Life Partners, Incorporated v. Theodore V. Morrison, Jr.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 LIFE PARTNERS, INCORPORATED,
Plaintiff-Appellant,
v.
THEODORE V. MORRISON, JR.; MARK
C. CHRISTIE, in their official
capacities as Commissioners of the
State Corporation Commission;
ALFRED W. GROSS, in his official
capacity as the Commissioner of
Insurance; JUDITH WILLIAMS
JAGDMANN, in her official capacity
as Commissioner of the State
Corporation Commission,
Defendants-Appellees, No. 06-1370 ROBERT F. MCDONNELL, in his
official capacity as the Attorney
General of the Commonwealth of
Virginia,
Intervenor-Appellee,
and
CLINTON MILLER, in his official
capacity as Commissioner of the
State Corporation Commission,
Defendant.
NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS; NORTH AMERICAN 

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 SECURITIES ADMINISTRATORS
ASSOCIATION, INCORPORATED,
Amici Supporting Appellees,
and 
VIATICAL SETTLEMENT PROFESSIONALS,
INCORPORATED,
Movant. 
 LIFE PARTNERS, INCORPORATED,
Plaintiff-Appellee,
v.
THEODORE V. MORRISON, JR.; MARK
C. CHRISTIE, in their official
capacities as Commissioners of the
State Corporation Commission;
ALFRED W. GROSS, in his official
capacity as the Commissioner of
Insurance; JUDITH WILLIAMS
No. 06-1371  JAGDMANN, in her official capacity
as Commissioner of the State
Corporation Commission,
Defendants-Appellants,
and
CLINTON MILLER, in his official
capacity as Commissioner of the
State Corporation Commission,
Defendant,
and 
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 ROBERT F. MCDONNELL, in his
official capacity as the Attorney
General of the Commonwealth of
Virginia,
Intervenor-Defendant.
NORTH AMERICAN SECURITIES
ADMINISTRATORS ASSOCIATION, INCORPORATED; NATIONAL
ASSOCIATION OF INSURANCE
COMMISSIONERS,
Amici Supporting Appellants,
and
VIATICAL SETTLEMENT PROFESSIONALS,
INCORPORATED,
Movant. 
Appeals from the United States District Court
for the Eastern District of Virginia, at Richmond.
Henry E. Hudson, District Judge.
(3:05-cv-00368-HEH)
Argued: November 30, 2006
Decided: April 30, 2007
Before NIEMEYER, MICHAEL, and TRAXLER, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Michael and Judge Traxler joined.
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COUNSEL
ARGUED: Douglas Michael Palais, LECLAIR RYAN, P.C., Rich-
mond, Virginia, for Appellant/Cross-Appellee. Maureen Riley
Matsen, OFFICE OF THE ATTORNEY GENERAL OF VIRGINIA,
Richmond, Virginia; Robert A. Dybing, THOMPSON & MCMUL-
LAN, Richmond, Virginia, for Appellees/Cross-Appellants. ON
BRIEF: Cameron S. Matheson, LECLAIR RYAN, P.C., Richmond,
Virginia; Lee E. Goodman, Robert P. Howard, LECLAIR RYAN,
P.C., Washington, D.C., for Appellant/Cross-Appellee. Faisal S.
Qureshi, THOMPSON & MCMULLAN, Richmond, Virginia; Ron-
ald N. Regnery, OFFICE OF THE ATTORNEY GENERAL OF VIR-
GINIA, Richmond, Virginia; Philip R. de Haas, William H.
Chambliss, Pamela B. Beckner, Scott A. White, STATE CORPORA-
TION COMMISSION OF VIRGINIA, Richmond, Virginia, for
Appellees/Cross-Appellants. Rex A. Staples, Stephen W. Hall, Lesley
M. Walker, NORTH AMERICAN SECURITIES ADMINISTRA-
TORS ASSOCIATION, INC., Washington, D.C., for North American
Securities Administrators Association, Incorporated, Amicus Support-
ing Appellees/Cross-Appellants. Elizabeth Mason Horsley, WIL-
LIAMS MULLEN, P.C., Richmond, Virginia, for National
Association of Insurance Commissioners, Amicus Supporting
Appellees/Cross-Appellants.
OPINION
NIEMEYER, Circuit Judge:
We decide, in this case of first impression, whether the Virginia
Viatical Settlements Act, Va. Code Ann. § 38.2-600, et seq., which
regulates viatical settlements with insureds who are residents of Vir-
ginia, is saved from the dormant Commerce Clause of the U.S. Con-
stitution by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, 1012, as
a state law that "relates to" the regulation of the business of insurance
or as a state law enacted "for the purpose of regulating the business
of insurance."
"Jane Doe," a terminally ill resident of Virginia with 6 to 18
months to live, sold her life insurance policy to Life Partners, Inc., a
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Texas corporation, at a deep discount to provide her with cash needed
for the remaining months of her life. This transaction, known as a
"viatical settlement," is purportedly regulated by Virginia to protect
its residents who, in the vulnerable circumstances of being terminally
ill, might find it necessary to sell their life insurance policies.
Following the transaction, Jane Doe sought to improve the sale
price of her policy by invoking the minimum pricing provisions of the
Virginia Viatical Settlements Act. Life Partners, contending that the
Virginia Act violated the dormant Commerce Clause, commenced
this action to declare the Act unconstitutional and to enjoin its
enforcement. Virginia defended the Act as serving a legitimate and
important local interest in regulating viatical settlements with its resi-
dents. Virginia also argued that, in any event, it properly acted pursu-
ant to the commerce power conferred on it by the McCarran-Ferguson
Act, which authorizes States to enact laws relating to or for the pur-
pose of regulating the business of insurance.
On cross-motions for summary judgment, the district court entered
judgment for Virginia, holding that the Virginia Viatical Settlements
Act did not violate the dormant Commerce Clause. Relying on the
balancing test of Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), the
district court concluded (1) that the Virginia Viatical Settlements Act
did not discriminate against interstate commerce; (2) that the Act
served a legitimate and important local purpose; and (3) that any bur-
den on commerce was only incidental.
