New York’s Appleton Law restricts free commerce and should be stricken by the state or Federal action under the Commerce Clause.
The Appleton Law is a section of New York state’s insurance law that was incorporated in 1939. The law requires every insurance company operating in New York to abide by New York’s Insurance Code, even when operating in other states. In other words, insurers must comply with New York’s state regulations, even when operating in other states where regulations may not be as stringent. Specifically, 1106(f) of the insurance code says,
“No foreign insurer and no United States branch of an alien insurer which does outside of this state any kind or combination of kinds of insurance business not permitted to be done in this state by similar domestic insurers hereafter organized, shall be or continue to be authorized to do an insurance business in this state, unless in the judgment of the superintendent the doing of such kind or combination of kinds of insurance business will not be prejudicial to the best interests of the people of this state.”
Appleton law is often applied to financial guarantee insurance including surety. In New York, financial guarantee insurance must be written only by monoline insurance companies. Should an insurance company want to create innovative financial products, they may be restricted for fear of losing their license in New York. This is protectionism at its finest and has no place in today’s marketplace. The law hurts businesses and consumers by limiting access to some financial products including lease bonds, utility bonds, letters of credit and countless other products falling under the umbrella of financial guarantees.
Should New York not voluntarily take action, the Federal government should under the United States Commerce Clause. The Commerce Clause is addressed under Article 1, Section 8, Clause 3 of the U.S. Constitution. The clause among other things gives Congress the authority to,
“To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;”
While controversial, the Commerce Clause has often been used as a restriction of the regulatory control of states when they interfere with interstate commerce. New York’s Appleton Law is a prime example. The Supreme Court has identified two basic principles that govern its decision on Commerce Clause rulings. First, states generally may not discriminate against interstate commerce. Second, states may not take actions that are facially neutral but unduly burden interstate commerce.
Under these two provisions, it has long been held that states have now power to regulate outside their borders. As far back as 1881, Chief Justice Waite wrote in his opinion on Bonaparte vs. Tax Court, “No state can legislate except with reference to its own jurisdiction.”
However, the Supreme Court has also ruled in favor of the Commerce Clause under a third but less used principle. Specifically, courts have struck down state laws when they violate what is known as The Extraterritoriality Principle of the Commerce Clause. In the simplest of terms, it means that a state cannot project its powers beyond its borders when it comes to commerce.
Much legislation has taken place regarding The Extraterritoriality Principle which is relevant to New York’s Appleton Law. In Brown-Forman Distillers Corp. v. New York State Liquor Authority, alcoholic beverage producers had to promise that they would not sell their products for a lower price in any other state. It meant that if a producer sold products in New York, that producer would have to sell their product for the same price in every other state it operated in and effectively allowed New York to control its national prices. The court sided with Brown-Forman in the case and reasoned that the state of New York, may not “project its legislation into [other States] by regulating the price to be paid”
In a similar case of Healy vs. Beer Institute, Inc., the court again upheld the extraterritoriality principle of the commerce clause citing,
“A statute that directly controls commerce occurring wholly outside the boundaries of a State exceeds the inherent limits of the enacting State’s authority and is invalid regardless of whether the statute’s extraterritorial reach was intended by the legislature.”
Many other cases relevant to New York’s Appleton law could also be applied, including North Dakota vs Heydinger, Edgar vs Mite Corp., and Am. Beverage Ass’n v. Snyder among many others. One of the biggest challenges to using the Commerce Clause has been defining what falls under the term “commerce”. However, in the case of U.S. vs Southeastern Underwriters, the court ruled that insurance does fall under the clause. The ruling says,
“1. A fire insurance company which conducts a substantial part of its business transactions across state lines is engaged in “commerce among the several States,” and subject to regulation by Congress under the Commerce Clause.”
New York is arguably the insurance and financial capital of the world. However, no state should be allowed to regulate activity outside of its borders. Appleton laws are a relic of an era when protectionism was prevalent and acceptable. Not only is the law bad for innovation, businesses and consumers, it also violates the Commerce Clause by effectively regulating other states. It’s time for the law to be amended, or struck down.
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