The opinion of the court was delivered by: PRATT
This is an action by four plaintiffs in the automobile repair business against five automobile insurance companies and two companies in the business of adjusting damage claims. Plaintiffs charge defendants with violations of the Federal antitrust laws and, more specifically, with conspiracy to fix prices, in allegedly agreeing to pay only the prevailing rates for labor and parts in the adjustment of the damage claims of defendants' insureds or on their behalf.
While several other motions are pending, this Memorandum concerns only the two motions for summary judgment filed on behalf of the five insurance company defendants on the ground that their activities, whether or not otherwise constituting Federal antitrust violations, are outside the scope of the Federal antitrust laws because of the antitrust exemption for insurance companies provided by the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq. (hereinafter referred to as the "McCarran Act"). This Act, passed in response to the Supreme Court's decision in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 88 L. Ed. 1440, 64 S. Ct. 1162 (1944) holding that insurance transactions were subject to Federal regulation under the commerce clause and that the antitrust laws were particularly applicable to such transactions, exempts the insurance business from regulation under the Federal antitrust laws provided that two criteria are met: (1) that the "business of insurance" is involved, and (2) that there is state regulation of the business of insurance.
A. The adjustment and settlement of claims, of which the practices challenged herein are an integral part, are clearly the business of insurance within the meaning of the McCarran Act.
For the exemption under the McCarran Act to be operative, the primary requirement is that the particular practice concern the "business of insurance" 15 U.S.C. § 1012(b). Although formal proof would seem unnecessary, the extensive record in this case shows, and plaintiffs admit, (Complaint, para. 12) that the automobile property insurance business involves the adjustment and settlement of claims. The insurance policy itself, the premiums paid thereon, and the payment of any claims are the key elements of the business of insurance. As the Supreme Court said in the leading case of Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453, 460, 89 S. Ct. 564, 21 L. Ed. 2d 668 (1969) the term "business of insurance" includes
"the relationship between the insurer and insured,
"the type of policy, which could be issued, its reliability, interpretation and enforcement * * *
"[and] other activities of insurance companies [which] relate so closely to their status as reliable insurers * * *"
Claims-settlement procedures, on the basis of which plaintiffs have alleged that in settling claims the defendants have agreed among themselves to fix prices for automobile repairs, concern payments to insureds or on their behalf. Clearly, such procedures are closely connected with the relationship between the insurer and insured. The adjustment practices actually followed depend upon the type of policy and its coverage and directly concern matters of policy interpretation and enforcement. The way and method an insurance company discharges claims under its policies relate closely to its status as a reliable insurer. Claims-settlement procedures are clearly "the business of insurance" as defined in National Securities, Inc., supra.
Finally, claims-settlement procedures have a direct connection with an insurance company's rate-making structure. The record clearly shows a close relationship between the costs of automobile repairs in Pennsylvania and Virginia, the states where plaintiffs do business, and the levels of premiums charged by defendants to its insureds. It is a fact of life that the cost of repairs, including labor charges and the cost of repair parts, paid in the settlement of damage claims are an important factor in the rate-making structure of insurance companies obligated under their policies to pay damage claims.
Claims-settlement practices which include activities complained of in this suit have a vital impact on rate-making and must, of necessity, be included within the term "business of insurance." Travelers Ins. Co. v. Blue Cross of Western Pa., 361 F. Supp. 774 (W.D. Pa. 1972), aff'd 481 F.2d 80, 83 (3rd Cir. 1973), cert. denied, 414 U.S. 1093, 94 S. Ct. 724, 38 L. Ed. 2d 550 (1973); California League of Ind. Ins. Pro. v. Aetna Cas. & S. Co., 175 F. Supp. 857 (N.D. Cal. 1959).
Plaintiffs' assertion that what is involved here is "the business of auto repair -- not the business of insurance" is a clever, but misleading turn of phrase. It is only partially true and completely misses the point that while the primary focus of the McCarran Act is the insurer-insured relationship, such relationship is not the all-inclusive boundary of that Act. The "business of insurance" can touch relationships between insurance companies and non-policy holders such as automobile repair shops when such relationships are closely connected with the insurer-insured relationship through the profound effect of the costs of damage claims in the rate-making structure. California League of Ind. Ins. Pro. v. Aetna Cas. & S. Co., supra (price fixing agreement between insurance companies concerning size of commissions paid to agents).
To conclude, the settlement and payment of damage repair claims is (1) a basic part of the contractual obligation owed by the insurance company to the insured, whether or not the payment is made to the insured or on his behalf, (2) directly affects the rate-making structure of the insurance company and the level of premiums to be charged, and (3) is connected directly with the writing of the policy, its interpretation and enforcement. ...