The New York Times reports:

Mr. Lott, a Republican and former majority leader, is one of thousands of homeowners on the Gulf Coast who have been fighting with their insurers over payments for damage in Hurricane Katrina. In an interview yesterday, he said he was angry about the insurers’ “insensitivity and outright meanness” in rejecting many homeowners’ claims. He said he inserted a provision into legislation, signed by President Bush last week, directing the Department of Homeland Security to investigate potential fraud by the insurance industry. Mr. Lott said he was also drafting legislation to challenge the industry’s exemptions from antitrust laws and had asked his staff to investigate the industry’s tax rates. “I am outraged,” he said. “I’m concerned there are lots of abuses in the aftermath of the hurricane.” Mr. Lott’s claim for the loss of his $400,000 house in Pascagoula was rejected by State Farm.

The antitrust exemption referred to derives from the McCarran-Ferguson Act and is unusual among antitrust exemptions such as Noerr-Pennington, labor, agricultural co-ops, or Baseball, in that it builds on the existence of state regulation.

The McCarran-Ferguson Act of 1945 was a response to U.S. v. South-Eastern Underwriters Ass’n, a Supreme Court case the year before that had upset the status quo by holding that insurance companies could be federally regulated through the antitrust laws. Before South-Eastern Underwriters, insurances had been regarded as local endeavors and outside the reach of the commerce clause. South-Eastern Underwriters threatened the insurance industry which had developed several practices that could be considered horizontal agreements under the Sherman Act, such as horizontal risk-pooling agreements. To protect the industry, the McCarran-Ferguson Act exempted insurances form the federal antitrust laws, to the extent the insurances were subject to state regulation and engaged in the “business of insurance” short of “boycott, coercion, or intimidation.” McCarran-Ferguson thus provides an exemption as a reflex to state regulation.

The exemption has been controversial, and Lott is reviving an old debate. The issue is not (and this may disappoint Mr. Lott) whether nice distinctions between flood damage and storm damage after a hurricane reflect positively on the insurance industry. The problem is that much of the insurance industry is not effectively regulated. The exemption from federal antitrust laws goes much further than the state-action doctrine and ties only to the existence of a state statute, without requiring actual state regulation or effective oversight. This low standard (established in 1958 by the Supreme Court in FTC v. National Casualty Co.) means that purely private collusion that harms competition remains unchecked either by real state regulation and oversight or the federal antitrust laws. The “boycott, coercion or intimitadation” clause provides little or no protection, as it is accepted that insurances may coordinate in the development of forms—Section 1 of the Sherman Act does not apply, for example, if insurance companies agree among themselves to exclude flood damage from home-owners insurance policies. (The Supreme Court did consider it a boycott when three insurance companies agreed no longer to offer medical malpractice insurance at all, leaving a fourth insurance company in a position to dictate terms to the insureds. St. Paul Fire & Marine Ins. Co. v. Barry.) And who can seriously say that the modern insurance industry isn’t engaged in interstate commerce?

Without the protection of the McCarran-Ferguson Act, insurance companies would still be able to profit from the state-action exemption, but only to the extent the state’s intention to replace the antitrust laws through its regulation is manifest, and the state actively supervises its regulatory policy. California Retail Liquor Dealers Ass’n v. Midcal Aluminum Co.

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