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MCILHENNY v. AMERICAN TITLE INS. CO.

June 7, 1976

PATRICK McILHENNY, Individually and on behalf of all Members of a Class of New Home Buyers similarly situated Plaintiff,
v.
AMERICAN TITLE INSURANCE COMPANY; BERKS TITLE INSURANCE COMPANY; BROKERS TITLE COMPANY; CHELSEA TITLE AND ABSTRACT COMPANY OF PENNSYLVANIA, INC.; CHICAGO TITLE INSURANCE COMPANY; CITY TITLE INSURANCE COMPANY; COMMONWEALTH LAND TITLE INSURANCE COMPANY; J. WILLIAM COTTER; DELAWARE VALLEY TITLE SEARCHES, INC.; THE GUARDIAN TITLE INSURANCE COMPANY; INDUSTRIAL VALLEY ABSTRACT COMPANY; INDUSTRIAL VALLEY TITLE INSURANCE COMPANY; LAWYERS TITLE INSURANCE CORPORATION; PENN TITLE INSURANCE COMPANY; PHILADELPHIA TITLE INSURANCE COMPANY; PIONEER NATIONAL TITLE INSURANCE COMPANY; PRESIDENTIAL, INC.; QUAKER CITY AGENCY, INC.; TITLE ABSTRACT COMPANY OF PENNSYLVANIA; and THE TITLE INSURANCE CORPORATION OF PENNSYLVANIA Defendants



The opinion of the court was delivered by: DITTER

 I. INTRODUCTION

 The primary question raised by the present motion to dismiss this anti-trust action is whether the defendants' activities fall within the "business of insurance" so as to be exempt from the anti-trust laws pursuant to the McCarran-Ferguson Act. I conclude that they do and therefore that the motion to dismiss must be granted. *fn1"

 The plaintiff bought a new house and was charged for mechanic's lien insurance as part of his title insurance policy. The defendants are 20 title insurance companies, all of which transact business in Pennsylvania. The alleged Sherman Act violations consist of a concerted practice by the defendant companies which requires purchasers of newly constructed residences to buy mechanic's lien insurance as part of the services provided by the companies at settlement. The plaintiff claims that although "mechanic's lien insurance is a useless and unnecessary charge since mechanics' liens are, as a matter of course, tradition, custom and statute waived by . . . contractors and subcontractors," *fn2" the defendants nonetheless force new home buyers to purchase it by refusing to provide title insurance covering other risks and normal settlement services unless the buyer also purchases mechanic's lien insurance. The plaintiff also brings pendent state claims alleging the defendants' activities violate the general laws of Pennsylvania and the anti-trust and conspiracy statutes and common law of various other states. The defendants have moved to dismiss the complaint on the grounds that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, exempts insurance companies from the operation of the anti-trust laws in states, such as Pennsylvania, which regulate the insurance business. They also argue that since the federal claims must be dismissed, this court either cannot or should not exercise pendent jurisdiction over plaintiff's state law claims.

 II. The McCarran-Ferguson Act

 The McCarran-Ferguson Act was passed in 1945 in response to United States v. South-Eastern Underwriter's Ass'n., 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440 (1944). That decision overruled prior precedent specifically Paul v. Virginia, 75 U.S. (8 Wall.) 168, 19 L. Ed. 357 (1869), and held that the insurance business was subject to the anti-trust laws.

 Fearing that South-Eastern Underwriters would be construed as limiting the states' power to oversee the insurance business, 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. The purpose of the Act was to "give support to the existing and future state systems for regulating and taxing the business of insurance." Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 429, 66 S. Ct. 1142, 1155, 90 L. Ed. 1342 (1946). To carry out this policy, the Act provided, inter alia, a three-year moratorium in which various federal laws would be inapplicable to the insurance business. The states were encouraged to create their own regulatory schemes by the Act's proviso that at the end of the moratorium the Sherman, Clayton and Federal Trade Commission Acts "shall be applicable to the business of insurance to the extent that such business is not regulated by State law." 15 U.S.C. § 1012. The relevant inquiry in deciding the motion before me is thus (1) whether the practice of the defendants challenged here falls within the term "business of insurance" and (2) whether it is "regulated by state law."

 That the title insurance industry in general is pervasively regulated by the Commonwealth of Pennsylvania cannot seriously be disputed and plaintiff makes no attempt to do so. The scope and nature of this regulation is adequately set forth in the thoughtful opinion of my colleague, Judge Edward R. Becker, in Schwartz v. Commonwealth Land Title Insurance Co., 374 F. Supp. 564, 567-69 (E.D. Pa. 1974), and need not be repeated.