On appeals by both parties, we conclude that the sale of life insur-
ance policies by terminally ill patients directly and substantially
affects the business of insurance and that the Virginia Viatical Settle-
ments Act "relates to" such business and was enacted "for the purpose
of regulating" such business. The McCarran-Ferguson Act thus saves
the Virginia Act from preemption of the Commerce Clause and ren-
ders it constitutional. Based on this conclusion, we affirm.
I
A "viaticum" in ancient Rome was a purse containing money and
provisions for a journey. A viatical settlement, by which a dying per-
son is able to acquire provisions for the remainder of his life’s journey
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by selling his life insurance policy, is thus thought to provide a viati-
cum. In the language of the industry, the insured is the "viator," who
sells his policy at a discount to a "provider" of the viaticum. The viati-
cal settlement provider is often backed by investors under arrange-
ments reached between the provider and the investors. Once a viator
sells a policy to a provider, the provider assumes the responsibility for
paying the premiums and designates itself as the beneficiary of the
policy. Upon the viator’s death, the provider collects the face value
of the policy, and the provider’s profit is the difference between the
face value of the policy and the amount paid to the viator, premiums
paid to the insurance company, and the administrative expenses
incurred. Because the sooner the viator dies the greater the provider’s
profit, a provider takes special care in calculating a viator’s life
expectancy by hiring an independent doctor to examine the insured
and his medical records and by monitoring the viator’s health until
death.
The viatical settlements industry was born in the 1980s in response
to the AIDS crisis. In the early years, AIDS was a rapidly fatal dis-
ease, and its victims usually died within months of diagnosis. Many
AIDS sufferers were in great need of cash to pay for their care after
they had become debilitated. Their life insurance policies were not
only expensive to maintain but could, upon liquidation, provide some
of the desperately needed cash. Moreover, investors were willing to
purchase the life insurance policies of AIDS sufferers. Inasmuch as
AIDS sufferers had predictably short life expectancies, their policies
were reliable investments. See generally, Liza M. Ray, Comment, The
Viatical Settlement Industry: Betting on People’s Lives is Certainly
No "Exacta," 17 J. Contemp. Health L. & Policy 321, 321-22 (2000);
Joy D. Kosiewicz, Comment, Death for Sale: A Call to Regulate the
Viatical Settlement Industry, 48 Case W. Res. L. Rev. 701, 704
(1998).
The viatical settlements market expanded to include other terminal
illnesses, especially as AIDS became a more treatable disease. People
suffering from cancer, heart disease, Alzheimer’s disease, and other
progressive illnesses, as well as elderly people in need of funds for
assisted living, found viatical settlements a useful source of immedi-
ate cash. Today, the industry is growing exponentially as investors
seek out not only the terminally ill, but the swelling ranks of generally
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healthy, elderly Americans. It is estimated that $13 billion worth of
life insurance policies were sold by policyholders to providers in 2005
— up from $5 million in 1989 and $200 million in 1998 — and it is
projected that by 2030 the number could reach $160 billion. See Hol-
man W. Jenkins, Jr., Life Insurers Face the Future, Grudgingly, Wall
St. J., Aug. 9, 2006, at A11; Liam Pleven & Rachel Emma Silverman,
Investors Seek Profit in Strangers’ Deaths, Wall St. J., May 2, 2006,
at C1; see generally Miriam R. Albert, The Future of Death Futures:
Why Viatical Settlements Must Be Classified as Securities, 19 Pace L.
Rev. 345, 353-55 (1999).
The need for regulating the business of viatical settlements became
apparent from the beginning. The power imbalance between the viator
and the provider creates a substantial potential for abuse. The viator
is usually in a weakened physical condition, often facing imminent
death, often in financial hardship due to medical and healthcare costs,
and often ignorant of industry practices. The provider, on the other
hand, has extensive resources, is usually backed by investors, and is
armed with sophisticated industry knowledge. Moreover, because of
his illness and lack of time and energy to "comparison shop" for the
best payment, a viator often agrees to sell at a drastically reduced
price, particularly when he fails to understand the nature and value of
the rights that he has in the insurance policy that he is selling. The
potential for harassment of the viator after the sale is also real, as the
providers, acting under the terms of the viatical settlement, closely
monitor the viator’s health, subjecting him to regular medical exami-
nations. In addition, the life insurance industry began to face new
risks, including the increased risk of fraud, as potential insureds
sought to hide their illnesses in order to obtain policies and thereafter
to sell them to viatical settlement providers. Finally, many have ques-
tioned the ethics of an industry whose profits depend on, and whose
investors hope for, the early death of its customers.
Because of the need to protect viators and to create a transparent
and fair viatical settlements market, the National Association of Insur-
ance Commissioners developed the Viatical Settlements Model Act in
1993 and Viatical Settlements Regulations in 1994 to guide States in
their regulation of the viatical settlements industry. To date, approxi-
mately 38 States, including Virginia, have adopted a version of the
Model Act or similar legislation.
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The Virginia Viatical Settlements Act (sometimes hereafter the
"Act") was enacted in 1997 to address Virginia’s concern with the
"potential for exploitation of vulnerable and seriously ill individuals."
Legislative Summary, House Bill 871 (Va. 1997). The Commissioner
of Insurance for the Bureau of Insurance of the Virginia State Corpo-
ration Commission, the state agency charged with implementing and
enforcing the Act, stated that some of the Act’s specific objectives
and purposes include "ensuring that entities providing viatical settle-
ment services are licensed, operated by persons of good character, and
do not engage in illegal, unfair or unethical conduct" and "ensuring
that fair compensation be paid to viators."
Thus, the core provisions of the Act ensure that providers are reli-
able; require full disclosures to viators; protect the privacy of viators;
establish minimum prices for policies; and prohibit fraud.
More particularly, the Act requires that brokers (defined as viators’
agents) and providers be licensed if they contract with a Virginia resi-
dent in connection with a viatical settlement. Va. Code Ann. §§ 38.2-
6002, -6003. The Act provides that before issuing a license to a pro-
vider, the State Corporation Commission is required to investigate the
applicant to ensure it is "competent and trustworthy," "indicates its
intention to act in good faith within the confines of the license," "has
a good business reputation," and "has provided an anti-fraud plan." Id.
§ 38.2-6002(D). The Act also requires providers to "be bonded" or
submit to "other mechanisms for financial accountability" adopted by
the Commission. Id. § 38.2-6002(I).
