. 1, reprinted in [1945] U.S. Code Cong. SERV. 670, 670-71.

47. 322 U.S. 533 (1944). Appellees, which consisted of over 200 fire insurance companies and 27 individuals, were indicted for violation of the Sherman Act in that they conspired to fix rates, monopolize trade, and used boycotts, force, and coercion to compel non-member insurance companies to become members of their association in certain southeastern states. Id. at 534. Appellees demurrer was sustained by the district court on the ground that the fire insurance business did not constitute interstate commerce and was, therefore, exempt from federal regulation. Id. at 536. The Supreme Court held: (1) the Sherman Act was intended to apply to fire insurance companies; and (2) the business of fire insurance did cross state lines so as to bring it within the definition of interstate commerce. Id. at 553. The Court distinguished Paul c. Virginia and subsequent cases relying on it because in those cases the Court was not confronted with a situation where there was a federal statute passed by Congress and intended to apply to fire insurance. Id. at 545. In the earlier cases, had the Court accepted the argument that, because there was no applicable state law, the federal government and not the states should regulate insurers, the insurers would have been virtually unregulated. The Court in South-Eastern adopted the position that state and federal regulation of fire insurers was concurrent, with federal law applying to those aspects of the business that are interstate in character, e.g., conspiracies across lines in restraint of trade. Id. at 553.

1012 (1976) provides.

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

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Whether regulated by state law or not, however, insurers are subject to federal antitrust laws prohibiting boycotts, coercion, or intimidation. 52 Thus, even if state law prohibits an insurer from engaging in a boycott, such conduct also is actionable at the federal level under the Sherman Act. 53

Historically, the proscription against boycotts, coercion, or intimidation in the McCarran-Ferguson Act generally had been interpreted to protect insurers from the actions of other insurers; 54 individual policyholders and' applicants for insurance were beyond the scope of the Act. In the spring of 1978, however, the Supreme Court was confronted with St. Paul Fire & Marine Insurance Co. v. Barry, 55 in which an individual applicant for medical malpractice insurance, denied insurance by several companies, alleged that the denials constituted a boycott. 56 The insurers argued that the prohibition against boycotts, coercion, and intimidation protected only other insurers and did not provide a cause of action for individuals. 57 The Court disagreed. In a seven to two decision, the Court held that the concerted refusal of insurers to deal with individuals constituted a boycott prohibited under the Sherman Act. 58 The Court was careful to qualify its decision, however, by indicating, on the one hand, that conduct by a single actor cannot constitute a boycott and, on the other hand, that not all concerted activity between insurers violates the Sherman Act. 59 How far the Court intends to extend the reach of the Sherman Act to insurance company practices awaits

(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended [15 U.S.C. 41 et seq.), shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

52. Id. 1013(b). For text of § 1013(b), see note 36 supra.

53. 15 U.S.C. §§ 1-7 (1976).

54. See St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 536 n.5 (1978). 55. 438 U.S. 531 (1978). Respondents, licensed physicians, sued, on a class action basis, four Rhode Island insurance companies, alleging that three of the companies refused to deal with them as a means of compelling the doctors to deal with the fourth on terms unfavorable to them. Id. at 533. The district court dismissed the complaint, which alleged Sherman Act violations, on the ground that the antitrust claim was barred by the McCarran-Ferguson Act. Id. The court of appeals reversed, id. at 534, and the Supreme Court affirmed. The Court stated that the provision of the Sherman Act that prohibits boycotts, coercion, or intimidation was applicable unless specifically exempted and the McCarran-Ferguson Act provided no such exemption. Id. at 550-51. The Court found that the type of conduct alleged by respondents constituted a boycott under the Sherman Act. Id. at 552-55.

56. Id. at 535.

57. Id. at 536.

58. Id. at 552-55.

59. Id. at 555. In regard to the agency relationship between agents and insurers, see notes 105 and 125 infra.

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[Vol. 29:315 future litigation. Nonetheless, the Barry decision represents a significant shift in traditional interpretation; at least some joint action by insurers that denies insurance coverage to individual applicants is now violative of the Sherman Act.

