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Public Policy Analysis & Opinion
Collateral damage
Efforts to declare health care reform unconstitutional could have wide-ranging effects
By Kevin P. Hennosy
Download a copy of Paul v. Virginia because if opponents of health insurance have their way, that opinion might once again define the law of the land—no matter what it means to large property/casualty and life insurance companies.
Even with a brand new tinfoil hat on my head and after imbibing from a jug of fluoride-free water, it is difficult for me to imagine a means to deny the constitutional authority of the federal government to establish a role in health care financing. It is one thing to disagree with the policy, but to argue against the constitutionality of the act invites trouble.
To do so, the Supreme Court decision in United States v. South-Eastern Underwriters Association (SEUA) would have to fall. In the SEUA case, the court overturned the insurance provisions of Paul v. Virginia, which ruled, “The business of insurance is not commerce.” Justice Hugo Black penned the decision for the majority of the Court.
To understand the decision and to understand what is being argued today, one must look at the standard definition of “commerce.” Generally, this term refers to the exchange of a material of value in return for money. The insurance mechanism measures the risk of financial loss and charges a fee based on moving the risk of that loss away from the insured to the insurer.
Again, following Justice Black’s logic, insurance policies are actually bills of lading that order the transfer of a defined measure of the commodity risk from insured to insurer, and sometimes on to reinsurers. Insurers made risk a commodity.
In the SEUA opinion, the Court defined insurance as interstate commerce because insurers move risk for a fee in an operation that generally involves more than one state; therefore, the SEUA decision deemed that insurance was interstate commerce, which falls squarely within the constitutional jurisdiction of the Congress.
Yet, if the current Court majority, which views every corporation as having the same human rights as you or I, decides that insurance is not commerce, then the reach of that decision will not be limited to health insurance.
Those insurance professionals who favor the availability of an Optional Federal Charter, or insurance sales across state lines, or an Insurance Information Office in the U.S. Department of the Treasury, or the federal “backstop” for terrorism risk, or the National Flood Insurance Program may just see these and other steps toward uniformity vanish if the opponents’ constitutional attack pushes aside the concept of insurance as interstate commerce. Those who support the state regulatory system should understand that it would suffer great disruption without the stability of the federal McCarran-Ferguson Act standing behind it.
If insurance is not interstate commerce, the federal government loses all jurisdiction over insurance.
Such an outcome would be something akin to “collateral damage,” a term that General Curtis E. LeMay first used in World War II to describe unintentional destruction and death associated with bombing. That term did not become widely used until the Vietnam War, when another applicable concept came into usage: having to burn the village in order to save it.
Defenders of “states’ rights” (a term that is curiously absent from the U.S. Constitution) might welcome the return of Paul v. Virginia with the same fervor as, say, the return of another standard from the states’ rights hit parade: the Dred Scott Decision. Yet, in the words of Jiminy Cricket, “Be careful what you dream because dreams do come true!”
In such an instance, selling or purchasing insurance could be every bit as fun as selling or purchasing canned food or pharmaceuticals before the Federal Clean Food and Drug Act. “Luck be a lady tonight!”
Colonel Paul
Let us remember that the losing side in the case of Paul v. Virginia consisted primarily of a coalition of the nation’s largest fire insurance companies. Colonel Samuel Paul was a licensed insurance agent in Virginia who refused to pay state licensing fees, in order to test state jurisdiction over insurance. Yet Colonel Paul was more than an insurance agent. Paul was also a lawyer for the New York Underwriters Agency—a fire insurance cartel.
In 1866, the New York Underwriters Agency was behind the introduction of the first insurance federal charter bill, which stalled in the U.S. Senate. In order to put political pressure on the Congress to pass insurance charter legislation, the New York Underwriters Agency concocted the legal challenge to Virginia’s jurisdiction over insurance.
The cartel was surprised when the court ruled against its complaint by opining that insurance was not commerce, and could not be interstate commerce; therefore, the Congress had no jurisdiction over insurance. The decision assumed that insurance was a local matter, barren of national interest.
The Paul v. Virginia ruling stymied the efforts of fire insurance companies and some life insurance companies to seek a federal charter and a weak system of federal oversight. The insurers wanted the same deal that the big banks got with the passage of the National Bank Act. The New York Underwriters Association helped to found the National Bureau of Fire Underwriters (NBFU) to lobby for a federal charter that would keep state officials at bay while leaving “supervision” to a submissive entity like the Office of the Comptroller of the Currency.
For more than seven decades after the Paul v. Virginia decision came down, the NBFU and life insurance companies tried to persuade the Court to overturn it. In addition, that lobbying coalition tried to find a way for Congress to work around the prohibition on legislating on insurance. At one point, the lobby worked with the Teddy Roosevelt administration to promote a bill to grant national operating rights to any company chartered in the District of Columbia, which at the time Congress governed through a subcommittee. Senator John F. Dryden (R-N.J.) introduced the bill. Senator Dryden was also known as President Dryden—at least around the headquarters of The Prudential Insurance Company.