The Act imposes extensive disclosure obligations on providers. For
instance, providers must disclose to viators, among other things, the
"possible alternatives to viatical settlement contracts including any
accelerated death benefits or policy loans offered under the viator’s
life insurance policy"; the tax consequences of selling the policy; the
right of a viator to rescind a viatical settlement for 15 days after
receipt of the proceeds; the fact that entering into a viatical settlement
may cause a viator to forfeit rights and benefits under the policy; the
fact that the provider may require medical visits as frequently as once
a month to determine the viator’s health status; and the possible loss
of coverage for third parties if the life insurance policy involves fam-
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ily riders or includes coverage of a life other than the viator’s. See Va.
Code Ann. § 38.2-6007.
Section 38.2-6005 of the Act is devoted to the protection of a via-
tor’s privacy and the confidentiality of information about the viator.
See also Va. Code Ann. § 38.2-6008(A)(1)(b), (B), (F).
The Act requires providers to pay a viator a minimum percentage
of the face value of the insurance policy sold, depending upon the via-
tor’s life expectancy. Thus, if the viator’s life expectancy is less than
6 months, he must be paid a minimum of 80% of the policy’s face
value; if his life expectancy is at least 6 but less than 12 months, then
he must be paid at least 70% of the policy’s face value; if his life
expectancy is at least 12 but less than 18 months, he must be paid at
least 65% of the policy’s face value; and if his life expectancy is at
least 18 but less than 25 months, he must be paid at least 60% of the
policy’s face value. See 14 Va. Admin. Code § 5-71-60(A) (2006).
And the Act contains several provisions prohibiting false or mis-
leading advertising, Va. Code Ann. § 38.2-6010; prohibiting fraud in
connection with viatical settlements, id. § 38.2-6011; and making vio-
lations of the Act unfair trade practices, id. § 38.2-6013.
Other miscellaneous provisions designed to protect Virginia viators
are also included in the Act, such as a requirement that providers sub-
mit to the Commission all viatical settlement contracts for review and
approval before closing. Va. Code Ann. § 38.2-6003(A). Funds must
be paid to the viator within three business days after the viatical set-
tlement provider has received the insurer’s acknowledgment that the
beneficiary of the life insurance policy has been changed. Id. § 38.2-
6007(A)(6). Before entering into a viatical settlement contract, a pro-
vider must obtain "a written statement from a licensed attending phy-
sician that the viator is of sound mind and under no constraint or
undue influence to enter into a viatical settlement contract." Id.
§ 38.2-6008(A)(1)(a).
Finally, we note that the Act does not regulate the relationship
between viatical settlement providers and their investors, a relation-
ship that is most often regulated by securities laws. See Va. Code
Ann. § 38.2-6016.
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II
"Jane Doe," a resident of Martinsville, Virginia, who was termi-
nally ill with AIDS, began in March 2004 to explore ways to liquidate
her life insurance policy. Her policy had a face value of $115,000 and
contained no accelerated death benefit of any value.
Researching on the Internet, Doe located two brokers — Ideal Set-
tlements, Inc., located in New Jersey, and Individual Benefits, Inc.,
located in North Carolina — and signed brokerage contracts with
both. Ultimately, however, she chose Ideal Settlements to negotiate
on her behalf. Ideal Settlements contacted Life Partners, located in
Waco, Texas, inviting a bid for Doe’s life insurance policy.
Life Partners engages nationally in the business of viatical settle-
ments. It locates investors to provide the money, and it negotiates
with viators or their brokers for the purchase of life insurance poli-
cies. Its profits and those of the investors are determined by the differ-
ence between (1) the face amount of the policy paid upon the viator’s
death and (2) the cost of the policy, the cost of paying premiums until
death, and administrative expenses. While Life Partners is licensed as
a viatical settlement provider under Texas law, it is not so licensed in
Virginia.
Life Partners hired an independent physician to assess Jane Doe’s
medical condition, and the physician determined that Doe had a life
expectancy of 6 to 18 months. Life Partners also located 12 investors
from 7 States — none from Virginia — who, acting as a group, were
interested in bidding on Doe’s policy. On behalf of these purchasers,
Life Partners submitted a bid to Ideal Settlements in the amount of
$26,000. When Doe rejected that offer, Life Partners raised the bid to
$27,000, which Doe also rejected. Life Partners then submitted a final
bid of $29,900 which Doe accepted. The bid represented 26% of the
face value of Jane Doe’s policy.
Life Partners sent the necessary forms, disclosures, and other infor-
mation required by Texas law to Doe for her review and signature.
Doe completed the forms and executed the viatical settlement, return-
ing them to Life Partners for final review and execution in Texas. Life
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Partners closed the transaction in Texas on May 13, 2004, and wired
$29,900 to Doe in Virginia.
Five months later, on October 11, 2004, Doe contacted Life Part-
ners demanding that it pay her more money, based on the Virginia
Viatical Settlements Act. That Act would have required Life Partners
to pay Doe at least $69,000, and maybe more, depending on the appli-
cable range of life expectancy. Life Partners refused her demand but
offered to rescind the transaction, even though the period for rescis-
sion had expired. Doe refused rescission and instead filed a complaint
with the Virginia Bureau of Insurance, the relevant enforcement arm
of the State Corporation Commission.
The Bureau of Insurance conducted an inquiry and concluded that
Life Partners had acted as an unlicensed viatical settlement provider
with a Virginia resident. At the request of the Bureau of Insurance,
the Virginia State Corporation Commission issued a "rule to show
cause" against Life Partners, requiring it to explain why it was con-
ducting business with a Virginia resident without proper licensing, in
violation of Virginia law. It also warned Life Partners that unless it
subjected itself to Virginia’s regulatory regime, Life Partners would
be barred from making any further purchases from Virginia residents,
under threat of prosecution for a "knowing and willful violation of the
law."
