Treatment of Renewals Under Section 305 Regulation
Introduction
ABIA and the ABA respectfully request that the federal banking agencies reconsider the
application of the disclosure requirements mandated by Section 305 of the Gramm-Leach-Bliley
Act to the renewals of insurance products sold prior to October 1, 2001. The application of
disclosure requirements to the renewals of insurance products sold prior to the effective date of
the Section 305 regulation is at variance with the language and the intent of Section 305 of the
Gramm-Leach-Bliley Act. Moreover, it is unworkable.
The Agencies’ Determination
In an August 2001 response to a list of questions regarding the insurance consumer
protection regulation (the “regulation”) mandated by Section 305 of the Gramm-Leach-Bliley
Act, the federal banking agencies concluded that the disclosure requirements imposed by the
regulation apply to an insurance product that is renewed after the effective date of the regulation
(October 1, 2001) if the required disclosures were not provided when the product was initially
sold. This conclusion is stated as follows:
At the outset, understand that renewals are subject to all requirements in the rule except
the disclosure requirements in ___.40. The requirements in ___.30, ___.50, and ___.60
apply to renewals. As for the disclosure requirements, if the consumer received the
disclosures at the initial sale, disclosures would not have to be made at the renewal.
If the consumer did not receive the disclosures at the initial sale, the disclosures
should be made at the first renewal after October 1, 2001 (the rule’s effective date).
(emphasis added)
Our Analysis
The agencies’ response regarding the application of the disclosure requirements to
renewals amounts to a retroactive requirement that is at variance with the language and the intent
of Section 305 of the Gramm-Leach-Bliley Act. Moreover, the application of the disclosure
requirements to renewals is unworkable.
To interpret the phrases “initial purchase” and “initial sale” to include a renewal
frustrates the common meaning of the terms “initial” and “renewal.”
Subsection (c) of Section 305 of the Gramm-Leach-Bliley Act provides that a covered
person must make certain disclosures to a consumer as part of the sale or purchase of an
insurance product. That subsection also requires the covered person to obtain the consumer
acknowledgment of those disclosures. Subsection (c) reads, in relevant part, as follows:
(c) Disclosures and Advertising. – The regulations prescribed pursuant to
subsection (a) shall include the following provisions related to disclosures and
advertising in connection with the initial purchase of an insurance product:
(1) Disclosures. –
(A) In General. – Requirements that the following disclosures be made orally and
in writing before the completion of the initial sale ....
.......
(F) Consumer Acknowledgment. – A requirement that a depository institution
shall require any person selling an insurance product at any office of, or on behalf
of, the institution to obtain, at the time a consumer receives the disclosures
required under this paragraph or at the time of the initial purchase by the
consumer of such product... (emphasis added)
As for the timing of the required disclosures and the acknowledgment, the subsection
states that they must be given upon the “initial” sale or purchase of the product. The term
“initial” is not defined in subsection (c). In such cases, “words will be interpreted as taking their
ordinary, contemporary or common meaning.” See Perrin v. United States, 444 U.S. 37, 42
(1979). 1 According to Webster’s the common meaning of the term “initial” is “[h]appening or
being at the very beginning.” When the common meaning of the term “initial” is read into
subsection (c), it is apparent that the required disclosures and acknowledgment must be given
when an insurance product is first sold or purchased.
The common meaning of the term “initial” precludes the application of the disclosure
requirements to the renewal of an insurance product. A renewal is commonly understood to be
the reestablishment of an insurance policy, usually achieved through the payment of a premium.
(Rubin, Dictionary of Insurance Terms). Similarly, the agencies have conceded that a renewal
“means continuation of coverage involving the same type of insurance for a consumer.” Some
state legislatures have defined a renewal as a new and independent contract for purposes of the
state’s insurance code. Those statutory definitions of the term, however, should not be confused
with the common meaning of the term renewal.2 Moreover, whether a renewal is legally
classified as a new or a continuing contract, it involves the same parties and the same type of
insurance. Also, it is based upon a pre-existing relationship and a prior transaction between
those parties. Therefore, by its very nature, a renewal cannot be equivalent to the “initial” sale or
purchase of an insurance product.3
1
See also, FDIC v. Meyer, 510 U.S. 471, 476 (1994) (stating that absent a statutory definition,
the Court construes “a statutory term in accordance with its ordinary or natural meaning”).
2
Also, whether or not a renewal constitutes a new contract or the continuation of the pre-existing
contract will be determined by the terms of the contract and the intention of the parties. (18
Couch § 68:40 at 41)
3
We acknowledge that the sale of a different type of insurance to the same customer does not
constitute a renewal for purposes of the regulation.
2
Section 305 was intended to complement the expansion of insurance powers otherwise
authorized by the Gramm-Leach-Bliley Act. Nothing in Section 305 suggests that the disclosures
required by that Section should apply to transactions initiated prior to the effective date of the
regulation, and such a reading is inconsistent with the general principles of statutory
interpretation.
