In the first fallout from a lawsuit seeking to set aside Ohio’s restrictive laws dealing with bank insurance sales, the Ohio Insurance Department told a federal magistrate Jan. 27 it will stipulate that a state law barring banks from selling title insurance is pre-empted by federal law.

But a banking industry lawyer says the stipulation is of little practical value because the main count, which seeks to pre-empt a law which bars banks from selling insurance to no more than 50% of their customers, will remain in place. Lawyers for the Ohio insurance department said they will contest that claim.

After a scheduling conference, Ohio banks and their allies said they are encouraged by a federal court ruling they believe will facilitate a quick decision on a lawsuit that claims state insurance laws unfairly discriminate against national bank sale of insurance.

The case is a derivative suit to the 1996 Supreme Court ruling in Barnett, which held that states cannot "prevent or significantly interfere" with the ability of a national bank to sell insurance.

The Barnett case dealt with overt laws or rules that blatantly and, according to the Supreme Court, illegally barred national banks from selling insurance. This case deals with laws and rules that indirectly bar bank sales of insurance.

The Ohio rule bars bank sales of title insurance outright, and requires that banks can sell other types of insurance only to non-customers. It is done through a law known as the "controlled business statute."

The suit was filed Oct. 6. In a scheduling conference Jan. 27 a federal magistrate in Columbus allowed state and national insurance groups to intervene in the case, but only with the understanding that the issue will be decided based on the law, and not on protracted discovery proceedings. Under the schedule agreed upon by the parties, all briefs in the case must be filed by March 15. A friend-of-the-court brief is due from the Office of the Comptroller of the Currency Feb. 3.

Alan Berliner, assistant director and chief counsel to the Ohio insurance department, said the department will have its stipulation on the title insurance issue in the court’s hands this week. But, he said, the agency will continue to challenge the banking industry’s argument that its controlled business statute unfairly discriminates against bank sales of insurance.

He also said, "We want to dispose of it as promptly as reasonably possible."

Commenting on the title insurance issue, Michael Crotty, deputy general counsel for litigation at the American Bankers Association, said the insurance department stipulation was meaningless–although Berliner contested that interpretation.

Crotty said that even if the state insurance department admits the title insurance law is pre-empted by federal law, "it still means banks can sell insurance only if they promise to comply with the principal purpose statute, which says that banks cannot do more than 50% of their insurance business with their own customers.

"And that is ridiculous because banks are likely to sell title insurance only to their own customers," Crotty said.

The scenario is similar to a case in upstate New York dealing with state laws which barred Canandaigua National Bank from selling property/casualty insurance to its own customers. The law was enacted in response to the Barnett decision.

A federal court judge in Rochester ruled last March that the law illegally, if indirectly, barred national banks from selling insurance. In that case, the judge declined to allow lengthy discovery proceedings, and also decided the case relatively promptly based on the law.

"These restrictions prohibit us from effectively meeting the financial needs of our customers," said William K. Browning, president of Huntington National Bank’s insurance operations. Huntington is based in Columbus. "Consumers in Ohio can benefit from more competition, which these existing Ohio laws actually prohibit," he said.

Approximately 20 states have either elected not to enforce discriminatory state laws against national banks or have amended their laws to give banks operating in those states insurance sales authority since the Supreme Court decision, according to Reynolds. While most other states do not restrict bank insurance sales, Ohio is one of only a handful of states that have not recognized the Barnett Bank decision, he said.

The plaintiffs include Huntington, the ABI, the Ohio Bankers Association and the American Bankers Association Insurance Association.