On May 26, 2005, Life Partners commenced this action under 42
U.S.C. § 1983, asserting that the State Corporation Commission and
the Bureau of Insurance (herein jointly, "Virginia" or the "Commis-
sion") violated the dormant Commerce Clause of the United States
Constitution by attempting to enforce the Virginia Viatical Settle-
ments Act against Life Partners. Life Partners’ dormant Commerce
Clause challenge was particularly grounded on the jurisdictional pro-
vision of the Virginia Act which gave the Commission oversight
authority over all viatical settlements involving Virginia viators. Life
Partners contended that this scope of jurisdiction rendered Virginia’s
regulatory control so broad that it affected commerce occurring
wholly outside of Virginia. It also argued that Virginia’s regulatory
regime, in particular the licensing requirement and price controls, dis-
criminated against and burdened interstate commerce.
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Life Partners filed a motion for summary judgment based on its
dormant Commerce Clause challenge, and the Commission filed a
cross-motion for summary judgment, contending that it had an impor-
tant and legitimate interest in regulating viatical settlements and that
its law had only incidental effects on commerce. The Commission
also argued that Congress had explicitly authorized state regulation of
viatical settlements in the McCarran-Ferguson Act, a statute that dele-
gates to the States Congress’ commerce power to regulate the insur-
ance industry.
The district court granted the Commission’s motion for summary
judgment and denied Life Partners’ motion, agreeing with the Com-
mission that the Act did not violate the dormant Commerce Clause.
The court conducted a full Commerce Clause analysis, concluding
that Virginia’s regulation of viatical settlements comfortably survived
the scrutiny. The district court declined to reach the Commission’s
argument that Congress had authorized States to regulate viatical set-
tlements with the McCarran-Ferguson Act.
These cross-appeals followed. Life Partners challenges the district
court’s holding that the Virginia Act does not violate the dormant
Commerce Clause, and the Commission challenges the district court’s
failure to address its argument based on the McCarran-Ferguson Act.
The Commission contends also that the district court should have
abstained in favor of Commission proceedings, under Younger v.
Harris, 401 U.S. 37 (1971).
III
Because we conclude that in the McCarran-Ferguson Act, Con-
gress delegated its commerce power to Virginia in sufficiently broad
terms to cover viatical settlements, thereby saving the Virginia Viati-
cal Settlements Act from any dormant Commerce Clause challenge,
we need not decide whether, in the absence of such delegation, the
Act would violate the dormant Commerce Clause.
Through the McCarran-Ferguson Act or any other act, Congress
holds the authority to "redefine the distribution of power over inter-
state commerce" by "permit[ting] the states to regulate the commerce
in a manner which would otherwise not be permissible." Southern
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Pacific Co. v. Arizona, 325 U.S. 761, 769 (1945); see also Northeast
Bancorp, Inc. v. Bd. of Governors, 472 U.S. 159, 174 (1985) ("When
Congress so chooses, state actions which it plainly authorizes are
invulnerable to constitutional attack under the Commerce Clause").
Thus, if the McCarran-Ferguson Act authorizes the States to regulate
viatical settlements, the issue of whether the Virginia Viatical Settle-
ments Act burdens interstate commerce becomes irrelevant. We there-
fore address whether the Virginia Act falls within the scope of the
McCarran-Ferguson Act.
The McCarran-Ferguson Act was passed in 1945 in reaction to the
Supreme Court’s decision in United States v. South-Eastern Under-
writers Ass’n, 322 U.S. 533 (1944). Prior to that decision, it had been
understood that "[i]ssuing a policy of insurance [was] not a transac-
tion of commerce." Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183
(1869). Consequently, "the States enjoyed a virtually exclusive
domain over the insurance industry." St. Paul Fire & Marine Ins. Co.
v. Barry, 438 U.S. 531, 539 (1978). Before South-Eastern Underwrit-
ers, the States regulated the insurance business free from any con-
cerns arising under the dormant Commerce Clause, and federal
statutes, such as the Sherman Act, were thought to be inapplicable to
the insurance industry. See SEC v. Nat’l Securities, Inc., 393 U.S.
453, 457-58 (1969). In South-Eastern Underwriters, the Supreme
Court altered this understanding by holding that the business of insur-
ance was a part of interstate commerce and therefore subject to the
Commerce Clause and federal enactments based on the Commerce
Clause, such as the Sherman Act. South-Eastern Underwriters, 322
U.S. at 552-53.
Congress reacted by enacting the McCarran-Ferguson Act the very
next year. Making its mission unmistakably clear, Congress declared
"that the continued regulation and taxation by the several States of the
business of insurance is in the public interest." 15 U.S.C. § 1011.
Shortly thereafter, the Supreme Court stated, "obviously Congress’
purpose was broadly to give support to the existing and future state
systems for regulating and taxing the business of insurance." Pruden-
tial Ins. Co. v. Benjamin, 328 U.S. 408, 429 (1946). The McCarran-
Ferguson Act achieved this purpose "by removing obstructions which
might be thought to flow from [Congress’] own power, whether dor-
mant or exercised," and "by declaring expressly and affirmatively that
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continued state regulation and taxation of this business is in the public
interest and that the business and all who engage in it ‘shall be subject
to’ the laws of the several states in these respects." Id. at 430.
To understand the McCarran-Ferguson Act as it might apply in this
case, we start with "the language of the statute itself." Group Life &
Health Ins. Co v. Royal Drug Co., 440 U.S. 205, 210 (1979).
The substantive portions of the McCarran-Ferguson Act are found
in its first two sections. The first provides:
The Congress hereby declares that the continued regula-
tion and taxation by the several States of the business of
insurance is in the public interest, and that silence on the
part of the Congress shall not be construed to impose any
barrier to the regulation or taxation of such business by the
several States.
15 U.S.C. § 1011 (emphasis added). And the second provides:
(a) State regulation. The business of insurance, and every
person engaged therein, shall be subject to the laws of the
several States which relate to the regulation or taxation of
such business.
(b) Federal regulation. No Act of Congress shall be con-
strued to invalidate, impair, or supersede any law enacted by
any State for the purpose of regulating the business of insur-
ance, or which imposes a fee or tax upon such business,
unless such Act specifically relates to the business of insur-
ance: Provided, That [the federal antitrust laws] shall be
applicable to the business of insurance to the extent that
such business is not regulated by State law.
