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'Silent tort reform: federal agencies, not Congress, are capping liability for business.

Using a variety of narrowly-tailored and little-noticed regulations, federal agencies and the industries they oversee have for the past several years been waging a battle against pro-consumer state authorities and the plaintiffs' bar, essentially helping to do for U.S. businesses what the Bush White House hasn't yet been able to do through Congress: Limit companies' liability.

Dubbed "silent tort reform" "stealth tort reform" or "back-door tort reform, the practice has seldom been noticed outside of the industries affected, though it has been applied by federal agencies that regulate everything from automobiles and banks to bedding manufacturers and drug makers.

Since midway through the first term of the Bush administration, the overall effect has been one in which trial lawyers, state regulators and state attorneys general have been barred from applying more stringent standards in state venues via language in new federal regulations that preempts state-level authority.

The practice has wide implications for insurers, as recent decisions with credit issues affect how insurers may handle customers' private information--and also because broadly limiting companies' exposure to lawsuits also shields insurance companies from having to pay for the losses involved.

"The reason this has worked so well is so much of this is beneath the radar" said Michael S. Greve, director of the American Enterprise Institute's Federalism Project. "Not for the industries, obviously, but for most of the media and the public at large."

Such regulatory efforts have reignited a dispute that has flared off and on almost since the founding of the country: When can the federal government preempt a state's jurisdiction? That dispute is at the heart of two cases now before the U.S. Supreme Court that have direct implications for insurers: Watters v. Wachovia, N.A., which pits Michigan's banking regulator against a federal banking regulator, and Safeco Insurance Co. v. Burr and Geico General Insurance Co. v. Edo, two consolidated cases argued on Jan. 16, that will impact insurers and anyone who extends credit or uses credit to set rates.

At the crux of the preemption debate is whether federal agencies such as the U.S. Food and Drug Administration or the National Highway Traffic Safety Administration should be able to issue rules that overturn the decisions of state-level regulators or bar state attorneys general from bringing lawsuits.

Professor Thomas O. McGarity, an expert on state common law and torts at the University of Texas School of Law, says no. "I do not think the agencies deserve any deference at all, because when they are reaching out to preempt state law ... they essentially have no expertise, and ultimately it's about interpreting statutes. To think that a federal agency would be more expert than Congress in determining the intent of a law ... I just don't think that's so. I don't think it's there."

David F. Snyder, vice president and assistant general counsel for the American Insurance Association, disagrees, saying that regulators have the expert knowledge about the industries they oversee and tend to know more about how they should work. "We certainly support consistent regulation, and we know that a lot of industries prefer to be regulated nationally, because there's more uniformity, more consistency, and more efficiency" Snyder said. "It's something we believe is in the public interest and we believe it's in the interest of insurers as well"

Snyder said regulators are generally "better at weighing and balancing all the factors, including the costs of compliance,' that go into rulemaking. "It's a generally held belief that it's better to recognize problems before they occur and regulate that way ... rather than regulation after the fact by state courts where they're very much focused on individual cases."

"State courts are good for certain things--they're certainly good at finding fault and certain other things," Snyder said, but businesses would prefer consistent regulation up front and then leaving businesses alone if they comply. "That, to us, is a better approach to regulating an industry than regulation by litigation."

Records on file with the clerk of the U.S. Senate show 479 insurance-related lobbying disclosures filed during 2006; none, however, shows direct lobbying of any federal agency on tort-related issues.

Supreme Court Cases

To those unfamiliar with legal jargon, Watters v. Wachovia Bank, N.A., is an impenetrable, Byzantine matter dealing with arcane points of banking law. At its crux, though, it involves a question that dates back to shortly after the country's founding and has broad implications for insurers and banks: Namely, when can a federal regulator preempt a state's authority to set its own rules? The question dates to at least 1819, when the Supreme Court first tackled the issue in the McCulloch v. Maryland case, in which the high court made its landmark finding that states cannot constitutionally control the powers of entities created under federal law.

