Sylvia Perry, Individually and on Behalf of All Others Similarly Situated v. Fidelity Union Life Insurance Company ( 1979 )

THORNBERRY, Circuit Judge:

In Cochran v. Paco, Inc., 606 F.2d 460 (5 Cir. 1978), we held today that the lending activities of a premium finance company do not constitute the “business of insurance” and that the McCarran-Ferguson Act (“McCarran Act”), 15 U.S.C. §§ 1011 et seq., does not preclude application of the disclosure requirements of the Truth in Lending Act (“TIL”), 15 U.S.C. §§ 1601 et seq., to the transaction.

The instant ease, the second in today’s trilogy,¹ presents a related question: whether the McCarran Act bars TIL’s application when an insurance company provides premium financing in connection with the sale of an insurance policy. The district court held that the McCarran Act was a good defense to plaintiff’s TIL action and granted summary judgment for the defendant insurance company. We reverse.

I. FACTUAL BACKGROUND

Sylvia Perry was a college student in Alabama when a salesman from Fidelity Union Life Insurance Co. sold her a life insurance policy in June, 1974. To obtain the policy, which had annual premiums of $295, she made a $10 down payment and executed a promissory note to Fidelity for the remainder of the first year’s premium. Fidelity provided Perry a form entitled “Disclosure Statement and Acceptance of Policy,”² which stated that she would be paying $134 in interest over the five-year life of the note. Perry made no further payments on the note, which was ultimately assigned to a bank.

On June 24, 1975, Perry, on behalf of herself and all persons similarly situated, filed this suit, alleging that she had entered into contractual relations with Fidelity in the nature of a consumer credit transaction and that Fidelity’s disclosure forms violated TIL and Regulation Z, 12 C.F.R. § 226.1 et seq.³ She sought the statutory penalty for herself and the class, costs, and attorneys’ fees.⁴ Following discovery, Fidelity successfully moved for summary judgment on the ground that the McCarran Act barred application of TIL to the Perry transaction.

The district court, in an unreported opinion, held that (i) the disclosure of credit information of a premium financing arrangement is part of the business of insurance; (ii) the State of Alabama has exercised its power to regulate the premium financing aspect of the business of insurance; and (iii) application of TIL to this particular transaction would require a construction of TIL that would invalidate, impair or supersede Alabama law enacted for the purpose of regulating the business of insurance. This appeal followed.⁵

II. DISCUSSION

Our opinion in Cochran v. Paco, Inc., supra, establishes the analytical framework for determining the applicability of the McCarran Act. Since we held in Cochran that TIL does not specifically relate to the business of insurance, 606 F.2d at 464, we turn immediately to the next inquiry, that is, whether Fidelity’s premium financing activities, carried out in connection with its sale of an insurance policy, constitute the “business of insurance.” We hold that it does not and that the McCarran Act is no bar to the application of TIL. Accordingly, we need not determine whether Alabama has “any law enacted . for the purpose of regulating” the financing activities or whether TIL would “invalidate, impair, or supersede” such state law. Cochran, supra, 606 F.2d at 467 n.15.

There is no doubt that the sale of an insurance policy is squarely within the “business of insurance.” Securities & Exchange Comm’n v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). However, the financing of such a sale is a different activity. As we said in Cochran, premium financing “has little — if any — effect on an insurance company’s ability to pay claims or on the nature of [its] policies” and “has only a peripheral connection with the business of insurance,” 606 F.2d at 466-467. We do not think that the nature of premium financing changes, in chameleon-like fashion, simply because an insurance company rather than a loan or finance company authors the promissory note. Not all insurance company activities constitute the business of insurance, and the McCarran Act does not insulate every operation of every insurance company from federal regulation. Cochran, supra, at 465 n.13.

It would be anomalous to hold that Fidelity’s premium financing activities are the “business of insurance” but that the identical activities of the finance company in Cochran are not. The appropriate focus is thus the nature of the activity itself, not the type of business that is conducting it.

In making available premium financing, an insurance company is acting not as an insurer but as a creditor, and the financing activity is purely ancillary to the insurance relationship between the insurance company and the policyholder. Premium financing has virtually nothing to do with a company’s reliability as an insurer, a factor that stands at the center of the insurer-insured relationship. National Securities, supra. When an insurance company offers premium financing as an inducement for persons to purchase policies, it plays two distinct roles in its relationship with the purchaser. On the one hand, the company is an insurer, the purchaser an insured; but on the other hand, the company is a creditor, the purchaser a debtor. The former relationship constitutes the “business of insurance,” while the latter does not.

