The allocation of authority (dual, exclusive, superior, or subordinate) over a challenged activity is often resolved by the courts. In the context of insurance regulation, this involves the constitutional issues relating to

The preemption doctrine is founded on the Supremacy Clause of the United States Constitution, which declares that the Constitution and federal law are "the supreme Law of the Land." When federal legislation or regulation is applicable to conduct that is also subject to state law or regulation, whether the latter survives is determined in accordance with the preemption doctrine. The preemption doctrine reflects judicial efforts to delineate the spheres of federal and state government authority within the federal system.

The Supreme Court has established two criteria in evaluating whether a particular state law or regulation should be preempted. First, state law or regulation must give way�is preempted�if this is the "clear and manifest purpose of Congress." Congressional preemptive intent may be found in explicit statutory command or inferred from the statute�s structure and purpose. Second, the Court seeks to ascertain whether federal and state law are so inconsistent that the state law must be preempted. Under this conflict test, preemption clearly occurs when federal law mandates action prohibited by state law or vice versa. As the degree of state interference with the federal legislative scheme diminishes, the presence of preemptive conflict becomes much less certain.

The congressional intent and the conflict tests are quite general and therefore subject to a wide range of judicial interpretations. The Court�s willingness to preempt state law has dramatically oscillated over time between a high degree of solicitude for federal interests (thereby favoring preemption) and greater respect for and tolerance of state concerns. In recent years the tendency has been toward state regulations. Nevertheless, there is little doubt that, in the absence of McCarran Act protection, both actual preemptions and uncertainty about whether future regulatory efforts would be preempted would circumscribe states� ability to respond to regulatory problems.

Congressional authority underlying legislation that affects the insurance business is typically predicated on its power to regulate interstate commerce under the Commerce Clause of the United States Constitution. The Commerce Clause not only authorizes Congress to act, it also limits the states� power to erect barriers against or unduly burden interstate commerce even in the absence of congressional legislation. As the volume and complexity of commerce and its regulation have grown, the Supreme Court has developed several tests to distinguish between state actions that the Commerce Clause permits and those that are prohibited.

There are at least three questions that the criteria raise. First, the discrimination against interstate commerce test raises the question about whether the state treats domestic companies more favorably than out-of-state companies. Second, the impermissible risk of inconsistent regulation test asks whether the subject of regulation is national in nature or admits only one uniform system or plan of regulation. Third, the balancing test weighs legitimate state interests in relation to the degree of burden (excessive or incidental) on interstate commerce. Failure of any one of these tests presumably finds state regulation an undue burden on interstate commerce and therefore prohibited by the Commerce and Supremacy Clauses. If there were no McCarran Act protection, the validity of the broad range of state insurance laws and regulations would be open to challenge as an undue burden on interstate commerce. Although there is a general sense that a major portion of state regulation would survive the challenge, uncertainty would always be present.

In the South-Eastern Underwriters Association case, the Supreme Court overturned 75 years of legal precedent and held that insurance can fall within the embrace of Congress�s power over interstate commerce, thereby rendering the preemption doctrine and interstate commerce limitations to state insurance regulation applicable. In response, Congress enacted the McCarran Act in 1945, declaring that continued regulation of the "business of insurance" by the states is in the public interest and that the business of insurance and every person engaged in it are subject to state insurance regulation. In subsequent constitutional challenges to state authority, the Supreme Court has made it clear that when Congress carves out an area for state law, state law prevails in that area even if it is in direct conflict with a federal statute, regulation, or policy. Consequently, to the extent the McCarran Act applies, it bars challenges premised on the Commerce Clause.

The McCarran Act also provides that no law of Congress impairs or supersedes state law regulating the business of insurance unless such federal law "specifically relates" to the business of insurance. Although not definitive, one lower court said that, in order to preempt state law, the federal law must expressly declare that the state insurance regulation is preempted before the McCarran Act is rendered inapplicable. Generally, therefore, existing federal legislation does not appear to specifically relate to the business of insurance.

Even if a federal law or regulation does not specifically relate, it may still apply to a particular activity if the activity does not constitute the business of insurance. However, even if the challenged activity falls outside the scope of the McCarran Act, the particular state regulatory effort being challenged may still survive under the principles of the preemption doctrine or the criteria as to what constitutes an unconstitutional undue burden on interstate commerce.