State Lawmakers Balk at Growing Trend of Federal Preemption

As Senate Banking committee members in Washington begin the debate over creating a new federal regulatory scheme for what is now state-regulated insurance, state lawmakers across the country are voicing their agitation with the growing trend of federal regulatory preemption in insurance, product liability, tort liability and other areas.

“Federal preemption of state authority is a growing concern,” said Georgia Senator Don Balfour, chair of the National Conference of State Legislatures’ Standing Committees. “These unwarranted power grabs by the federal government subvert the federal system, choke off innovation and ignore diversity among states.”

Of particular concern to state legislators is the rise of federal preemptions through the regulatory process. State lawmakers say that federal regulators are preempting state laws without even giving states an opportunity to comment on the regulations.

“Federal regulatory preemption is nothing more than a backdoor, underhanded means by which unelected federal bureaucrats impose their will on the states,” said New York Senator Michael Balboni, a member of NCSL’s Executive Committee. “No single, unelected individual should be able to wield such power with the stroke of a pen.”

Insurance regulatory proposals are part of this growing debate over federal versus state authority.

United States Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.), both members of the Senate Committee on Banking, Housing, and Urban Affairs, this week unveiled legislation that would allow life and property/casualty insurers to choose federal rather than state regulation under an “optional federal charter” system. The comprehensive legislation is titled the “National Insurance Act of 2006.”

State insurance commissioners, along with major interests within the insurance industry, have stated their opposition to the Sununu-Johnson approach.

“The nation’s state insurance officials share significant concern that this bifurcated regulatory regime with redundant, overlapping responsibilities will result in policyholder confusion, market uncertainty, and a host of other unintended consequences that will harm taxpaying individuals, families and businesses,” said the National Association of Insurance Commissioners President Alessandro Iuppa. “However, a new proposal unveiled today by Senators Sununu and Johnson would fundamentally dismantle the current system and allow insurance companies to opt out of state oversight and policyholder protections.”

Opponents of a federal charter prefer the approach taken in another bill, the State Modernization and Regulatory Transparency or SMART Act, which a House panel is expected to consider later this year. The SMART Act calls for streamlining state insurance regulation instead of creating a separate federal option. Yet even the SMART bill looks ike an undermining of state insurance regulation to some state lawmakers.

“States would have to adopt federal provisions or face preemptions and sanctions,” says the NCSL about the SMART Act, which notes that the bill also undermines state regulation of insurance rates.

Beyond insurance, there are lots of other proposals that concern state lawmakers.

NCSL released an updated Preemption Monitor highlighting 72 bills or amendments that would step on the toes of state policy makers. This represents a 35 percent increase over the number of bills and amendments in the previous Preemption Monitor issued in January 2006.

State legislators point to a rule proposed by the National Highway Transportation Safety Administration designed to improve automotive roof-crush standards. The proposed rule would preempt all state common and product liability laws that now hold automobile manufacturers to a stricter standard than prescribed in the regulations.

A study commissioned by state lawmakers says that the federal preemptions contained within the NHTSA rule will cost states $60 million per year. The report indicates that while the automotive industry gets immunity from state tort claims through the issuance of the rule, states get higher costs to care for those who become permanently disabled and have no recourse to recover their medical costs.

Among other items on their list of attempts to circumvent state liability laws or regulations are proposals for immunity from civil liability for nonprofit charitable organizations; Consumer Product Safety Commission rules on product liability standards; the federal driver license identification act; a waiver of all liability for producers of antifreeze and coolants; legislation to create association health plans that skirt state regulations; bills on notification of breaches of data confidentiality; bills to ban lawsuits in state courts against food manufacturers for obesity claims; immunity for vaccine manufacturers and medical malpractice tort reforms that pre-empt state laws.

“Federal preemption is nothing more than a one-size-fits-all approach to public policy,” said NCSL President-elect and Texas Senator Leticia Van de Putte. “Our federal system of government was designed so that each state could address the needs of its own people. These blanket solutions to multi-faceted problems just don’t work.”

NCSL is a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories.