Can the state bar insurance companies from giving discounts based on group membership or employer affiliation?

Subject

Opinion No. 13-33, Unfair Trade Practices in the Insurance Business, April 24, 2013

Plain-English summary

Tennessee's Unfair Trade Practices and Unfair Claims Settlement Act (Tenn. Code Ann. §§ 56-8-101 to -113) bars insurance companies from offering discounts or other preferences in property, marine, casualty, or surety insurance based on a person's membership, nonmembership, or employment with a particular group, association, corporation, or organization. § 56-8-104(18). The statute also contains a carve-out for domestic companies that confine their business to Tennessee and provide insurance "solely for the benefit of [their] members, or members of [their] parent or sponsoring organization." § 56-8-104(18)(B).

Senate Majority Leader Norris asked whether § 56-8-104(18) violated commercial speech protections under the First Amendment or article I, section 19 of the Tennessee Constitution, and whether the domestic-company carve-out violated equal protection.

The AG concluded the statute was facially constitutional on both fronts.

Commercial speech. Tennessee can regulate insurance trade practices that it deems discriminatory. Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (2011), Douglas v. State, 921 S.W.2d 180 (Tenn. 1996), and H & L Messengers v. City of Brentwood, 577 S.W.2d 444 (Tenn. 1979), confirm that commercial speech protection is qualified. States can ban a particular type of commercial transaction, and when they do, "speech proposing or facilitating the unlawful transaction may be banned without offending the First Amendment." Katt v. Dykhouse, 983 F.2d 690, 695 (6th Cir. 1992). § 56-8-104(18) regulates the practice of group-affiliation discounts (a transaction), not speech about it. Tennessee Secondary School Athletic Ass'n v. Brentwood Acad., 551 U.S. 291, 297 (2007), described this kind of regulation as "more akin to a conduct regulation than a speech restriction."

Distinguishing rebate disclosure (Op. 86-016). A previous AG opinion (86-016) had analyzed a Tennessee rebate-disclosure statute under commercial speech standards because that statute required specific disclosures about rebates. § 56-8-104(18) is different. It bans the practice itself; it doesn't compel or restrict speech about the practice. So the commercial speech framework doesn't apply with full force.

Equal protection. The domestic-company carve-out at § 56-8-104(18)(B) doesn't raise serious equal protection concerns. The AG read the carve-out as essentially declaratory: a company that insures only its own members or its parent organization's members isn't "discriminating among similarly-situated purchasers" in the first place. Membership is the entry condition, not a discount. So whether the company is domestic or foreign, this business model isn't violating § 56-8-104(18). The carve-out merely confirms what would already be the case. Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985), held that state insurance regulations can't discriminate against foreign companies, but the AG read § 56-8-104(18)(B) as not actually doing that in practice.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Tennessee Unfair Trade Practices Act has been amended periodically. The constitutional framework (commercial speech / equal protection) remains stable. Sorrell in particular has continued to evolve. Anyone advising on a current group-affiliation discount or affinity program should pull the current statute and check the latest Sorrell-line cases.

Background and statutory framework

The statute. Tenn. Code Ann. § 56-8-104(18)(A) (formerly § 56-8-116(a) (2008)) prohibits:

[m]aking, offering to make, or permitting any preference or distinction in property, marine, casualty, or surety insurance as to form or policy, certificate, premium, rate, benefits, or conditions of insurance, based upon membership, nonmembership, or employment of any person or persons by or in any particular group, association, corporation, or organization, or making the preference or distinction available in any event based upon any fictitious grouping of persons.

The purpose, per the Georgia Supreme Court in Caldwell v. Standard Nat'l Ins. Co., 194 S.E.2d 456, 458 (Ga. 1972), interpreting a similar Georgia statute: prevent insurance companies from offering discounts to certain groups based on factors other than legitimate rate-making considerations.

The carve-out. § 56-8-104(18)(B): "any domestic company that confines its insurance business and operations to this state and to the provision of insurance solely for the benefit of its members, or members of its parent or sponsoring organization." This describes mutual companies and similar single-membership-pool insurers.

Commercial speech doctrine. The First Amendment and article I, section 19 give "qualified" protection to commercial speech. Sorrell; Douglas; H & L Messengers. States have wider latitude regulating commercial speech than political speech. Virginia Pharmacy Board v. Virginia Citizens Consumer Council, 425 U.S. 748, 772 n.24 (1976). When the state bans a transaction outright, the speech that proposes the transaction can also be banned without First Amendment problem. Katt v. Dykhouse. The deeper principle is from Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502 (1949): "it has never been deemed an abridgement of freedom of speech or press to make a course of conduct illegal merely because the conduct was in part initiated, evidenced, or carried out by means of language, either spoken, written, or printed."

Conduct vs. speech. Brentwood Academy drew the line between "conduct regulation" (state has wide authority) and "speech restriction" (state needs to meet commercial speech standards). The AG put § 56-8-104(18) on the conduct side: the statute prohibits the discriminatory practice, not communication about it.

Distinguishing Op. 86-016 (rebates). The earlier opinion analyzed a Tennessee statute that prohibited rebates unless they were specified in the insurance contract. That was a disclosure requirement (about how rebates must be communicated), not a ban on rebates themselves. The AG applied commercial speech principles to that statute and concluded it was a "permissible restraint on commercial speech," citing Zauderer and Central Hudson. The relevance to § 56-8-104(18) is by contrast: where 86-016 analyzed a speech regulation, 13-33 analyzes a conduct regulation. Op. 86-016 also relied on Dade County Consumer Advocate's Office for the proposition that a total ban on rebates would be an unconstitutional speech restraint. The AG distinguished that case because Dade County was decided on Florida state due process grounds, not federal First Amendment grounds. Dept. of Ins. v. Dade County Consumer Advocate's Office, 492 So. 2d 1032 (Fla. 1986).

Equal protection. Metropolitan Life Ins. Co. v. Ward held that state insurance statutes that on their face treat domestic and foreign companies differently can be challenged under equal protection. McCarran-Ferguson preserves state authority to regulate insurance, but it does not exempt the state from federal equal protection scrutiny. Rational basis review applies to economic regulation. Exxon Corp. v. Eagerton, 462 U.S. 176 (1983); Harrison v. Schrader, 569 S.W.2d 822 (Tenn. 1978). But "promotion of domestic business by discriminating against nonresident competitors" is not a legitimate state purpose under Ward, 470 U.S. at 882. The AG read the domestic-company carve-out as essentially restating what would be true in any event: a company insuring only its own members isn't engaged in discriminatory group-affiliation pricing. So the carve-out doesn't actually treat domestic and foreign companies differently in operation.

Common questions

Why isn't the group-discount ban a speech restriction?

Because it regulates the underlying conduct (the practice of offering different prices based on group affiliation), not how a company talks about its prices. Under Brentwood Academy and Giboney, regulating conduct doesn't become a speech restriction just because conduct typically involves communication.

Could a company advertise group discounts that are illegal under § 56-8-104(18)?

No. Speech proposing an unlawful transaction can be banned without First Amendment problem (Katt v. Dykhouse; Virginia Pharmacy). If the underlying practice is unlawful, so is the advertisement of it.

What about discounts for affinity groups like alumni associations or professional associations?

Those would generally be prohibited by § 56-8-104(18) for property, marine, casualty, or surety insurance. The statute lists those four insurance lines. Other lines (e.g., life and health) have their own anti-discrimination provisions at § 56-8-104(7)(A)-(G), which prohibit discrimination based on different factors.

What is the domestic-company carve-out actually for?

It carves out mutual companies and similar member-only insurance operations from the group-affiliation ban. A mutual company that requires customers to be members of the company isn't offering a "discount based on group affiliation"; it's just offering insurance to its members. The AG concluded this carve-out is essentially declaratory; the practice it protects wouldn't violate the main rule anyway.

What if the carve-out gives domestic companies an actual competitive advantage over foreign companies?

If it did in practice, Ward would create an equal protection problem. But the AG read the carve-out as not actually doing this: a foreign company that confined itself to insuring its own members would equally be outside the ban, the carve-out just makes that explicit for domestic companies.

Citations

Tenn. Code Ann. §§ 56-8-101 to -113 (Unfair Trade Practices Act); § 56-8-104 (especially subsections (7) and (18)). U.S. Const. amend. I (commercial speech); amend. XIV (Equal Protection). Tenn. Const. art. I, § 8; art. I, § 19 (Tennessee press clause and commercial speech); art. XI, § 8. Cases: Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (2011); Douglas v. State, 921 S.W.2d 180 (Tenn. 1996); H & L Messengers, Inc. v. City of Brentwood, 577 S.W.2d 444 (Tenn. 1979); Virginia Pharmacy Board, 425 U.S. 748 (1976); Katt v. Dykhouse, 983 F.2d 690 (6th Cir. 1992); Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447 (1978); Giboney, 336 U.S. 490 (1949); Tennessee Secondary School Athletic Ass'n v. Brentwood Acad., 551 U.S. 291 (2007); Caldwell v. Standard Nat'l Ins. Co., 194 S.E.2d 456 (Ga. 1972); Zauderer, 471 U.S. 626 (1985); Central Hudson Gas & Elec. Corp., 447 U.S. 557 (1980); Dade County Consumer Advocate's Office, 457 So. 2d 495 (Fla. Dist. Ct. App. 1984), aff'd 492 So. 2d 1032 (Fla. 1986); Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985); Exxon Corp. v. Eagerton, 462 U.S. 176 (1983); Harrison v. Schrader, 569 S.W.2d 822 (Tenn. 1978); Waters v. Farr, 291 S.W.3d 873 (Tenn. 2009). Prior AG opinion: Op. 86-016 (Jan. 24, 1986).

