MERCHANTS HOME DELIVERY SERVICE, INC., a California
corporation, Plaintiff-Appellant,
v.
FRANK B. HALL & CO., INC., a Delaware corporation;
Prometheus Liquidating Corp., a Delaware corp.; Frank B.
Hall Insurance Brokers, Inc., a Delaware corp.; James
Dwight Ismay, an individual; Terry Don Smalridge, an
individual; Paul C. Carter, an individual, Defendants-Appellees.
MERCHANTS HOME DELIVERY SERVICE, INC., a California
corporation, Plaintiff-Appellant,
v.
FRANK B. HALL & CO., INC., a Delaware corp.; Prometheus
Liquidating Corp., a Delaware corp.; Frank B.
Hall Insurance Brokers, Inc., a Delaware
corporation, Defendants,
and
Paul C. Carter, an individual, Defendant-Appellee.
MERCHANTS HOME DELIVERY SERVICE, INC., a California
corporation, Plaintiff-Appellant,
v.
FRANK B. HALL & CO., INC., a Delaware corporation;
Prometheus Liquidating Corp., a Delaware corp.; Frank B.
Hall Insurance Brokers, Inc., a Delaware corp.; James
Dwight Ismay, an individual; Terry Don Smalridge, an
individual, Defendants-Appellees,
and
Paul C. Carter, an individual, Defendant.
Nos. 93-56302, 93-56589, 94-55035.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted, March 8, 1995.
Decided March 28, 1995.
Stephen R. Knapp and John B. Wallace, Bishop, Barry, Howe, Haney & Ryder, Los Angeles, CA, and G. Robert Blakey, Notre Dame, IN, for plaintiff-appellant.
James C. Martin, Crosby, Heafey, Roach & May, Los Angeles, CA, for defendants-appellees.
Appeals from the United States District Court for the Central District of California.
Before: BROWNING, BOOCHEVER and BEEZER, Circuit Judges.
BEEZER, Circuit Judge:
Plaintiff Merchants Home Delivery Service, Inc. ("Merchants") appeals the district court's judgments dismissing Merchants' action against its former insurance broker, Frank B. Hall & Co., Inc. and associated defendants (collectively "Hall"). Merchants' complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). See 18 U.S.C. Secs. 1961-1968. The district court granted Hall's motion for judgment on the pleadings due to the court's determination that section 2(b) of the McCarran-Fergusоn Act (15 U.S.C. Sec. 1011, et seq.) precluded the application of RICO to Hall's alleged wrongdoing. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We reverse and remand.
* Merchants' complaint alleges: Merchants is a national company engaged in shipping and delivering packages. It retained Hall on a continuing basis to secure numerous insurance policies and to рrocess claims for which Merchants was self-insured. Merchants says that employees of Hall, with Hall's knowledge or acquiescence, defrauded Merchants in three ways: (1) by overbilling Merchants for insurance premiums on actual policies, (2) by billing Merchants for premiums on nonexistent policies, and (3) by billing Merchants for direct, uninsured claims that were never paid to the claimants. Merchants alleges that these fraudulent acts were accomplished through use of the mails and wires, thus bringing them within the scope of RICO.
Merchants asserts numerous state law claims in addition to its RICO claims. The district court declined to exercise supplemental jurisdiction over the state law claims, and Merchants is pursuing those claims in state court. Hall moved for judgment on thе pleadings (Fed.R.Civ.P. 12(c)), which the district court granted, ultimately disposing of the claims against all defendants in three successive judgments. Merchants timely appealed from each judgment and the appeals were consolidated.
