The Supreme Court ruled yesterday that a 33-year-old law entrusting regulation of the insurance business to the states allows policyholders to sue carriers for alleged federal antitrust violations.
The 7-to-2 ruling affirmed a decision by the 1st U.S. Circuit Court of Appeals enabling seven Rhode Island physicians and six of their patients to sue four insurers they claimed refused to sell malpractice coverage of any kind in order to compel the doctors to accept new ground rules.
The decision has "major implications" for buyers of all kinds of insurance, according to Dean Sharp, a former Senate Antitrust and Monopoly Subcommittee investigator who specialized in the insurance industry.
The law is the McCarran-Ferguson Act of 1945. While turning insurance regulation over to the states, it provides that the Sherman Act of 1890 continues to apply "to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation."
The carriers in the case are St. Paul Fire & Marine Insurance Co., Aetna Casualty & Surety Co., Travellers Indemnity of Rhode Island (and two affiliates), and Hartford Casualty Co. They were the only providers of medical malpractice insurance in Rhode Island.
St. Paul, the the largest of the firms, announced in April 1975 that it would not renew medical malpractice coverage on an "occurrence" basis, which protects a policyholder from liability for any act done while the coverage is in effect.
Instead, St Paul said, it would write insurance only on a "claims made" basis, which protects the holder only against claims made during the life of the policy.
The difference was depicted this way by the appellate court: "a doctor who practices for only one year, say, 1972, would need only one 1972 'occourrence' policy to he fully covered, but he would need serveral years of 'claims made' policies to protect himself from claims arising out of his acts in 1972."
The other carriers then refused to accept applications for any type of insurance from physicians, hospitals, or other medical personnel then insured by St. Paul. The common purpose, the plaintiffs said, was to force them to buy "claims made" coverage and to buy it only from St. Paul under terms it dictated.
They sued but lost in U.S. District Court. It held that the sole purpose of the Sherman Act boycott exception was "to protect insurance agents or other insurance companies from being 'blacklisted' by powerful combinations of insurance companies . . ."
The 1st Circuit reversed, holding that "concerted boycotts against groups of consumers" that do not derive from the authority of a state "would have no immunity" from suit.
Meanwhile, the state formed the Joint Underwriting Association to provide malpractice insurance in a pool arrangement. In the opinion for the Supreme Court, Justice Lewis Powell Jr. rejected a claim that the JUA had mooted the dispute.
After tracing the legislative history of the boycott exception, Powell said it "provides no substantial support" for the companies' claim that it was limited to competitors.
Accepting for purposes of the ruling that the plaintiffs' charges are true, Powell said that "St. Paul's policyholders became the captives of their insurer." St. Paul, in a statement yesterday, termed the charges "groundly."
The dissenters were Justice Potter Stewart and William Rehnquist.