Is Insurance Really Exempt from the U.S. Antitrust Laws?

Author: Jarod Bona

In many instances, conduct involving the business of insurance is, indeed, exempt from antitrust liability.

So why does insurance sometimes get a free pass?

In 1945, Congress passed a law called The McCarran-Ferguson Act. Insurance, of course, has traditionally been regulated by the States. Territorial and jurisdictional disputes between the States and the Federal government are a grand tradition in this country. We call it Federalism. In 1945, it appears that the states won a battle over the feds.

As a result, in certain instances, business-of-insurance conduct can escape federal antitrust scrutiny.

The business of insurance isn’t the only type of exemption from the antitrust laws. There are a few. At The Antitrust Attorney Blog, we have discussed state-action immunity quite a bit (as suing state and local governments under the antitrust laws is a favorite topic of mine).

An exemption that is similar to the McCarran-Ferguson Act is the filed-rate doctrine, which we discuss here. There are, of course, several others, including–believe it or not–an antitrust exemption for baseball. The courts, however, disfavor these exemptions and interpret them narrowly.

But back to the insurance-business exemption and The McCarran-Ferguson Act. Do you notice that I keep calling it the “business of insurance” exemption and not the insurance-company exemption? That is because the courts don’t just exempt insurance companies from antitrust scrutiny. No, the exemption only applies to the business of insurance and in certain circumstances.

Below are the basic elements a defendant must satisfy to invoke the McCarran-Ferguson Act:

1. The conduct in question must be regulated by the state or states.
2. The conduct must qualify as the business of insurance—the business of insurers is not sufficient.
3. The conduct must not consist of a group boycott or related form of coercion.

Each of these elements, in turn, has its own requirements, case law, and doctrinal development. The most interesting of the three elements is how to define the business of insurance.

To determine whether conduct qualifies as the “business of insurance,” courts examine whether the conduct includes the following three components:

1. The conduct must be concerned with transferring or spreading the risks of policyholders;
2. It must be an integral part of the policy relationship between an insured and its insurer; and
3. It must concern entities within the insurance industry itself.

So if a defendant can show that the challenged conduct is related to an insurance relationship within the insurance industry involving the spreading of policyholders’ risks, there is a good chance that a court will hold that it is the business of insurance. And if the defendant isn’t engaging in a group boycott and the insurance business in question is regulated by the states, the federal antitrust laws probably won’t apply.

Of course, like everything else related to antitrust law, there are plenty of exceptions and nuances, so you should contact an antitrust lawyer if you really need to know whether the antitrust laws are likely to apply—or if you’ve been sued or are about to sue.

Update: Near the end of 2020, Congress passed and the President signed a bill called the Competitive Health Insurance Reform Act of 2020. This Act limits the McCarren-Ferguson Act exemption as applied to health insurance companies. There are, of course, certain exceptions to this new exception, which leave in place the exemption for activities like sharing historical loss data and developing standard policy forms. The complexity of health care markets combined with extensive government interference in this area create significant competition and antitrust issues. So this area is an antitrust minefield. Don’t traverse it without an antitrust attorney.

For some reason, insurance has a reputation as rather dull. And, I suppose, if you are dealing with surface insurance issues or reading policies, it might seem dull. But I have quite a bit of antitrust experience involving the insurance industry—including In re Insurance Brokerage Antitrust Litigation—and I can tell you that from an economic and business standpoint, it is quite fascinating.

Insurance markets are some of the most interesting and complex markets out there. Risk is something that everyone thinks about on the surface, but very few people think about deeply.

This goes beyond insurance, but since we are on the topic of risk, I highly recommend that you read everything you can by Nassim Taleb. One of my favorite books of all time is Antifragile: Things That Gain From Disorder, which you should read as soon as you can. It is the sort of book that will change the way you think to such an extent that you will look back and it will seem obvious. Writing this is reminding me that I should read it again.