Id. § 1012 (emphasis added). Section 1011 thus declares that the
"business of insurance" continues to be subject to regulation by the
States, as had been the case before South-Eastern Underwriters. Sec-
tion 1012(a) then confers the federal commerce power on the States
to enact laws which "relate" to the regulation of the business of insur-
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ance, and § 1012(b) restricts federal authority so that no federal law
can be construed to "invalidate, impair, or supersede" any state law
enacted "for the purpose of" regulating the business of insurance —
unless the federal law does so explicitly. By so restricting federal
authority, § 1012(b) also defines the scope of state authority, implic-
itly authorizing States to enact laws "for the purpose of" regulating
the business of insurance. See U.S. Dep’t of Treasury v. Fabe, 508
U.S. 491, 504 (1993) (explaining that § 1012(b) "was intended to fur-
ther Congress’ primary objective of granting the States broad regula-
tory authority over the business of insurance").
In short, the McCarran-Ferguson Act "declares" that regulation of
the business of insurance belongs with the States, and to implement
that declaration, the Act explicitly protects from a dormant Commerce
Clause challenge (1) any state law that "relates to the regulation of
the business of insurance" or (2) any state law "enacted for the pur-
pose of regulating the business of insurance." The Act reserves from
its operation only the federal antitrust laws. 15 U.S.C. § 1012(b).
Important to a proper application of these provisions is an under-
standing of the terms (1) "insurance," (2) the "business of insurance,"
(3) the nature of laws that "relate to" or are enacted "for the purpose
of" regulating the business of insurance, and (4) the historical context
in which Congress enacted the McCarran-Ferguson Act.
A contract of insurance is one by which an insured transfers risks
to an insurer for the payment of a premium. See Union Labor Life Ins.
Co. v. Pireno, 458 U.S. 119, 130 (1982). And so, under a life insur-
ance policy, the insured purchases a hedge against his early death by
the insurer’s commitment to pay the face amount of the policy.
Because the insurer must pay the insured’s beneficiary even upon an
early death, the insurer takes the bet that the insured will not die
before the premiums and investment income accumulate to exceed the
face amount of the policy. The cost of the insured’s risk, represented
by the amount of premiums, is calculated so as to match the antici-
pated premium amount with the anticipated payout plus a profit.
Thus, both parties to an insurance contract have a large array of
factors to consider in determining whether to enter into a contract of
insurance. The insurer considers, among other things, the insured’s
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age and life expectancy, health, work, healthcare and life habits, fam-
ily history, and similar data from its relevant pool of insureds. The
insurer also considers the market for the investment of premiums,
data from the pool of insureds relating to the lapsing and early surren-
der of policies, and marketing, selling, and administrative expenses.
The insured, on the other hand, considers, among other things, the
insurer’s financial strength, its history of honoring policies, its invest-
ment record, the risk represented by the relevant pool of insureds, and
the insurer’s service. But in the end, both parties enter into the con-
tract of insurance with the hope that the insured will not die early.
That hope is reflected in the insurer’s acceptance of the bet that the
insured will not die before premiums and investment income at least
equal the face amount of the policy, and that hope is inherent in the
insured’s will to live as part of human nature.
The "business of insurance" refers to the marketing, selling, enter-
ing into, managing, servicing, and performing of insurance contracts.
See National Securities, 393 U.S. at 460 (explaining that in the
McCarran-Ferguson Act, "Congress was concerned with the type of
state regulation that centers around the contract of insurance," includ-
ing "the type of policy which could be issued, its reliability, interpre-
tation, and enforcement"). Thus, "[t]he relationship between insurer
and insured," which is the heart of the insurance contract, is also at
"the core of the business of insurance." See id. ("Whatever the exact
scope of the statutory term [‘business of insurance’], it is clear where
the focus was — it was on the relationship between the insurance
company and the policyholder"). In applying these principles, the
Supreme Court has distinguished state statutes that regulate the
merger of insurance companies, which are aimed at "the relationship
between a stockholder and the company in which he owns stock,"
from statutes that directly affect contracts of insurance, their risks,
and their performance. See National Securities, 393 U.S. at 460
(explaining that even though the state merger statute only applied to
insurance companies, "[t]he crucial point is that here the State has
focused its attention on stockholder protection; it is not attempting to
secure the interests of those purchasing insurance policies"). Thus, at
bottom, any understanding of the scope of what amounts to the busi-
ness of insurance must be based on the "common-sense understand-
ing" of whether the business relates to or affects "the risk pooling
arrangement between the insurer and insured." Ky. Ass’n of Health
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Plans, Inc. v. Miller, 538 U.S. 329, 341-42 (2003) (examining the
scope of the business of insurance in determining whether, under
ERISA, a state law regulates insurance); see also Pireno, 458 U.S. at
129.
Finally, we understand that the McCarran-Ferguson Act confers
more commerce power to the States than is necessary simply to regu-
late the business of insurance directly. The grant of power sweeps
more broadly, giving States the power to enact laws that "relate to"
the regulation of the business of insurance or are enacted "for the pur-
pose of" regulating the business of insurance. See Fabe, 508 U.S. at
504 ("The broad category of laws enacted ‘for the purpose of regulat-
ing the business of insurance’ consists of laws that . . . necessarily
encompass[ ] more than just the ‘business of insurance’"). This grant
of power to the States was deliberately broad "to allay fears" about
the "widely perceived . . . threat to state power" that followed the
Supreme Court’s decision in South-Eastern Underwriters. See Fabe,
508 U.S. at 499-500; see also Prudential Ins., 328 U.S. 408, 429-30
(1946).
IV
With this understanding of the McCarran-Ferguson Act, we now
turn to address whether the Virginia Viatical Settlements Act is pro-
tected from a dormant Commerce Clause challenge as a state law that
relates to or was enacted for the purpose of regulating the business
of insurance.
While obvious, it must first be stated that the subject of every viati-
cal settlement is an insurance policy. Moreover, the viatical settle-
ment is not collateral to the policy. Rather, it modifies it, changing the
parties’ obligations and benefits, while yet leaving the insurance —
i.e., the transfer of the specified risk — in place. At its essence, a via-
tical settlement is a transaction that fractures the two-part insurance
contract between the insurer and the insured and creates a new tripar-
tite arrangement (albeit not a three-party agreement) among the
insurer, the insured, and the insured’s assignee — the viatical settle-
ment provider. Because of this new tripartite arrangement, each party
has, with respect to the preexisting insurance contract, new or differ-
ent obligations and benefits.