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-033.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

April 24, 2013

Opinion No. 13-33

Unfair Trade Practices in the Insurance Business

QUESTION

Is Tenn. Code Ann. § 56-8-104(18) unconstitutional to the extent that it prohibits insurance companies from offering insurance discounts or other preferences to customers based on their affiliation with or employment by a particular group?

OPINION

The provisions of Tenn. Code Ann. § 56-8-104(18) are defensible from a facial constitutional challenge. The State's prohibiting insurance companies from granting reduced rates or other preferences based upon group affiliation does not implicate commercial speech protections under the United States or Tennessee Constitutions. Moreover, the statute's exception for domestic companies that provide insurance solely for the benefit of their own members or members of a parent or sponsoring organization does not raise equal protection concerns under the United States or Tennessee Constitutions, inasmuch as both foreign and domestic companies that operate under this business model are not in violation of Tenn. Code Ann. § 56-8-104(18).

ANALYSIS

The Tennessee Unfair Trade Practices and Unfair Claims Settlement Act, codified at Tenn. Code Ann. §§ 56-8-101 to -113 (hereinafter "the Act"), seeks to regulate insurance trade and claims settlement practices "by defining, or providing for the determination of, all such practices in this state that constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices and claim settlement practices so defined or determined." Tenn. Code Ann. § 56-8-101(b). One practice prohibited as an unfair trade practice is the

[m]aking, offering to make, or permitting any preference or distinction in property, marine, casualty, or surety insurance as to form or policy, certificate, premium, rate, benefits, or conditions of insurance, based upon membership, nonmembership, or employment of any person or persons by or in any particular group, association, corporation, or organization, or making the preference or distinction available in any event based upon any fictitious grouping of persons.

Tenn. Code Ann. § 56-8-104(18)(A) (formerly Tenn. Code Ann. § 56-8-116(a) (2008)). Essentially, this statute prohibits insurance companies from offering discounts to certain groups of people based upon their membership in or employment by a particular organization or company. This type of anti-discrimination restriction is designed to prevent insurance companies from offering discounts or other preferences "to persons, or groups of persons, based upon factors other than legitimate rate-making considerations." Caldwell v. Standard Nat'l Ins. Co., 194 S.E.2d 456, 458 (Ga. 1972) (discussing virtually identical provision of Georgia insurance law). See also 5 Couch on Insurance § 69:34 (2012). These provisions prevent "unfair discrimination among similarly situated purchasers of insurance." Tenn. Att'y Gen. Op. 86-016 (Jan. 24, 1986).

The anti-discrimination restriction in Tenn. Code Ann. § 56-8-104(18)(A) does not violate the commercial speech protections of either the First Amendment of the United States Constitution or Article I, Section 19, of the Tennessee Constitution. Both of these constitutional guarantees provide a qualified protection for commercial speech. See Sorrell v. IMS Health Inc., 131 S. Ct. 2653, 2664-72 (2011); Douglas v. State, 921 S.W.2d 180, 183-88 (Tenn. 1996); H & L Messengers, Inc. v. City of Brentwood, 577 S.W.2d 444, 449-53 (Tenn. 1979). States are "allowed to regulate commercial speech to a significantly greater degree than other areas of expression." Douglas v. State, 921 S.W.2d at 183-84 (citing Virginia Pharmacy Board v. Virginia Citizens Consumer Council, 425 U.S. 748, 772 n.24 (1976)). Specifically, a state may "ban a particular type of commercial transaction within its borders," and when it does so, "speech proposing or facilitating the unlawful transaction may be banned without offending the First Amendment." Katt v. Dykhouse, 983 F.2d 690, 695 (6th Cir. 1992). "[T]he State does not lose its power to regulate commercial activity deemed harmful to the public whenever speech is a component of that activity." Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456 (1978). As the United States Supreme Court has observed, "it has never been deemed an abridgement of freedom of speech or press to make a course of conduct illegal merely because the conduct was in part initiated, evidenced, or carried out by means of language, either spoken, written, or printed." Id. (quoting Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502 (1949)).