The Paul v. Virginia decision proved highly resilient to attack, much to the chagrin of the nation’s most powerful insurers. Between the 1870s and 1920s, insurers filed a series of lawsuits that they hoped would overturn the Paul v. Virginia decision.
Because of problems that consumers faced in insurance markets, and in the absence of federal oversight, state officials instituted more affirmative regulatory frameworks around the turn of the 20th century. These frameworks included the approval of insurance rates and forms before they could be legally offered to the public.
Insurers tried to fight this new level of consumer protection from the states, which required state officials to verify that insurers based their prices on the product’s risk. Unlike other sectors, pricing could not be based solely on “what the market will bear.” States passed laws that forbade consumers the choice of uncertified products and prices, and forbade insurers to offer uncertified products and prices.
Kansas enacted the first of these laws in 1909, and insurers challenged it in federal courts.
Public interest
In 1914, The Supreme Court rejected the insurers’ arguments in German Alliance Ins. Co. v. Kansas, 233 U. S. 389. While accepting the Paul v. Virginia decision as settled law, the Court opinion in German Alliance undermined the tenet that insurance is simply a private contract between two parties.
The Court ruled that insurance is “clothed with a public interest”; therefore, government regulation of insurance is proper. Writing for the majority, Justice Joseph McKenna cited a two-part test for determining whether a private business becomes clothed in a public interest: (1) the business must be affected with a public interest, and (2) the property employed in such business must be devoted to a public use.
Among Justice McKenna’s arguments:
(Insurance) companies have been said to be the mere machinery by which the inevitable losses by fire are distributed so as to fall as lightly as possible on the public at large…Their efficiency, therefore, and solvency, are of great concern…We can see, therefore, how it has come to be considered a matter of public concern to regulate it.
The decision in German Alliance remains settled law. Whether or not the opinion in SEUA is overruled, the ruling in German Alliance stands and insurance is clothed in a public interest. Somehow a regulatory framework would have to be built to protect the public interest.
Interstate commerce
It was not until President Franklin Roosevelt decided to revive the Antitrust Division of the Justice Department that the Supreme Court would overturn its opinion that insurance was not interstate commerce.
The Justice Department filed an antitrust complaint against the South-Eastern Underwriters Association, which was a fire insurance cartel. Justice Department lawyers probably decided to cite the SEUA rather than some other regional insurance cartel as a product of “venue shopping.” That means that the Justice Department lawyers wanted to introduce the case through a district and circuit court that gave them the best chance of victory. The complaint was filed in the U.S. District Court in Atlanta, but the investigation was initiated in Kansas City, Missouri, following the fall of political boss Tom Pendergast—who had taken and distributed bribes on behalf of a Chicago-based fire insurance cartel.
Justice Hugo Black wrote the opinion for the Court’s majority. Black argued that insurance was not a contract subject only to local jurisdiction. Rather, insurance was trade in risk.
Just as Justice McKenna borrowed from cases based on disputes over grain elevators, Justice Black focused on whether insurers charged the public a fair price for the movement of an accurately measured risk. Building on Black’s logic, risk is a commodity that cannot be seen, smelled, or tasted, but it can be weighed. In reality, all actuaries ever do is watch the scales, and regulators look to see whether the actuaries place a thumb on the scales.
“This business is not separated into 48 distinct territorial compartments which function in isolation from each other,” Black wrote. “Interrelationship, interdependence, and integration of activities in all the states in which they operate are practical aspects of the insurance companies’ methods of doing business.”
Furthermore, Justice Black opined, “In short, a nationwide business is not deprived of its interstate character merely because it is built upon sales contracts which are local in nature. Were the rule otherwise, few businesses could be said to be engaged in interstate commerce.”
To seal the deal, Justice Black summoned the spirit of Chief Justice John Marshall, who observed in 1824 that, “Commerce, undoubtedly, is traffic, but it is something more: it is intercourse. It describes the commercial intercourse between nations, and parts of nations, in all its branches…”
Justice Black continued, “Commerce is interstate, [Chief Justice Marshall] said, when it ‘concerns more States than one.’ No decision of this Court has ever questioned this as too comprehensive a description of the subject matter of the Commerce Clause.”
With the local transaction fantasy pushed aside, Justice Black turned his attention to the federal Antitrust Law of 1890, which stands guardian over competition in American commercial markets.
“Whether competition is a good thing for the insurance business or not 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 and not this Court,” wrote Justice Black.
A discussion of whether competition is or is not good for insurance and insurance markets will come in a future edition of this column.
Until recently, I would not have taken the constitutional challenge to insurance as interstate commerce as within the realm of probability. That changed when a five-member majority of the current court voted to reject more than a century of precedent and invest corporations with the same rights as natural human beings, at least in the realm of political speech.
Who knows what this group is capable of doing?
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