II
We review a judgment on the pleadings de novo. Westlands Water Dist. v. Firebaugh Canal,
III
Congress enacted the McCarran-Ferguson Act in part to allow the states to regulate the business of insurance free from inadvertent preemption by federal statutes of general applicability. See Group Life & Health Ins. Co. v. Royal Drug Co.,
Section 2(b) provides, in relevant part: "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance ... unless such Act spеcifically relates to the business of insurance." Id. The terms of the statute suggest a four part inquiry for determining when Sec. 2(b) precludes the application of a federal statute. See Cochran v. Paco, Inc.,
The first and third elements are not at issue here. As Merchants concedes, RICO does not specifically relate to the business of insurance. See 18 U.S.C. Secs. 1961, 1962 (listing activities proscribed by RICO). Also, California has enacted a comprehensive insurance code, which prohibits the acts alleged by Merchants.1 See Feinstein v. Nettleship Co.,
IV
We first address whether the practices alleged by Merchants fall within the business of insurance under Sec. 2(b). We hold that overcharging for premiums on actual insurance policies is the business of insurance, but that collecting premiums on false policies and charging for unpaid, uninsured claims are not.
* The parties contest the prоper scope of inquiry concerning whether the acts challenged under RICO constitute the business of insurance. Merchants argues that the court must look only to the wrongful component of the acts alleged, positing that "fraud and theft cannot be the 'business of insurance.' " It finds support for this position in several district court decisions. See, e.g., Thacker v. New York Life Ins. Co.,
Neither party has identified the proper scope of inquiry. The approach put forth by Hall is too broad. The Supreme Court has stated that the McCarran-Ferguson Act "does not exempt the business of insurance companies.... The exemption is for the 'business of insurance[.]' " Royal Drug,
Merchants' proposed test, however, defines the challenged practice too narrowly. As the Seventh Circuit stated, "it is not helpful to point to a practice forbidden by federal law ... and observe that this practice is not itself insurance." NAACP. v. American Family Mut. Ins. Co.,
B
The Supreme Court has identified three factors to be applied in determining whether a practice constitutes the business of insurance: (1) whether the practice has the effect of transferring or spreading the policyhоlders' risks, (2) whether the practice is an integral part of the policy relationship between the insurer and the insured, and (3) whether the practice is limited to entities within the insurance industry.2 See United Labor Life Ins. Co. v. Pireno,
Merchants alleges three types of fraudulent practices by Hall: (1) overcharging for premiums on actual policies, (2) collecting premiums on fictitious policies, and (3) collecting payments for uninsured claims which Hall did not actually pay. We address each practice separately.
* Overcharging for premiums on actual policies is part of the business of insurance. All three factors are satisfied. First, Merchants actually was a party to an insurance policy which transferred and spread its risks. The payment and collection of premiums is necessary to the risk-spreading transaction; if the premiums are not paid, the policy will lapse and the risk spreading relationship will be terminated. Second, an insurance broker's collection of premiums is integral, though not indispensable, to the relationship between the insured and the insurer. Finally, only in the insurance industry are insurance policies written and insurance premiums collected. Merchants' claim here is not that it was never insured or that its risk was not spread, but simply that it was charged more than it should have been for the insurance coverage it received. This type of transaction is at the core of the "business of insurance."
2
We fail to see, however, how the collection of premium payments for nonexistent policies falls within the business оf insurance. Where there is no insurance policy, the first two factors are not satisfied: Merchants' risk is not spread, and there is no relationship at all between it and an insurer. This conclusion is supported by the very wording of the first two factors, which assumes the existence of a "policy." See Nettleship,
Given the Supreme Court's clear statements that the transfer or spreading of risk is the primary factor to be considered, the absence of this element requires, at a minimum, that the other two factors weigh strongly in Hall's favor in order for its practice to fall within the business of insurance. See SEC v. National Sec., Inc.,
3
The third challenged practice, collecting money for false claims to be directly paid by Merchants, is not even arguably the business of insurance. This practice satisfies none of the faсtors. There is no spreading or transfer of the risk. Indeed, even had the transactions not been fraudulent, the parties always contemplated that Merchants would bear its own risk. There is no policy relationship between Merchants and any insurer. Finally, the practice is not limited to the insurance industry. Merchants could pay these claims itself, without using Hall as an intermediary, оr could use a different company as its agent for claims adjustment. Hall simply happens to be an insurance broker which Merchants engaged to administer claims settlement. This practice is not the business of insurance.
