Commerce and Insurance

The Ramsey-Rappaport exchange on the “interstate commerce” nature of insurance raises issues that have played a huge role in American constitutional and economic history. In the hope that the background may be helpful or at least mildly intriguing:

In Paul v. Virginia (1869), the Supreme Court (per Justice Field, a friend of interstate commerce but, like all the legal formalists of the time, a vehement foe of corporations) held that the sale or purchase of insurance could not ever constitute interstate commerce. The sale or purchase agreement, he noted, had to be tied to the place of execution, meaning state law must govern. This meant in practice that states could wall off domestic insurers against out-of-state competition by means of protectionist and discriminatory legislation. One might think that the Privileges and Immunities Clause of Article IV would forbid that, but no dice: corporations, the Court had previously held, aren’t “persons” for the purposes of Article IV (although they are persons for purposes of diversity jurisdiction).

In an intriguing irony, Paul gave rise to two bodies of doctrine that many originalists find deeply suspect. The first is the dormant Commerce Clause. If the P&I Clause doesn’t protect the dominant actors in interstate commerce, the thinking went, there has to be some other way to protect commerce against parochial state interference, and the dormant Commerce Clause (that is, the notion that the Commerce Clause, of its own force, prohibits certain state interferences even in the absence of a federal statute) was that doctrine: it doesn’t speak of “persons” and so has to be available to all. Obviously, the dCC maneuver wasn’t available to insurers under the direct holding of Paul. But it became available to a slew of other industries: railroads and telegraphs at first, then manufacturers.

As for insurers, they continued to run up against Paul to no avail. In 1897, they eventually found a partial remedy: discriminatory state legislation, the Supreme Court held, interfered with the consumer’s right to purchase out-of-state products (Allgeyer v. Louisiana). So was born the substantive due process doctrine.

In 1944, after that doctrine had died, the Supreme Court ruled that insurance was interstate commerce after all: South-Eastern Underwriters. However, that inveterate protector of interstate commerce, the United States Congress, promptly overruled the decision by means of the McCarran-Ferguson Act, which broadly immunizes state insurance regulation from dormant Commerce Clause review. Without that protection, the thinking went, interstate competition might break out in insurance, and we can’t have that. This arrangement has lasted to this day, with an exemption for ERISA-covered plans “relating to” health insurance.

Note the underlying, little recognized irony: if (like many originalists) you think there is no dormant Commerce Clause, you pay the price of a hopelessly balkanized economy. (A Constitution without that construct is a McCarran-Ferguson Act writ large.) The same result follows if (like most conservative-libertarians) you believe in a very limited affirmative Commerce Clause: because the dormant Commerce Clause can’t be broader than the affirmative Commerce Clause, you constrict the Court’s ability to police state conduct.

The Upside-Down Constitution contains a more extended account of these issues.