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The insurer is faced with the newly divided obligations reflected in
the interests of the insured and the viatical settlement provider. While
the insured gives up her financial interest in the insurance contract,
her life and the risk of her death remain the subject of the insurance
contract. But now, the insurer, instead of carrying its obligation to pay
on the insurance contract with an insured "who guards against possi-
ble loss and disaster to [her] as an individual," see 1 Appleman on
Insurance § 1 (2d ed. 2006) (defining life insurance), carries its obli-
gation with a viatical settlement provider, who hopes, for financial
reasons, for the early death of the insured. The insurer must also now
keep track administratively of both the insured, whose life remains
essential to the arrangement, and the viatical provider, who now must
pay the insurer the premiums. Moreover, the fact that a new contract
— the viatical settlement — introduces a new interested party to the
arrangement raises the possibility that the insurer can become
involved in legal disputes between the insured and the viatical pro-
vider.
The insurer is also faced with changed economic risks that were
not factored into its calculation of premiums. Under the two-party
arrangement that preexisted the viatical settlement, the insured was in
a class of persons that statistically surrendered a portion of its policies
or let a portion of them lapse. Insurance companies rely on these sur-
render and lapse rates to calculate premiums to charge for life insur-
ance policies. The viatical provider distorts these rates, however,
because it will always hold onto the policy until the insured dies in
order to protect its investment. Thus, as the initial actuarial risk is dis-
torted with each new viatical settlement, the risk-spreading profile of
the insurer becomes less reflective of its initial calculations.
The insured too faces changed obligations and risks. Fundamen-
tally, instead of relating to the insurer as an insured whose own life
is the subject of financial benefits that she controls, she now relates
as an insured whose death is meaningful only to financial investors.
Also, while she likely subjected herself to a health examination by the
insurer when she initially purchased the life insurance policy, under
the tripartite arrangement with a viatical provider, she must subject
herself to routine, periodic medical examinations — perhaps even
monthly. She also might have unwittingly given up rights provided by
her insurance policy that could have generated cash through loans or
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cash surrender value because she lacked adequate knowledge and
information about the value of those rights. Finally, the insured is
subjected to additional privacy concerns relating to her medical
records and financial information. While generally these are already
regulated to some degree, certain private financial and health matters
nonetheless could legally become public as a result of a viatical settle-
ment.
Not only are the parties to insurance contracts affected by viatical
settlements, but the State too has interests, especially in ensuring (1)
that its residents not be subjected to unscrupulous conduct by the via-
tical settlement providers who might defraud, harass, or abuse
insureds in the State and (2) that its residents not defraud insurance
companies in an effort to realize a quick financial return by entering
into insurance contracts while hiding the fact that they will soon,
within a determinable time, die.
Virginia addressed these concerns in the Virginia Viatical Settle-
ments Act, recognizing that each party to the new tripartite arrange-
ment has interests meriting attention and protection. The insured’s
privacy rights are addressed in Virginia Code § 38.2-6005; the
insured’s potential lack of information and knowledge about her pol-
icy and what she loses in a viatical settlement are addressed by man-
dating disclosures, id. § 38.2-6007. A requirement that the insured be
of sound mind when entering into a viatical settlement is imposed in
§ 38.2-6008(A)(1). Section 38.2-6008 also regulates the practices of
viatical settlement providers and § 38.2-6011 prohibits unfair adver-
tising with respect to viatical settlements. The insurers are protected
by being provided in advance with applications of their insureds for
viatical settlements and the insured’s medical records to allow the
insurers to conduct fraud investigations. See id. § 38.2-6008(A)(3),
(4). The Act requires viatical settlement providers to submit to the
Commission for review and approval all viatical settlement contracts
before closing, see id. § 38.2-6003, and they must pay viators (within
three days of the change of beneficiary) a minimum percentage of the
face value of the life insurance policy, see 14 Va. Admin. Code § 5-
71-60. Finally, the Act requires that any viatical settlement provider
dealing with Virginia citizens have a plan of operation, be competent
and trustworthy, indicate an intention to act in good faith and in com-
pliance with state licensing requirements, have a good business repu-
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tation, and be present within the State for purposes of regulation and
enforcement. See Va. Code Ann. § 38.2-6002.
All of these matters, and more, regulated by the Virginia Viatical
Settlements Act surely "relate to" the business of insurance in that
they regulate the new ordering of the tripartite insurance arrangement
involving the insurer, the insured, and the viatical settlement provider.
See 15 U.S.C. § 1012(b). The term "relate to" as used in the
McCarran-Ferguson Act is parallel to the same language used in the
preemption provision of the Employee Retirement Income Security
Act of 1974 ("ERISA"), as both words define the scope of preemp-
tion. In ERISA, Congress preempted "any and all State laws" that "re-
late to any employee benefit plan" covered by ERISA. 29 U.S.C.
§ 1144(a) (emphasis added). And of course, the McCarran-Ferguson
Act narrows the preemption of the Commerce Clause by conferring
commerce power to the States to enact laws that "relate to" the regula-
tion of the business of insurance.
The Supreme Court has described ERISA’s "relate to" language as
"clearly expansive." See N.Y. State Conf. v. Blue Cross & Blue Shield
Plans v. Travelers, 514 U.S. 645, 655 (1995). Hoping to focus judi-
cial analysis, the Court commented that a state "law ‘relates to’ an
employee benefit plan, in the normal sense of the phrase, if it has a
connection with or reference to such a plan." Shaw v. Delta Air Lines,
Inc., 463 U.S. 85, 96-97 (1983) (emphasis added). But even these
terms, if "taken to extend to the furthest stretch of [their] indetermi-
nacy," would have preemption "never run its course." Travelers, 514
U.S. at 655. Faced with such expansive language capable of swallow-
ing, by its own terms, much more than Congress intended, the Court
surrendered: "We simply must go beyond the unhelpful text and the
frustrating difficulty in defining its key term [‘relate to’], and look
instead to the objectives of the ERISA statute as a guide to the scope
of the state law that Congress understood would survive." Id. at 656.