Section 305 must be read within the context of the rest of the Gramm-Leach-Bliley Act.
See Richards v. United States, 82 S.Ct. 585, 591-592 (1962) (Stating “that a section of a statute
should not be read in isolation from the context of the whole Act.”) That Act significantly
expanded the insurance powers of banking institutions, by permitting banks to affiliate with
insurance companies within a financial holding company framework, and by allowing national
banks to sell insurance through financial subsidiaries. Congress recognized, however, that the
potential for consumers to confuse insurance products with traditional banking products would
increase as more banks become engaged in insurance activities. The intent of Section 305,
therefore, is to safeguard the consumers of insurance products in the post-Gramm-Leach-Bliley
world, not to reach transactions that were initiated prior to passage of the Act. In fact, when it
crafted Section 305, Congress recognized that the federal banking agencies had addressed the
sale of non-deposit products that occurred prior to the passage of the Gramm-Leach-Bliley Act.4
Nothing in Section 305 suggests that the regulation mandated by the Section should apply
to the renewal of a product initially sold or purchased prior to the effective date of the regulation.
Section 305 includes no directive to the federal banking agencies to look back at transactions that
were initiated prior to the effective date of the regulation. Moreover, Section 305 does not
address how the agencies should implement such a retroactive application of the regulation. For
example, how far back should the regulation reach? Do the disclosure requirements apply to the
initial sale or purchase of an insurance product made between the effective date of the Act and
the effective date of the regulation? Do the disclosure requirements apply to the initial sale or
purchase of an insurance product made prior to the effective date of the Act, and, if so, how far
back do they apply? One year? Five years? Presumably, if Congress intended to reach
transactions that were initiated prior to the effective date of the regulation, it would have
provided the agencies with some guidance on these questions.
To read Section 305 as applicable to transactions that were initiated prior to the effective
date of the regulation is inconsistent with standard principles of statutory construction. Absent
express language, a statute should not be construed to apply retroactively. See Bowen v.
Georgetown, 109 S. Ct. 468, 471 (1998). In Bowen, the Supreme Court held that the Department
of Health and Human Services could not promulgate a rule to apply retroactively without the
express grant of authority of Congress. In rejecting the agency’s arguments, the Court stated “a
statutory grant of legislative rulemaking authority will not … be understood to encompass the
power to promulgate retroactive rules unless the power is conveyed by Congress in express
4
House Report 106-74, Part 1, page 143.
3
terms.” 109 S. Ct. at 472.5 Section 305 does not expressly provide the federal banking agencies
with the authority to apply the regulation to transactions that were initiated prior to the effective
date of the regulation.
The unworkable nature of the disclosure requirements is further proof that the statute
was not intended to apply to sales and purchases that occurred prior to the effective date of the
regulation.
The application of the disclosure requirements to the renewals of insurance products sold
prior to the effective date of the regulation is unworkable. As the foregoing discussion indicates,
it is not clear how far back such a requirement should reach. Although the Gramm-Leach-Bliley
Act expanded the insurance powers of banking institutions, many of ABIA’s members have been
selling insurance products for years. Identifying all such policies, much less providing the
required disclosures, would be extremely costly and time consuming. Many insurance products
are sold with a fixed premium for the duration of the insurance contract, i.e., term life insurance,
and cannot be changed. When pricing insurance products prior to October 1, 2001 the
underwriters did not contemplate the expense of providing disclosure notices or the expense of
following up with consumers on acknowledgments.
Furthermore, providing the required disclosures would be difficult, if not impossible. In
most cases, the bank that sells an insurance policy has little, if any, continuing contact with the
customer. After the sale by a bank, it is the underwriter, not the bank, that sends the customer
the policy, and it is the underwriter, not the bank, that receives premium payments.6 When it
comes time to renew the policy, the renewal often is completed simply by the payment of the
next premium, after which the underwriter, not the bank, forwards the renewed policy to the
customer. How, in this process, is the bank to provide the customer with the required
disclosures? Are both oral and written disclosures required? What happens if the customer does
not provide the required acknowledgment? During an initial sale, a consumer can be told that
the policy will not be effective without the acknowledgment. In the case of a renewal, however,
the policy has been in effect. It would be a significant disservice to a consumer to allow an
underwriter to terminate an insurance contract for failure to return an acknowledgement. These
questions illustrate the difficultly associated with applying the disclosure requirements to sales
prior to the effective date of the regulation.
See also, Johnson v. United States, 120 S.Ct. 1795, 1801 (2000) (stating that “[a]bsent a clear
statement of … intent, … [the Court does] not give retroactive effect to statutes burdening
private interests.”
5
6
For purposes of this discussion, we assume that any party that is not a covered person would
not be subject to the disclosure requirements.
4
Conclusion
In conclusion, we respectfully request that the federal banking agencies clarify that the
Section 305 disclosure requirements do not apply to the renewal of an insurance product
purchased or sold prior to the effective date of the regulation.
5