We do not doubt that an insurance company can, by offering a premium financing package, facilitate the sale of insurance policies. But that alone cannot elevate the activity to the “business of insurance,” for one can hardly claim that the extension of credit is an integral part of the insurance business. As we have said in the antitrust context, business activities of insurance companies not peculiar to the insurance industry are outside the scope of the “business of insurance.” Royal Drug Co. v. Group Life & Health Ins. Co., 556 F.2d 1375, 1386 (5 Cir. 1977); see also Battle v. Liberty Nat’l Life Ins. Co., 493 F.2d 39, 50 (5 Cir. 1974), cert. denied, 419 U.S. 1110, 95 5. Ct. 784, 42 L.Ed.2d 807 (1975).⁶

Accordingly, we hold that premium financing by an insurance company does not constitute the “business of insurance” within the meaning of the McCarran Act and that the McCarran Act is thus no bar to the application of TIL’s disclosure requirements. The judgment of the district court is reversed and the case remanded for further proceedings consistent with this opinion.

REVERSED and REMANDED.

1 . The third case is Cody v. Community Loan Corp., 606 F.2d 499 (5 Cir. 1978).

2 . This statement provides, in pertinent part:

(4) Cash Downpayment_____________$ 10.00

(5) Unpaid Balance of Cash Price_____$285.58

(6) Unpaid Balance ________(Same as Item 5)

(7) Amount Financed_______(Same as Item 5)

(8) Total FINANCE CHARGE (interest) ___________________________$134.03

(9) Deferred Payment Price (3 + 8)___$429.61

(10) Total of Payments (5 + 8) _______$419.61

The Total of Payments is payable in a single payment due 6-13-79, except if the above Policy terminates, the Note may be declared immediately due and payable.

(12) Date of Note___________________6-13-74

(13) Finance Charge Accrues From____6-13-74

Record at 46.

Had Perry paid later premiums, she would have received a cash payment at the end of the fifth year (the policy’s fifth anniversary endowment) that would have covered a substantial portion of the first year’s premium.

3 . Perry alleged the following violations of TIL:

(1) failure to disclose the finance charge as an accurate annual percentage rate computed in accordance with the provisions of 15 U.S.C. §§ 1606, 1638(a)(7), and 12 C.F.R. §§ 226.5(b), 226.8(b)(2);

(2) failure to furnish a completed, duplicate copy of the disclosure statement containing all the required disclosures prior to the consummation of the consumer credit transaction as required by § 226.8(a);

(3) failure to disclose the “total down payment” as required by § 226.8(c)(2);

(4) use of the term “cash price of policy (annual premium)” instead of “cash price,” as required by §§ 226.6(a), 226.8(c)(1); and

(5) use of the term “total finance charge (interest)” instead of “finance charge,” as required by §§ 226.6(a), 226.8(c)(7).

Record at 3.

After discovery, Perry admitted that if the finance charge was correctly reported, the annual percentage rate was accurately computed. However, she sought to amend the complaint to allege that the finance charge was too low and the cash price too high. The record is silent as to whether this amendment was allowed.

4 . 15 U.S.C. § 1640(a). Count II of the complaint presented a state law claim. At the pretrial conference the parties agreed to submit the case on the sole issue of the McCarran Act defense, on which Fidelity prevailed, and the state law claim is thus not before us.

5 . The Board of Governors of the Federal Reserve System filed in this appeal the same amicus curiae brief submitted in support of appellant’s position in Cochran v. Paco, Inc., supra.

6 . We recognize that other courts, in other contexts, have held that an insurance company’s inducing persons to become policyholders is part of the business of insurance. E. g., Dexter v. Equitable Life Assurance Soc'y, 527 F.2d 233 (2 Cir. 1975) (antitrust action challenging Equitable’s requirement that plaintiff purchase life insurance as precondition to granting mortgage loans); Addrisi v. Equitable Life Assurance Soc’y, 503 F.2d 725 (9 Cir. 1974), cert. denied, 421 U.S. 922, 95 S.Ct. 1590, 43 L.Ed.2d 790 (1975) (same). However, in these cases the inducement was actually a requirement, and forcing prospective policyholders to buy insurance cannot be equated with making the purchase “easier” by offering premium financing. Moreover, if this “inducement” rationale were applied in the financing context, the activities of any lender who engages in premium financing would constitute the “business of insurance.” We have rejected such a result in Cochran v. Paco, Inc., supra, and application of the “inducement” theory in the instant case would make the McCarran Act’s applicability turn on who is engaged in premium financing rather than on the nature of that activity.