Since 1863, the United States has had a dual banking system in which banks are chartered and regulated either by the federal government or by states. In the Watters case, a federal agency, the Office of the Comptroller of the Currency, is locked in a dispute with Michigan's banking regulator in a fight to see who has authority over a state-chartered banking corporation.

"The Wachovia case is going to be huge," McGarity said.

The case, which was argued on Nov. 29, pits Michigan's insurance and banking regulator against a Michigan-based operating subsidiary of nationally chartered Wachovia Bank. That same week, legal experts at an American Enterprise Institute panel said the decision would set a precedent under the new Roberts court as to how much regulatory authority federal agencies have when deciding to preempt state laws.

According to Brian P. Brooks, a banking class-action litigator with the Washington, D.C., office of the O'Melveny & Myers law firm, the federal agency's rulemaking probably wasn't a direct effort by the Bush administration "to achieve tort reform through regulatory agency preemption"--but it certainly fit in with other White House attempts to do so. "If you were to ask the [U.S.] Solicitor General's office, probably not in this specific case:' he said. "But it's consistent with other administration efforts on everything from pharmaceuticals to telecom issues."

The high court's decision, likely to come before July, will immediately affect the mortgage lending industry, but it also will affect the business of insurance because it will decide whether federal agencies can dismiss the edicts of state regulators through their own rulemaking.

If the court were to side with Wachovia and the Office of the Comptroller of the Currency, it would present "a huge threat" to long-standing principles preserving states' abilities to set their own consumer protections, said panelist Amy Quester, a senior policy and litigation attorney at the Center for Responsible Lending and a former attorney with the Federal Trade Commission. "It would concentrate a huge amount of authority in one federal agency. A huge mistake, in my view" Quester said.

In the Safeco and Geico cases, insurers potentially face billions of dollars worth of statutory fines and lawsuits from millions of policyholders if the appellate court's rulings are allowed to stand. In both cases, the issue is whether the insurers "willfully" violated the federal Fair Credit Reporting Act, as well as whether the interpretation of the 9th U.S. Circuit Court of Appeals of insurers' reporting duties under the law was too broad.

The FCRA law says insurers and other businesses must provide an "adverse action notice" to consumers in instances where their credit reports negatively impact what they pay for goods or services--such as insurance premiums. The 9th Circuit said FCRA compels insurers to notify policyholders whenever they pull consumers' credit scores and do not give them the company's best possible rate.

The 9th Circuit ruling also held that the insurers made an "implausible and indefensible" interpretation of the FCRA law, which amounted to "willful" violation, paving the way for untold millions in punitive damages in civil suits and allowing the Federal Trade Commission to Free the companies $1,000 for each violation. Both insurers have argued any FCRA violations cannot have been "willful," because the law is ambiguous--which they contend is proven by the existence of differing court rulings on the matter.

The Bush administration has sided with the insurers, with the U.S. Solicitor General's Office arguing for reversal of the 9th Circuit decision in the Geico case, and arguing in favor of vacating that court's ruling in the Safeco case.

What's Next

A now-Democratically controlled Congress means little, as the rules and regulations are still coming from the Bush White House, said Greve.

"Expect more of the same," he said. Democrats are also more oversight-focused, he said, so more regulation that preempts state rules is more, not less, likely.

Federal regulators and the industries overseen by them also are well acquainted with the cycles in Washington, D.C., he said, meaning more narrowly-tailored rules are likely to be slipped in before the current administration leaves town.

"The White House and the OMB (Office of Management and Budget) are attuned to this ritual in Washington, which is to drop a slew of 'midnight regulations' before the curtain falls," Greve said. "If these industries and their regulators have their act together, which I suspect they really do, those sorts of things are gearing up right now."

Key Points

* Under the Bush administration, federal agencies have been issuing rules preempting state tort laws and state regulations.

* Adoption of the rules almost always has the effect of preempting lawsuits.

* Two upcoming U.S. Supreme Court decisions may settle longstanding state versus federal authority disputes.
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Title Annotation:Regulatory/Law
Author:Grier, Chris
Publication:Best's Review
Date:Mar 1, 2007
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