Interpreting the "relate to" language in § 1012(a) of the McCarran-
Ferguson Act, we may similarly say that it is "clearly expansive" and
that a state law that has a "connection with" or "reference to" the reg-
ulation of the business of insurance is saved from the Commerce
Clause’s preemption. But these terms too prove to be somewhat inde-
terminate in the context of the McCarran-Ferguson Act. Therefore,
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we likewise look "to the objectives of the [McCarran-Ferguson Act]
as a guide to the scope of the state law that Congress understood
would" be immune from dormant Commerce Clause attack. See Trav-
elers, 514 U.S. at 656.
Congress made its objectives in passing the McCarran-Ferguson
Act clear by declaring "that the continued regulation and taxation by
the several States of the business of insurance is in the public inter-
est." 15 U.S.C. § 1011. By passing the McCarran-Ferguson Act, Con-
gress "put the full weight of its power behind existing and future state
legislation" that relates to the business of insurance "to sustain it from
any attack under the commerce clause to whatever extent this may be
done with the force of that power behind it." Prudential Ins., 328 U.S.
at 431. It was "Congress’ purpose . . . to give support to the existing
and future state systems for regulating and taxing the business of
insurance." Id. at 429.
Thus, focusing on the business of insurance insofar as it involves
the marketing, sale, execution, performance, and administration of
insurance contracts, Congress gave States broad authority to regulate,
and we conclude that because the Virginia Viatical Settlements Act
addresses these aspects of insurance contracts with Virginia residents,
the Act "relates to" the regulation of the business of insurance.
The Virginia Viatical Settlements Act was also enacted "for the
purpose of regulating the business of insurance." 15 U.S.C. § 1012(b).
"The broad category of laws enacted ‘for the purpose of regulating the
business of insurance’ consists of laws that possess the end, intention,
or aim of adjusting, managing, or controlling the business of insur-
ance." Fabe, 508 U.S. at 505 (citation omitted). Just as the Virginia
statute relates to the business of insurance, it also clearly "manages"
and "controls" the relationship between the insurer and the insured
and is "aimed at protecting or regulating" that relationship, as it dic-
tates in what manner an insured may alter fundamental aspects of her
relationship with the insurer.
Our holding that the Virginia Act was passed "for the purpose" of
regulating the insurance business is bolstered by a comparison to the
Supreme Court’s holding in National Securities, where the Securities
and Exchange Commission sought to rescind the merger of two Ari-
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zona insurance companies based on material misstatements made in
violation of federal law during the merger process. 393 U.S. at 462-
63. Arizona argued that under the McCarran-Ferguson Act, its merger
law should govern the transaction. In holding that federal law gov-
erned, the Supreme Court noted that the state law was focused on pro-
tecting the insurance company’s stockholders rather than "attempting
to secure the interests of those purchasing insurance policies," distin-
guishing regulations involving stockholders from regulations involv-
ing insurance policyholders. Id. at 460 (emphasis added). National
Securities thus would control here if the Virginia Viatical Settlements
Act purported to regulate the relationship between viatical settlement
providers and their investors — the so-called "securities" side of the
viatical settlements business. But the Virginia Viatical Settlements
Act regulates only the "insurance" side of the transaction — involving
the providers’ purchase of life insurance policies from viators — with
the clear purpose of securing the interests of those originally purchas-
ing the policies by mandating that they receive a fair price from
licensed providers for the policies that become the subject of viatical
settlements. Indeed, the Virginia Act states that it does not apply to
the securities side of the viatical settlements business. See Va. Code
Ann. § 38.2-6016.
Consistently, in Fabe, the Supreme Court upheld under the
McCarran-Ferguson Act a state-created bankruptcy priority favoring
insurance policyholders in bankruptcy proceedings because the state
law carried out "the enforcement of insurance contracts by ensuring
the payment of policyholders’ claims despite the insurance company’s
intervening bankruptcy." 508 U.S. at 504. Thus, if a statute assigning
priority in an insurance company’s bankruptcy proceedings is passed
"for the purpose of regulating the business of insurance," as the
Supreme Court held in Fabe, then surely a statute regulating the trans-
ferability of life insurance policies is also passed for the purpose of
regulating the business of insurance.
Indeed, in this case, we need not even rely on the full breadth of
the McCarran-Ferguson Act, which protects any law that "relates to"
the regulation of the insurance business or was enacted "for the pur-
pose of" regulating such business. We can rely on the McCarran-
Ferguson Act’s core protection of laws that actually regulate the
"business of insurance." The subject matter of the Virginia Viatical
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Settlements Act is life insurance policies issued to Virginia residents
— policies that are altered by viatical settlements. As already noted
above, the insured, whose life remains the insurable interest, is given
new duties and has reduced rights under the policy. By introducing
a third party to the transaction whose interests are different from those
of the original insured, the effect of the insured’s policy on the insur-
er’s risk pool changes.
Most importantly, however, the Virginia Viatical Settlements Act
regulates directly the conduct and relationships of those traditionally
engaged in the insurance business — insurers and insureds. The insur-
ers on such contracts must be given information about every viatical
settlement before the settlement is entered into. See Va. Code § 38.2-
6008(A)(3). Moreover, in connection with every such viatical settle-
ment, the insurer is required to respond to a request for verification
of coverage within a specified time or to "indicate whether, based on
the medical evidence and documents provided, [it] intends to pursue
an investigation regarding possible fraud or the validity of the insur-
ance contract." Id. § 38.2-6008(A)(4). In addition, insurers are, under
the Act, prohibited themselves from being viatical settlement provid-
ers. Id. § 38.2-6002(F). Of course, the insureds involved in viatical
settlements are the principal subjects of the Virginia Viatical Settle-
ments Act, for the Act is devoted mostly to giving them rights when
they sell their financial rights in insurance contracts.
These direct regulations focused on selling insurance policies and
the altering of insurance contracts surely satisfy the factors listed in
Pireno. See Pireno, 458 U.S. at 129 (directing courts to consider
"first, whether the practice has the effect of transferring or spreading
a policyholder’s risk; second, whether the practice is an integral part
of the policy relationship between the insurer and the insured; and
third, whether the practice is limited to entities within the insurance
industry"). Even as the Court in Pireno noted that none of the enu-
merated criteria was "necessarily determinative," see id., the Court in
Kentucky Association of Health Plans, considering the business of
insurance in the context of ERISA, later chose to make a "clean
break" from the Pireno factors insofar as they might be restrictive,
relying on a "common-sense understanding" of whether the state law
"substantially affect[ed] the risk-pooling arrangement between the
insurer and the insured." Ky. Ass’n of Health Plans, 538 U.S. at 341.