By enacting Tenn. Code Ann. § 56-8-104(18), the General Assembly effectively has prohibited insurance companies from granting preferences in premiums, rates, benefits, or other conditions of insurance based upon group membership or employment. This provision is consistent with other provisions of the Act, which prohibit insurance companies from granting preferences based upon factors other than risk, see Tenn. Code Ann. § 56-8-104(7)(A)-(E), and, conversely, which prohibit insurance companies from giving less favorable terms based upon other impermissible factors, such as sex, race, national origin, and disability. See Tenn. Code Ann. § 56-8-104(7)(F) & (G).

The General Assembly has thus deemed harmful to the public the commercial activity of granting insurance rate reductions or other preferences based upon group association rather than risk factors, and it has banned such activity in keeping with other anti-discrimination provisions that prohibit granting preferences or offering less favorable terms based upon impermissible considerations. This ban is "more akin to a conduct regulation than a speech restriction." Tennessee Secondary School Athletic Ass'n v. Brentwood Acad., 551 U.S. 291, 297 (2007). Commercial speech that offers to make such a prohibited transaction is not protected by the First Amendment.

The fact that Tenn. Code Ann. § 56-8-104(18) regulates conduct rather than speech distinguishes it from the statute addressed in Tenn. Att'y Gen. Op. 86-016 (Jan. 24, 1986). There, this Office was asked to opine on the constitutionality of a law that prohibited insurance companies from offering any rebate as an inducement to enter into an insurance contract unless the rebate was specified in the contract itself. Rather than prohibiting insurance companies from offering rebates, the statute merely imposed a disclosure requirement on insurance companies to specify the terms of any rebate in the insurance contract. Inasmuch as the provision was a direct regulation of commercial speech, this Office analyzed its constitutionality by applying established First Amendment principles and, ultimately, concluded that it imposed "a permissible restraint on commercial speech."

In Opinion 86-016, this Office further opined, relying on Dade County Consumer Advocate's Office v. Department of Insurance, 457 So. 2d 495 (Fla. Dist. Ct. App. 1984), that a total ban on rebates would be an unconstitutional restraint on commercial speech. The Dade County case, however, was decided upon state constitutional due process grounds, not First Amendment grounds. In a 4-3 opinion, the Florida Supreme Court subsequently affirmed the District Court of Appeal's decision, see Department of Ins. v. Dade County Consumer Advocate's Office, 492 So. 2d 1032, 1035 (Fla. 1986), but only the dissent addressed a possible First Amendment challenge to the ban on rebates.

In any event, a significant difference exists between regulating the practice of offering rebates and prohibiting the practice of offering reduced rates or other preferences based upon group affiliation. If done in secret, the practice of offering rebates "tended to unfairly discriminate among similarly situated purchasers of insurance," but the practice itself was not inherently discriminatory. In contrast, the practice of offering preferences based upon group affiliation is in itself a form of discrimination. As discussed above, constitutional commercial speech protections do not preclude the General Assembly from banning such discriminatory practices.

The Act sets forth several exceptions to the anti-discrimination provisions of Tenn. Code Ann. § 56-8-104(18). Among others, the Act contains an exception for "any domestic company that confines its insurance business and operations to this state and to the provision of insurance solely for the benefit of its members, or members of its parent or sponsoring organization." Tenn. Code Ann. § 56-8-104(18)(B). This exception applies only to domestic companies that confine their operations to this state. The United States Supreme Court has recognized that, "[a]lthough the McCarran-Ferguson Act exempts the insurance industry from Commerce Clause restrictions," equal protection principles may prevent states from enforcing statutory provisions that on their face treat domestic and foreign companies differently. Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 889 (1985).

Application of the foregoing exception does not raise significant equal protection concerns. Rather than creating a true exception to Tenn. Code Ann. § 56-8-104(18), subsection (18)(B) appears merely to state the obvious. Whether domestic or foreign, a company that provides insurance "solely for the benefit of its [own] members, or members of its parent or sponsoring organization" does not violate Tenn. Code Ann. § 56-8-104(18). Companies that fit within this exception require their customers to be members of the company or the company's parent or sponsoring organization. Membership, however, is not in any way exclusive but, in fact, is open to any person who wishes to purchase insurance. Moreover, all members are offered rates on the same basis, adjusted for legitimate individual risk characteristics. Consequently, this business model does not result in unfair discrimination among similarly-situated purchasers of insurance, nor does it create preferences that are based upon factors other than legitimate rate-making considerations, since both domestic and foreign companies that operate under this model by their very nature would not be engaged in this sort of discrimination.

This Office is unaware of any other constitutional infirmity in Tenn. Code Ann. § 56-8-104(18) and, accordingly, concludes that this statute is facially constitutionally defensible.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Mark Norris
Senate Majority Leader
9A Legislative Plaza
Nashville, Tennessee 37243