A U.S. Supreme Court ruling that could be delivered as early as next month will go a long way toward clarifying banks' position in the insurance market.

Ultimately, however, the court's ruling in Barnett Bank of Marion County N.A. vs. Tom Gallagher, Florida Insurance Commissioner may only affect the speed at which banks begin offering insurance products.

Since 1986, the Comptroller of the Currency has held that the National Bank Act permits federally chartered banks to sell insurance nationwide from branches in towns with fewer than 5,000 people. The comptroller also has allowed national banks to sell annuities, arguing they are not insurance. Both positions have been challenged in court and ultimately upheld by the U.S. Supreme Court.

In the case now before the court, Florida argues that the federal law does not pre-empt a prohibition against banks in insurance, a view held by many insurance agents and some other states with such bans.

Whatever the high court ruling in Barnett, though, banks this year inevitably will continue their drive to sell insurance products. And while much of their initial interest seems to be in personal lines products, for the largest banks-or those with histories of commercial banking activity-dealing in commercial lines products is a very real possibility.

"The activity is beginning in areas that are closest to traditional bank products," such as annuities, said Philip Corwin, director of retail banking for the American Bankers Assn. in Washington. "But I think you'll see an increase in the property and casualty areas, too."

There's "absolutely" potential for banks to move into distributing commercial lines of insurance, said Mr. Corwin, who added that they will "want to proceed cautiously....in an area where you get into the possibility of the handling of claims raising contentious issues."

Forrest Ward, national director of financial service industries for Ernst & Young L.L.P. in New York, said banks' initial interest in personal lines is understandable because "that's where their branch distribution system is already in place to serve the consumer."

It's "conceivable," however, that some larger banks would find commercial lines opportunities, he said.

"You've got to keep in mind that some of the corporate products are a lot more complex and the banks don't have the expertise," Mr. Ward said.

But that could merely prompt banks to instead form strategic alliances with brokers or insurers in order to serve their business customers.

In fact, some insurers are looking to form such relationships with banks as they look for more cost-effective ways to distribute their products.

"Bank distribution for insurance companies has been growing and will continue to grow," according to Larry Mayewski, a senior vp at A.M. Best Co. in Oldwick, N.J.

"Most insurance companies we talk to are looking to come into a relationship with banks," Mr. Mayewski said.

"There are many states right now that allow a significant amount of bank distribution" of insurance products, Mr. Mayewski said.

According to the Washington-based Assn. of Banks-in-Insurance, though, 22 states still have "anti-affiliation" statutes that prohibit the insurance licensing of anyone associated with a financial institution.

Ten of those 22 states, though, do permit banks to market annuities.

The Barnett case revolves around whether Florida can bar national banks from selling insurance products from offices in towns of fewer than 5,000 people, as the National Bank Act provides.

The high court is scheduled to hear oral arguments on the case Jan. 16, and Mr. Corwin said he wouldn't be surprised if a ruling is handed down by the end of February.

Mr. Corwin noted that it took the justices five weeks to reach a ruling early in 1995 on the NationsBank of North Carolina vs. Variable Annuity Life Insurance Co. case-which permitted national banks to sell annuities-a case which he deemed more complex than Barnett.

The Barnett ruling's likely impact on bank sales of insurance products is that it will either "throttle it back a little bit or it's going to open it up to greater evolution or revolution in terms of financial services," said Mr. Mayewski of Best.

If Jacksonville, Fla.-based Barnett Banks Inc. is successful in its appeal, "it's obviously going to broaden the distribution channels for banks," said Mr. Mayewski.

If, on the other hand, the appeals court verdict is upheld, "the growth might be a little bit less than it would be already if the state laws were pre-empted," he said.

"We believe we will prevail in that case," said the ABA's Mr. Corwin, adding that he believes the Supreme Court could even go as far as overriding the McCarran-Ferguson Act by limiting states' authority to regulate banks' insurance sales activities.

