( Note: This is the second part in a series of McCarran-Ferguson Act.)
Last week in my post, McCarran-Ferguson Act – What It Is and How It Affects it insurance? we learned that the McCarran-Ferguson Act gives insurance regulatory power back to the states by granting a narrow exemption from federal antitrust laws for activities regulated by the states. According to the law:
No congressional act may be interpreted as invalidating, impairing or replacing any law
adopted by any state for the purpose of regulating insurance business, or
imposing a fee or a tax 1  Congress did not think the law would provide a complete sales exemption for the insurance industry from federal laws. 2 Instead, it set up a 3-step test that must be satisfied before an insurance company's operations are exempted from federal law. These requirements are:
- The business in question must fall within the insurance business,
- The business must be regulated by state law; and
- The activity must not involve a boycott, coercion or threat.
In many cases, behavior involving insurance business is often exempt from antitrust liability. In order to determine which conduct qualifies as "insurance business" courts have determined that it must meet three requirements:
- The conduct must be about transferring or spreading the risks to policyholders.
- It must be an integral part of the insurance relationship between an insured and the insurer; and
- it must apply to entities in the insurance industry itself. 3
In summary, if a defendant can show that the contested behavior is related to an insurance relationship in the insurance industry that involves spreading the policyholders' risks, there is a chance that the court may consider the behavior to fall under business insurance.
Many courts have argued that agreements between insurance companies and their prices are within the "insurance business" and therefore exempt from antitrust laws. 4
In addition, agreements were held between insurance companies which affected the scope and extent of the policyholders "within the insurance business." 5
Activity regulated by the states
This requirement eliminates the federal exemption that gives power back to the states. McCarran-Ferguson was supposed to restore insurance regulation to the situation before southeastern insurers where states had exclusive responsibility for regulation. However, it is important to note that it was not intended to leave the insurance company's operations free from federal control if the states did not commit the crime. 6
Boycott, coercion or threat
] Section 3 (b) of the Act provides an exemption from this exemption by excluding the protective shield of the statutes. Even if the activity is within the "insurance business" and is regulated by state law, it will not be applied under the exemption if it constitutes an agreement or a boycott, coercion or threat. To learn more about the Boycott Exemption, be sure to stay updated next week for the next sub-series on the McCarran-Ferguson Act!
In summary, only a conversation between competitors does not break the laws. The danger is where the communication can be taken as evidence of an illegal agreement between competitors. The Sherman Act prohibits, among other things, agreements between competitors to set their prices, limit their production or restrict the conditions under which they will compete to sell their goods and services. 7 Meetings and collaborations between competitors create antitrust risks when they propose an anti-competitive agreement of this kind. Types of agreements that have been held illegal include agreements between competitors to set prices or outputs, rig bids, or divide or dive markets by allocating customers, suppliers, territories or trade lines.
1McCarran-Ferguson Act, 15 USC §§ 1011-1015.
2 Law of 9 March 1945, chap. 220, § 1-3, 59 Stat. 33-34 (codified with amendments at 15 USC (1982)).
3 Legal Principles Defining the Extent of Federal Antitrust Insurance Exemption B-304474, March 4, 2005.
4 Royal Drug 440 U.S. at 221; see also National Sec 393 USA at 460 ("Certainly the setting of interest rates apart from this activity; that was what Southeastern insurers were all about …").
5  Proctor v. State-Farm Mut. Auto Ins. Co. 675 F.2d 308 (D.C. Cir.), Cert. nekad, 459 U.S.C. 839 (1982).
6 United States v. Southern-Eastern Underwriters Association 322 U.S. Pat. 533 (1944).
7 Sherman Act, 15 U.S.C. § § 1-2 (1970).