Does insurance redlining constitute a violation of the Sherman Act under the Barry rationale? It is clear that a decision by a single insurer or agent to redline an area or deny insurance to a single applicant does not constitute a violation of the Act. If two insurers agree to decline insurance applications or limit the amount or type of coverage available to applicants in a specific geographic area, however, such agreements probably would violate the Act as currently interpreted by the Supreme Court. A more likely situation to trigger insurer liability would arise when an insurer and an independent agent or broker agree to avoid a given geographic area. In fact, many complaints have been registered addressing the refusal of Chicago agents, on instructions from the company, to attempt to place insurance with a particular company because it no longer writes in a given neighborhood. 60 If these agreements between insurer and independent agent are tantamount to a concerted “refusal to deal" arrangement, they are prohibited by the Sherman Act. 61

In

In Barry, however, the Court indicated that its boycott discussion did not apply to concerted activity between insurers, or between insurers and others, that is "compelled or specifically authorized by state regulatory policy.” 62 recognizing the legitimacy of such state action, the Court followed the rationale set forth in Parker v. Brown. 63 In that case, the Court held that anticompetitive conduct becomes insulated from antitrust laws, even where competition is displaced by regulation or monopoly, when the conduct occurs as a result of state action. 64 For purposes of the McCarran-Ferguson Act, federal courts repeatedly have held that the state's power to control rates constitutes such insulating state action under the prevailing Parker doctrine. The power to regulate rates both directly and indirectly through adversary proceedings provides this antitrust insulation. 65 For example, under the Parker doctrine an agreement between an insurer and independent agent or between two insurers to accept only preferred risks or to limit coverage to repair cost would be exempt from federal antitrust laws when the insurer has filed those policies with the chief insurance regulatory officer and received necessary authorization.

60. See Valukas & Bollow, supra note 2, at 12-23.

61. 15 U.S.C. § 1 (1976).

62. St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 555 (1978).

63. 317 U.S. 341, 350-52 (1943) (state agricultural marketing program that operated to restrict competition and to regulate sale and distribution of agricultural commodities held not within the scope of, and thus not a violation of, the Sherman Act).

64. Id. at 350-52.

65. ILLINOIS Dep't of Insurance, Insurance RegulATION AND ANTITRUST: THE EFFECT OF THE REPEAL OF THE McCarran-FERGUSON ACT 12-13 (1979).

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Parker leaves open the question whether state action would insulate an insurer if it were alleged that the chief regulatory officer was a joint participant with the insurer in a “concerted refusal to deal," i.e., a boycott, rather than exercising his or her proper governmental function. If the state is not carrying out a legitimate governmental function but instead is a culpable joint participant, the insurer could be stripped of its exemption from antitrust law. 66 The congressional intent behind the Sherman Act should determine whether the state itself would be liable in such a situation. The legislative history of the Act indicates that the Congress did not intend that law to apply to such acts by a state.

67

The allegation often is made that there is a revolving door between the insurance industry and the office of the chief state insurance regulatory officer. 68 The implication, of course, is that the latter's decisions are made in the self-interest of the officer and insurer, not in the public interest. The Parker doctrine is premised on the state's exercising a proper governmental role. 69 Thus, if a regulatory officer's decision could be shown to exceed the bounds of his or her statutory authority, and to be in his or her limited pecuniary or other interest or that of an insurer, such misuse of discretion could be sufficient to remove the shield of antitrust protection, at least from the insurer. 70 Such a situation might exist where it could be proved that the chief regulatory officer agreed with an insurer's decision to remove its business from a geographic area in return for a promise of future employment. Problems of proof, of course, abound. Nonetheless, those problems should not obscure the potential for liability when the regulatory officer permits an insurer to withdraw its business totally or permits the insurer to withdraw more desirable or comprehensive forms of coverage from an urban community.

Because a boycott requires an agreement between at least two parties, the applicability of the Sherman Act to decisions of the state regulatory officer will be crucial when the challenged activity is an agreement between a single insurer and the regulatory officer. It is not necessary, however, to

66. See notes 51-53 and accompanying text supra.

67. See 21 CONG. REC. 2457, 2459, 2461, 2562 (1889). See also Parker v. Brown, 317 U.S. 341, 351 (1943) (legislative history suggests that Congress did not intend to include states within reach of the Sherman Act); Apex Hosiery Co. v. Leader, 310 U.S. 469, 493-95 n.15 (1940) (Sherman Act covers only business combinations).

