The power of advocacy (NRRA)

The Product Liability Risk Retention Act was amended in 1986 to expand the scope of the law to include all lines of commercial liability insurance (excluding workers’ compensation). The new law, the Liability Risk Retention Act (LRRA) has since become of substantial benefit to the alternative risk industry.

The National Risk Retention Association (NRRA) was formed shortly thereafter by a group of interested parties keen to offer representation for the risk retention and purchasing group (RRG) industry.

In 1986, the number of RRGs was limited and the amount of premium written was modest. Since the enactment of the LRRA, the industry has grown substantially. Now, more than 250 RRGs are in operation, writing more than $2.7 billion in premiums each year.

However, the road has been somewhat bumpy. RRGs are statechartered and licensed insurers authorised by the LRRA, 15 U.S.C. § 3901 et seq. In order to facilitate growth, they benefit from a broad pre-emption of state regulatory law. Unfortunately, many states have resisted this intrusion upon what is normally their regulatory domain and have, over the years, raised various issues about RRGs and their operation.

Litigation

Due to the unique regulatory status of RRGs, it was clear that the industry needed an effective advocate. Over the years, there have been several cases where effective representation by the NRRA delivered favourable outcomes. The first opportunity came in 1992, when Pennsylvania challenged the right of an RRG to insure limousines operating in that state. The NRRA filed an amicus brief (a document filed in a court by a third party, such as an advocacy group, that is not directly related to the case under consideration) supporting the right of the insurance carrier. The court found that the NRRA’s position was correct and held that federal law pre-empted the law of the state.

In 1993, the NRRA was asked to file in Mears Transportation Group v. Florida an amicus brief supporting the proposition that a state could not require a business to purchase insurance only from a company that participated in the state insurance guaranty fund, which RRGs are expressly prohibited from participating in pursuant to the LRRA. In 1994, the NRRA again filed a brief in the Preferred Physicians Mutual Risk Retention Group v. Pataki case. This case challenged New York’s requirement that doctors must obtain excess insurance from New York licensed insurers, which discriminated against RRGs because they are not ‘licensed’ but rather are ‘registered’ through the LRRA.

In 1996, the NRRA sued the state of Louisiana in NRRA v. Brown. Louisiana law required that each RRG has at least $5 million in capital and surplus, files a bond or equivalent funds of $100,000, and pays a fee of $100,000 in order to operate. The NRRA won the case at the district court level and then again on appeal to the US Circuit Court of Appeals.

In the National Warranty Insurance Company v. Greenfield case in 2000, the NRRA challenged Oregon’s requirement that insurance policies covering the liability of certain service contracts be written only with “authorised insurers” (a definition that excluded RRGs). The court found that such a requirement was discriminatory and in violation of the LRRA.

In the following year, NRRA filed a brief in the case of ALAS v. Fitzgerald. In that case, the state of Michigan imposed a fee on RRGs that was referred to as a ‘tax’. The court determined that it was not a tax but rather a fee and therefore was barred by the LRRA. Moreover, the court held that certain employee-related coverages were “liability insurance” under the federal definition. Although the court invited the plaintiffs to submit requests for reimbursements of their legal fees pursuant to § 1983 of Title 42 of the United States Code, the case settled.

In February 2008, the NRRA filed an amicus brief supporting Auto Dealers RRG in the case of Auto Dealers RRG v. Poizner, which resulted from the issuance of a cease and desist order by the California Department of Insurance in an attempt to prevent Auto Dealers RRG from writing stop-loss policies covering excess expenses in members’ self-funded employee health plans. A major victory was achieved when the judge issued a preliminary injunction prohibiting the department from enforcing the cease and desist order. The RRG had raised several important issues, including: 1) the role and limits of authority of the non-domiciliary state regulator regarding the qualification of the liability insurance company as an RRG; (2) whether liability as defined under the LRRA included contractual liability; and (3) the ability of the nondomiciliary state to take administrative action against the RRG by way of a cease and desist order, when the LRRA requires states to bring actions in a “court of competent jurisdiction”. The case settled before the preliminary injunction could be finalised as a permanent injunction.

Dealing with the states

Since its inception, the LRRA has been an irritant to a number of states. Over the years, however, the NRRA has worked with the states to resolve disputes over such issues as filing fees, assessment of taxes, assessment of examination fees, registration and disclosure requirements for non-domiciliary RRGs, and disputes over some states’ ‘financial responsibility’ laws, which either directly or indirectly try to exclude RRGs from writing business. This has been an ongoing effort, which sometimes has been repetitive due to the turnover of staff at state insurance departments.

One recurrent issue has been the extent to which non-domiciliary states can request information that may exceed the amount allowed by the LRRA. Section 3902(d) requires that the RRG only file with the non-domiciliary state its “plan of operation” or “feasibility study”and then update that plan if any material changes occur. However, individual states keen to access more information have challenged this (federal) requirement on numerous occasions. While most RRG managers are willing to provide some additional information, some state requests have exceeded any reasonable limits and have required the NRRA to intervene. In most cases, an accommodation can be achieved. However, in many cases over the years, the NRRA has had to write letters and discuss the issues with regulators to prevent further erosion of the standards set by the LRRA.

Working with the NAIC

After the LRRA was passed in 1986, the National Association of Insurance Commissioners (NAIC) appointed a task force—including members of the NRRA—to create rules for the states to follow. The result was the NAIC Model Risk Retention Act, which has been adopted into law by all of the states. This act describes what a state can do under the regulatory structure created by the LRRA. In addition, the NAIC developed its Risk Retention and Purchasing Group Handbook, which summarises the law, as well as cases and regulations interpreting it.

The Government Accountability Office issued a study in 2005 that had implications for the regulation for RRGs. Its principal conclusion was that RRGs were regulated inconsistently by the states. The result was that the NAIC appointed a working group and a task force to work on the governance of RRGs, financial regulation and the coordination of the regulatory requirements among the states, with a particular emphasis on the RRG’s state of domicile. The NRRA again played a key role.

Amending the LRRA

The NRRA has been a leader in the efforts to get Congress to amend the LRRA. As early as 2002, legislation to expand the authority of RRGs to write commercial property insurance was submitted as an amendment to the Graham-Leach-Bliley Act. The amendment failed after a Senate parliamentarian ruled it to be “non-germane”; in other words, it was not related to the purpose of the bill.

The NRRA was instrumental in the introduction of HR 5792, Increasing the Insurance Coverage Options for Consumers Act of 2008. In July 2008, that bill was passed out of the House Financial Services Committee but failed to pass in the 110th Congress. In the 111th Congress, the NRRA has been successful in promoting the Risk Retention Modernization Act (HR 4802). This bill is pending before the House Financial Services Committee.

If the bill is passed, it would expand the authority of RRGs to write commercial property insurance, establish baseline standards for corporate governance and establish a dispute resolution process within the US Department of the Treasury. It would also cap off a quarter of a century of successful advocacy by the NRRA, though as general counsel of the NRRA, I think there is more to come. The work so far has been interesting and important and, undoubtedly, will continue for many years to come.

Robert H. (Skip) Myers, Jr. is the general counsel of the National Risk Retention Association and a managing partner at law firm Morris, Manning & Martin. He can be contacted at: rhm@mmmlaw.com