Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Building a House in the Sand:
The Intersection of Good Law and Bad Policy in First American Title Insurance Co. v. Combs
Since the passage of the McCarran-Ferguson Act in 1945, insurance has been subject to very little Congressional oversight and no restriction by the Commerce Clause of the U.S. Constitution. Title insurance in particular has become an industry subject to heavy regulation within states, but ineffectively controlled nationally by the paucity of interstate regulation. However, some half-measures have developed to protect against some state abuses of power. Prominent among these measures is the retaliatory tax, an openly discriminatory tax system which has the stated goal of keeping interstate tax rates low by preventing any insurer from conducting business at a lower tax rate than that of its home state. This solution has its faults, however, and the problems intrinsic to this fractured system most recently bore fruit in the Texas Supreme Court case of First American Title Insurance Co. v. Combs. This Note analyzes Combs and demonstrates the need to reassess the policy expressed in the McCarran-Ferguson Act that rejected classification of insurance as interstate commerce.
Part I of this Note describes the industry and regulation of title insurance, paying special attention to its unique qualities and laying the foundation for later consideration of the thesis that the federal policy decision to stay out of insurance regulation has generated overly broad grants of power to states who are nevertheless ill-equipped to confront corrupt practices by large interstate insurance agencies. Part II recounts the operative facts in Combs, including how a tweak in the calculation of the retaliatory tax resulted in millions more dollars of tax liability for the plaintiffs. Part III outlines the majority and dissenting opinions of Combs, drawing attention to the determinative issues for both sides. Part IV analyzes the decision in two steps, showing that while the legal conclusion reached by the majority is unassailable, the policy behind this whole area of law is obsolete and unwise. Part V emphasizes that the title insurance regulatory structure that has developed, while internally consistent and compelling on the surface, is indisputably rooted in sandy soil, and concludes that Congress should step in to limit the abuses committed by both states and insurers.