But even a victory for the banking interests "is not going to mean that every bank in every big city will have an insurance agent sitting in it and it doesn't mean as a practical matter states won't be regulating these things," Mr. Corwin said.

Banks will still be selling the products of licensed insurance companies, noted Mr. Corwin, which would mean continued state regulatory involvement even if the court shielded banks from states' regulatory authority under the McCarran-Ferguson Act.

"It will not mean wide-open, pedal-to-the-floor bank insurance sales," Mr. Corwin said, and "it's not going to gut state regulation of insurance sales."

Even if the Supreme Court upholds the 11th Circuit ruling, siding with Florida regulators over Barnett Banks, activity at the state level is likely to continue to increase banks' involvement in the insurance market.

"It offers another option to consumers and I think states are adjusting to that reality and they're acting in their own interest to insure that they will continue to be able to regulate insurance," Mr. Corwin said.

Ohio officials recently granted the state's first licenses to bank-affiliated businesses to sell a broad package of insurance products. Two agencies-Northwest Territory Life Insurance Agency and Northwest Territory Property & Casualty Agency-were licensed to sell annuities as well as life, auto and property insurance underwritten by Minnesota Mutual Insurance Group.

The agencies are owned by First National Bank of Southeastern Ohio, which in turn is a unit of Columbus-based bank holding company Peoples Bancorp Inc.

A ruling by the 7th U.S. Circuit Court of Appeals in Chicago in October, coupled with the recent merger of NBD Bancorp Inc. and First Chicago Corp., may spur bank insurance sales in Illinois.

The 7th Circuit sided with NBD Bancorp's challenge of Indiana's refusal to allow a national bank in Indianapolis to sell insurance through a branch in a town of fewer than 5,000 residents. Indiana officials have not decided whether to appeal the ruling.

With the favorable ruling coupled with its merger with First Chicago, NBD now has the potential to add the Illinois insurance market to the Indiana and Michigan markets in which it already sells insurance products.

As part of consideration of a state regulatory reform study, New York officials may examine the banks-in-insurance issue this year, and legislation expanding banks' powers to sell insurance products is expected to be introduced this year in Connecticut.

Massachusetts officials received a lengthy report in late November from the state's Financial Services Advisory Committee advocating allowing banks to sell insurance products.

The first legislation aimed at reaching that goal is expected to come before the state's Legislature soon, said Alan R. Morse Jr., Massachusetts' superintendent of financial services and a member of the advisory committee.

"No doubt there will be quite a lot of conversation," said Mr. Morse, adding that whether the issue is addressed piecemeal or as a single bill will be up to the governor and the legislators.

The Massachusetts advisory committee determined that fairness is a key reason for allowing banks to deal in insurance products, said Mr. Morse, "both from a market and a regulatory process point of view."

On the market side, already some banks are dealing with commercial lines customers on their own.

According to the Assn. of Banks-in-Insurance, while just over half of commercial banks' estimated $2.1 billion in 1994 insurance income came from annuities and nearly another third from credit insurance, they also took in nearly $19.5 million in commission and fee income from commercial property/casualty sales and another $7.8 million from sales of various employee benefits coverages.

An executive with one bank whose insurance activities are largely in the commercial lines said it is a natural result of his bank's expertise dealing with commercial customers.

"As we look at a line of business such as insurance, we naturally think of the business lines activity," said the bank executive, who asked not to be identified. "It reflects our heritage."

The bank executive said it is a "logical conclusion" that as risk management techniques become more financial, a bank might find ways to couple its financial activities with commercial customers with its insurance activities.

But either the law or simple good business practices will prompt banks to steer well clear of linking the extension of credit to a customer's use of the bank's insurance activities, the executive noted.

"But we view the acquisition of risk protection as a financial service that is appropriate to sit on the shelf alongside our other financial services," the executive said.

"Our bringing it to the table alongside these other financial services is appropriate."