 This extensive regulation coupled with the fact that the complaint essentially challenges the provisions of title insurance policies (and therefore appears to involve the business of insurance) facially supports the defendants' position that the McCarran-Ferguson Act is a bar to this suit. The plaintiff, however, advances three arguments in support of his contention that the motion to dismiss must be denied. First, plaintiff asserts that, despite initial appearances, a closer analysis will reveal the activities of which complaint is made do not constitute the "business of insurance" as that term has been judicially construed. Second, the plaintiff asserts the specific practice at issue here is not sufficiently regulated by Pennsylvania to fall within the Act, despite the pervasive general regulation of the title insurance industry by the Commonwealth. Finally, the plaintiff contends defendants' practices come within the exception contained in section 3(b) of the Act, 15 U.S.C. § 1013(b). I will address these arguments seriatim.

 A. The Business of Insurance.

 In Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453, 459-60, 89 S. Ct. 564, 568-69, 21 L. Ed. 2d 668 (1969), Mr. Justice Marshall delineated the type and scope of activity intended by Congress to be encompassed within the term "business of insurance:"

 
Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the "business of insurance" does the statute apply. Certainly the fixing of rates is part of this business; that is what South-Eastern Underwriters was all about. The selling and advertising of policies, FTC v. National Casualty Co., 357 U.S. 560, 78 S. Ct. 1260, [2 L. Ed. 2d 1540] (1958), and the licensing of companies and their agents, cf. Robertson v. People of State of California, 328 U.S. 440, 66 S. Ct. 1160, [90 L. Ed. 1366] (1946), are also within the scope of the statute. Congress was concerned with the type of state regulation that centers around the contract of insurance, the transaction which Paul v. Virginia held was not "commerce." The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement -- these were the core of the "business of insurance." Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was -- it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly are laws regulating the "business of insurance." (Emphasis added.)

 Plaintiff's claim that the activity he challenges here does not constitute the business of insurance is bottomed on the well known fact that "in the usual situation, title insurance is indispensable to the occurrence of the real estate sale." Schwartz, supra at 574. The plaintiff contends that because of their indispensability, title insurance companies are able to dictate the terms of property settlements. From this assertion, plaintiff alleges that an agreement among the defendants not to provide other settlement services to buyers of newly constructed residences unless they also purchase mechanic's lien insurance in reality involves, not the business of insurance, but the "business of real estate sales." Brief for Plaintiff at 8. Plaintiff seeks to bolster this argument by contending that where mechanics' liens have been expressly waived, the risk of loss is nonexistent and any contract purporting to cover such a hazard cannot properly be called "insurance." I do not agree.

 The mere fact that the services performed by a title insurance company are an indispensable part of the transfer of real estate does not remove those services from the sphere of the insurance business. See Schwartz, supra at 574-75. If this were the case, not only mechanic's lien insurance, but every other risk covered or service provided by title insurance companies would fall beyond the "business of insurance" perimeters. Acceptance of plaintiff's argument also would have effects reaching far beyond the title insurance industry. As a practical matter there are numerous, everyday transactions which depend on the availability of various types of insurance. Many states, Pennsylvania among them, require automobile insurance in one form or another. In these states the obtaining of insurance is a prerequisite to the lawful operation of a motor vehicle. Banks and other lending institutions customarily require the purchasers of new automobiles to carry collision insurance as a prerequisite to obtaining financing. *fn3" Building contractors are frequently required to have liability and workmen's compensation coverage. Leases, particularly of commercial property, customarily require one of the parties to carry insurance. These are but a few examples: there are many others. Plaintiff's theory would mean that in each of the examples just given the insurance companies would not be engaged in the business of insurance because their activities have collateral consequences in other areas. In short, plaintiff's theory would carve out of the McCarran-Ferguson Act a large amount of activity that has traditionally been regarded as part of the business of insurance.

 Plaintiff's contention that where there has been a waiver of mechanics' liens, there is no risk and thus nothing to insure is an over simplification. In the first place, the obtaining of a waiver and the willingness of a title insurance company to issue its policy are not simply ships which pass in the night but are engine and hull of the same vessel. The very basis on which a company is willing to insure title is the obtaining of a mechanic's lien waiver. If there is no waiver, there may be no insurance. Obviously, the company's insistence on a waiver of mechanics' liens is one of the ways it tries to minimize the risk of loss -- in much the same way that a workmen's compensation carrier will try to minimize its risk of loss by requiring an employer to institute certain safety practices. In neither case, however, does the attempt mean that liability is eliminated entirely. So far as mechanics' liens are concerned, "waivers" have been held to be untimely, defective, insufficient, and fraudulent. By statute, 49 P.S. § 1402, Pennsylvania set forth exactly ...


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