68. Address by Eleanor Lewis, Ass't Insurance Commissioner, New Jersey, Discrimination Against Minorities and Women in Pensions and Health, Life and Disability Insurance Consultation, U.S. Comm'n on Civil Rights (Wash., D.C., April 26, 1978).

69. 317 U.S. at 351-52 (reliance on state as sovereign entity).

70. Whether the chief regulatory officer will enjoy sovereign immunity from personal liability for acts not entered into in good faith or for acts not representing a proper governmental function is beyond the scope of this article. The Supreme Court, however, in Scheuer v. Rhodes, 416 U.S. 232, 247-49 (1974), determined that government officers are entitled only to a qualified immunity, not an absolute immunity for discretionary acts. Further, the Court recently upheld Scheuer in Butz v. Economou, 438 U.S. 478 (1978) (executive officials charged with constitutional violations enjoy a qualified immunity, although there are some officials whose special functions require absolute immunity).

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[Vol. 29:315 prove a racial or ethnic basis for the agreement. Thus, the hurdle of proving intentionality or foreseeability of racially adverse consequences is eliminated under this statutory vehicle.

72

The Impact of the McCarran-Ferguson Act

Upon Access to the Courts for Civil Rights Violations

73

Alternative state and federal courts were not always available to individuals aggrieved by racial or ethnic discrimination. Prior to the Civil War, Congress relied solely on the states to vindicate individual rights to personal security. When the Civil Rights Acts were enacted following that war, Congress altered its established policy and placed primary responsibility for protecting individual civil rights on the federal level. Thus, until enactment of the McCarran-Ferguson Act of 1945,74 there would have been no question that federal courts were open to complaints of civil rights violations in regard to insurance.

Since 1945, however, the McCarran-Ferguson Act has exempted the business of insurance from federal law to the extent that state law regulates the subject. 75 The Act, however, does not define the "business of insurance." Recently, in St. Paul Fire & Marine Insurance Co. v. Barry, 76 the Supreme Court distinguished between the "business of insurance," which is exempt under the Act, and the "business of insurance companies," which lies within the scope of the federal antitrust laws. The "business of insurance," according to the Court, refers to the essence of insurance itself, that is, the spreading and distribution of risk. 77 Ultimately, this function is manifest in the contract between insurer and insured. Thus, the "business of insurance" is only that part of the insurer's activities that is related to risk assessment and marketing. Clearly, basic underwriting decisions represent the "business of insurance."

71. The McCarran-Ferguson Act does not distinguish between a boycott grounded in commercial as against racial or other invidious discrimination. See 15 U.S.C. § 1013(b) (1976). For the text of 1013(b), see note 36 supra.

72. T. EMERSON, D. HABER, & N. Dorsen, Political and Civil Rights in the United STATES 1375-76 (3d ed. 1967). Prior to the enactment of the thirteenth, fourteenth, and fifteenth amendments, individual civil rights were virtually the exclusive concern of state law. Since 1833, the Bill of Rights had been held to constrain the federal government but not state, municipal, or private conduct. Barron v. Mayor of Baltimore, 32 U.S. (7 Pet.) 242, 248 (1833). Furthermore, blacks were not considered "persons" entitled to such federal constitutional protections as did exist until the passage of the Civil Rights Acts. Scott v. Sandford, 60 U.S. (19 How.) 393, 404 (1856).

73. The thirteenth, fourteenth, and fifteenth amendments to the U.S. Constitution and the statutes passed to enforce them form the core of federal protection against racial and ethnic discrimination in the public (state and municipal) and private spheres. 42 U.S.C. §§ 1981-1983, 1985 (1976). See notes 96-125 and accompanying text infra.

74. 15 U.S.C. §§ 1011-1015 (1976).

75. Id. § 1012 (unless a federal law relates specifically to business of insurance).

76. St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531 (1978).

77. Id. at 551. The Court did not define the "business of insurance companies."

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