As noted in the discussion of the early development of insurance regulation, prior to 1944, court decisions found the transaction of insurance not to be commerce and hence beyond the scope of congressional authority. However, in the South-Eastern Underwriters Association decision of that year, the United States 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 applicable the preemption doctrine and the interstate commerce limitations to state insurance regulation.

In response to fundamental and widespread concerns as to the impact of this decision on the ability of the insurance industry to function in several crucial areas and the possible preemption of the authority of the states to regulate (under either the preemption doctrine or as an undue burden on interstate commerce), Congress enacted the McCarran-Ferguson Act in 1945. Because of its fundamental importance, the essential parts of the Act are quoted here.

In the McCarran Act, Congress declared 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 therein shall be subject to state insurance regulation. Furthermore, no act of Congress shall be construed to invalidate or impair a state law regulating the business of insurance unless that legislation specifically relates to such business. However, a major proviso is that the antitrust laws shall apply to the business of insurance to the extent such business is not "regulated by State law." But Congress also stated that nothing in the Act renders the Sherman Act inapplicable to boycotts, coercion, or intimidation, nor does the Act apply to the federal National Labor Relations, the Fair Labor Standards, or the Merchant Marine Acts.

It was not long after the enactment of the McCarran Act that state authority was challenged as being unconstitutional. In Prudential Insurance Co. v. Benjamin, the Supreme Court upheld a state tax discriminating against interstate commerce saying that through the Act, Congress "broadly . . . [gave] support to the existing and future state systems for regulating and taxing the business of insurance. . . ." This conclusion has been more recently reaffirmed in Western Southern Life Insurance Co. v. State Board of Equalization of California when the Court said that

When Congress carves out and saves an area for state law, in that area, state law prevails even if 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. Thus the crucial issue becomes the scope of the McCarran Act.

The McCarran Act provides that no law of Congress shall impair or supersede state law regulating the "business of insurance" unless such federal law "specifically relates" to the business of insurance. As to the "specifically relate" requirement, the issue becomes whether the federal legislation must contain preemptive language or simply referral language. Although not definitive, one lower court said that, in order to preempt, the federal law must expressly and unambiguously declare that the state insurance regulation is preempted before the McCarran Act is rendered inapplicable. Thus, for the most part, 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. Whereas originally this language was believed to be quite broad, in more recent years it has been narrowed by judicial interpretation and perhaps will be further narrowed by Congress. However, a relatively recent Supreme Court decision may have arrested the judicial trend toward narrowing the scope of what constitutes the business of insurance, especially in situations not involving the application of federal antitrust laws. It also should be remembered that 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 and/or the criteria as to the undue burdens on interstate commerce limitations.

In short, in the absence of a flurry of federal legislative initiatives, as a general proposition, state efforts to regulate the insurance business are likely to survive challenges under the Commerce and Supremacy Clauses, albeit perhaps often in a dual or subordinate capacity. Survival becomes infinitely stronger if the challenged activity falls within the scope of the McCarran Act. The changing mix of federal regulation, state regulation, or combination thereof will continue to evolve and shift with the interplay of judicial interpretation of the criteria set forth in the McCarran Act as well as other acts (such as the federal securities laws), judicial application of the constitutional concepts of preemption and undue burdens on interstate commerce, and the nature of future congressional action.