V
As some of Hall's alleged practices fall within the business of insurance, it is necessary for us to determine whether the application of RICO to those practices would "invalidate, impair, or supersede" California's laws regulating those practices. We hold the application of RICO to Hall's alleged fraudulent acts is consistent with California's insurance laws.
* The parties again argue in favor of widely disparate standards for determining whether a federal law invalidates, impairs or supersedes state insurance regulations. Hall argues that the term "impair" is intended to be a very broad proscription against applying federal law where a state has regulated, or chosen not to regulate, in the insurance industry. Under this construction of Sec. 2(b), Hall argues that the private right of action for treble damages and mandatory attorney fees allowed by RICO would upset the balаnce struck by California's insurance code, which, in general, allows only administrative enforcement and actual damages. See Moradi-Shalal v. Fireman's Fund Ins. Cos.,
Merchants counters with a much narrower reading of the McCarran-Ferguson Act's "inverse preemption." Under Merchants' construction, application of a federal law would be precluded only where the federal law expressly prohibited acts permitted by state law, or vice versa. Further, Merchants' argues that the California statute's express statement that it is cumulative with state common law causes of action weighs against Hall's "delicate balance" argument. Merchants has support from several district courts for this position as well. See, e.g., Thacker,
We have not previously addressed the question of exactly when a federal statute "invalidate[s], impair[s], or supersede[s]" a state law under Sec. 2(b). The Seventh Circuit, however, recently addressed this issue in NAACP v. American Family Mutual Insurance Co.,
In reaching its conclusion, the Seventh Circuit analogized to the principles governing federal preemption of state law in areas heavily regulated by federal statute. For example, in the area of nuclear power, despite pervasive federal regulation and a lower cap on liability under federal law, the Supreme Court upheld a state punitive damages award for acts prohibited by both state and federal law. See Silkwood v. Kerr-McGee Corp.,
We adopt the Seventh Circuit's well-reasoned approach. The language of Sec. 2(b) is inconsistent with a congressional intent to allow states to preempt the field of insurance regulation. First, Sec. 2(b)'s exemption of federal laws which specifically relate to the business of insurance weighs against a congressional intent wholly to abandon the field to the states. Second, only federal statutes which "invalidate, impair, or supersede" state insurance statutes are "preempted." If Congress had intended to cede the field, it could have said: "No federal statute shall be construed to apply to the business of insurance." Instead, it allowed federаl statutes to apply unless they conflict with the states' statutes. The terms of the Act's "inverse preemption" are not so broad as Hall would have it.
We hold that the application of a federal statute prohibiting acts which are also prohibited under a state's insurance laws does not "invalidate, impair, or supersede" the state's laws under Sec. 2(b) of the McCаrran-Ferguson Act.
B
Under this rule, Sec. 2(b) allows the application of RICO to the present facts. Hall concedes, indeed strenuously argues, that California law prohibits the acts alleged by Merchants. As RICO prohibits these same acts, there is no conflict; RICO does not invalidate, impair, or supersede California law in this context.
VI
We REVERSE the district court's judgments in favor of defendants and REMAND to that court for further proceedings consistent with this opinion.
Notes
Merchants argues that certain of Hall's alleged practices are not regulated by the California Insurance Code because the practices are not the business of insurance. This is simply a repetition of Merchants' argument on the second element. The relevant inquiry on the third element is satisfied; to the extent Hall's acts do constitute the business of insurance, it is not disputed that the acts are proscribed by the California Insurance Code
Hall argues that this three factor analysis should only be applied in the antitrust area, where the "business of insurance" is meant to be defined narrowly. Hall contends that United States Department of the Treasury v. Fabe, --- U.S. ----,
Although Silkwood's specific holding was superseded by statute (42 U.S.C. Sec. 2210(s)), the general principle remains viable