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Speaking in even broader terms, the Supreme Court has held that
"[s]tatutes aimed at protecting or regulating [the] relationship
[between insurer and insured], directly or indirectly, are laws regulat-
ing the ‘business of insurance.’" National Securities, 393 U.S. at 460
(emphasis added).
In sum, we have little difficulty in concluding that the Virginia
Viatical Settlements Act relates to the regulation of the business of
insurance; was enacted for the purpose of regulating the business of
insurance; and indeed regulates directly and substantially the actual
business of insurance. Thus the McCarran-Ferguson Act saves the Act
from any dormant Commerce Clause challenge.
Were there any residual doubt on this issue, Congress’ treatment of
viatical settlements under the Internal Revenue Code lays it to rest.
In 1996, Congress amended the Internal Revenue Code to exclude
from taxable income proceeds from the sale of a life insurance policy
by a person who is terminally or chronically ill to a viatical settlement
provider so long as the viatical settlement provider is "licensed . . .
in the State in which the insured resides." 26 U.S.C. § 101(g)(2)(B)
(i)(I) (emphasis added). Moreover, if a State in which the insured
resides does not provide for the licensing of viatical settlement pro-
viders, the insured still receives the tax benefit if the viatical settle-
ment provider meets both "the requirements of sections 8 and 9 of the
Viatical Settlements Model Act," and "the requirements of the Model
Regulations . . . relating to standards for evaluation of reasonable pay-
ments." 26 U.S.C. § 101(g)(2)(B)(ii)(I-II). Section 8 of the Model Act
requires the viatical settlement provider to make extensive disclosures
to the viator, and § 9 regulates the settlement process and post-sale
relationship between the provider and the viator. Viatical Settlements
Model Act §§ 8-9 (Nat’l Ass’n of Ins. Comm’rs 2006).
Thus, in amending the Tax Code in 1996, Congress did far more
than just extend significant tax benefits to viators in § 101(g)(2). It
made those tax benefits contingent upon the viatical settlement pro-
vider’s compliance with state licensing requirements, and when the
insured’s State did not require licensing, they were contingent upon
compliance with numerous safeguards found in the Model Act and
regulations, including the minimum prices for policies. This incorpo-
ration of state regulation shows Congress’ concern with the pitfalls of
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an unregulated viatical market. It also reveals congressional trust in
state regulatory measures to address these pitfalls. Most importantly,
the contingency shows that Congress was aware of existing state reg-
ulation in the area and that it intended that the viatical settlement
industry be regulated at the state, not federal, level.
In addition, § 101(g)(2) of the Tax Code requires not only that the
viatical settlement provider be licensed, but also that it be licensed "in
the State in which the insured resides." 26 U.S.C. § 101(g)(2)(B)(i)(I).
This requirement contemplates a multi-state licensure regime. And it
too encourages each State to pass viatical settlement laws because, if
a State does not, its citizens may not receive the tax benefit, as the
State cannot guarantee that providers will comply with the Model
Act.
In short, in order to ensure that their citizens enjoy the tax benefit
found in § 101(g)(2), States must enact licensing requirements. And
the Virginia Viatical Settlements Act implements the very licensing
regime Congress relied upon to confer tax benefits to viators under
§ 101(g)(2).
Life Partners relies heavily on SEC v. Life Partners, Inc., 87 F.3d
536 (D.C. Cir. 1996), to argue that viatical settlements are not part of
the business of insurance which is subject, by virtue of the McCarran-
Ferguson Act, to state regulation. In Life Partners, the Securities and
Exchange Commission was attempting to exercise regulatory jurisdic-
tion over the securities’ side of a viatical settlement transaction, in
which the provider sells interest in the purchased policy or policies to
investors. 87 F.3d at 540-42. The D.C. Circuit held that the invest-
ment side of the viatical transaction is not part of the business of
insurance under the McCarran-Ferguson Act. Id. at 541-42. But that
holding has no application to this case, which deals with Virginia’s
efforts to regulate the insurance side of the viatical transaction — the
transaction by which the policyholder sells its policy to a settlement
provider. Life Partners’ argument fails to distinguish the two different
aspects of the viatical settlement business — the one involving the
viatical settlement provider’s transaction with an insured to purchase
a policy of life insurance and the other involving the relationship
between the viatical provider and its investors to raise money for pur-
chasing the insurance policies. In failing to make that distinction, Life
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Partners also ignores the Supreme Court’s holding in National Securi-
ties, 393 U.S. at 460.
V
In its cross-appeal, the Commission argues that the district court
should have "abstained from exercising jurisdiction over this case out
of respect for the important State interests implicated in regulating
viatical settlements by Virginia citizens," citing Younger v. Harris,
401 U.S. 37 (1971).
Younger abstention is a doctrine requiring federal courts to refrain
from interfering with ongoing state judicial proceedings that implicate
important state interests. See Middlesex County Ethics Comm’n v.
Garden State Bar Ass’n, 457 U.S. 423, 432 (1982). When the federal
case, however, involves "an overwhelming federal interest — an
interest that is . . . a core attribute of the national government . . . —
no state interest, for abstention purposes, can be nearly as strong at
the same time." Harper v. Public Serv. Comm’n, 396 F.3d 348, 356
(4th Cir. 2005).
This case involves just such an interest, the commerce power.
Thus, the issue in this case is not whether Virginia has an interest in
regulating viatical settlements — it most certainly does — but
whether Congress authorized Virginia to do so, and if not, whether
Virginia’s regulations violate the dormant Commerce Clause. In such
cases, "the commerce power itself justifies a narrower view of state
interests in the abstention context." Harper, 396 F.3d at 357.
Under these principles, we conclude that the district court did not
abuse its discretion in declining to abstain under Younger v. Harris.
For the reasons given herein, we affirm the judgment of the district
court.
AFFIRMED
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