History of Insurance Regulation Part 1

We have mentioned in an earlier article insurance began in America in the early 18th century when Charleston South Carolina residents created the first American mutual insurance company. The growth of the industry and its spread through the states led to situations in need of regulation, particularly as insurers reached out to cross state lines in search of clients.  There are a number of key cases and laws that have defined the current regulatory status of the insurance industry.

Paul vs. Virginia was an early case that tested whether states had a right to regulate insurance or whether insurance was “interstate commerce” and subject to regulation by the federal government.    The Virginia legislature passed a law that provided that an insurance company must be incorporated and licensed in the State in order to do business there.  In the 1860s, a New York insurance agent began to sell insurance in Virginia. The State of Virginia filed a legal action against the agent for failing to comply with Virginia law. The case was argued all the way to the U.S. Supreme Court, which decided that insurance was not interstate commerce and should, therefore, remain under each state’s jurisdiction.

In the early 1940’s, The Department of Justice sued the South-Eastern Underwriters Association (SEUA) a group of insurers,  for violating the Sherman Anti-trust Act. The Association members had agreed to use uniform insurance rates.  The Department of Justice contended that this amounted to price fixing and was a violation of federal law. The association argued that since insurance was not commerce, it was not subject to federal law. This case also made its way to the U.S. Supreme Court.  The Court was persuaded by the antitrust aspects of the case and ruled that insurance was interstate commerce and subject to federal regulation. This overturned the decision of Paul Vs. Virginia and handed regulatory authority back to the Federal Government. 

The reversal came only a year later with passage of the McCarran-Ferguson Act which reaffirmed the ability of individual states to regulate insurance. The Act added provisions that required each state to enact the same type of anti-trust laws used by the federal government. Eventually, each state did pass its own anti-trust laws, allowing the states to keep insurance regulation at the state level.

Since the 1940’s the states have regulated insurance within their own borders.  Here the Washington Insurance Commissioner’s office has the responsibility for assuring that there is oversight for all insurance products sold in the state.  The Commissioner’s office protects consumers and helps make sure that companies, agents and brokers follow the rules. 

More recently, there have been additional changes in the regulatory environment that affect the insurance industry. We will address some of these 21st century changes in another installment. 

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