RRGs and Florida: a storm that could spread
This year the market has been following, with great interest, the saga of Florida House Bill 57-Senate Bill 516, a piece of legislation which proposed to require risk retention groups (RRGs) providing commercial auto liability insurance to possess an AM Best “A” rating (AM Best’s third-highest rating) and a financial strength classification of “VIII” (meaning $100 to $250 million of capital surplus).
Given that no states require any insurance companies to possess such ratings, as distinguished from minimum limits required for certain licensed activities, e.g. trucking, Captive International spoke to Joe Deems, the executive director of the National Risk Retention Association (NRRA), to understand the issues involved with the bill, which has come close to passing into law.
Some background is important here, Deems is keen to stress. First, he says that the NRRA only learned in March 2023 that what it described as “this stealth bill” had been fast-tracked for passage and was well on its way through multiple legislative committees in the Florida House and the Senate, purely along partisan political lines.
Second, he claims the impetus for the bill came from a small handful of very large public works construction contractors insured by RRGs. Some were being blocked from having their contracts approved by the Florida Depart of Transportation (FDOT) and other municipalities because of what the NRRA describes as “a discriminatory and misleading ‘pop-up’ message sponsored by the Florida Office of Insurance Regulation (FOIR) appearing ubiquitously when anyone researches any RRG registered in the state”.
Third, the underlying dispute erroneously targeted commercial auto liability, which FOIR had been permitting for a decade and a half, noting that the state’s Department of Motor Vehicles had written almost 12 years earlier that RRG commercial auto liability coverage satisfies the financial responsibility requirements of the state.
Fourth, amongst other things, the efforts to get the Bill passed by these RRG-insured state contractors included a misguided effort to correct the legally incorrect and unnecessarily negative and prejudicial notice from the FOIR stating that RRGs are ‘not authorised’ to write liability insurance in the state of Florida.”
According to Deems, this notice was clearly designed to turn business entities away from using RRGs based upon the FOIR’s overarching “spin” that RRGs are somehow financially unreliable. In turn, this would steer them in the direction of the traditional carriers in the state.
He also notes that, in an effort to correct the ‘pop-up’ problem, one of the large contractor group RRGs sponsored the bill, only to learn this could jeopardise a vast majority of RRGs’ commercial auto and potentially other liability coverage written by RRGs registered in Florida.
According to Deems, the NRRA now faces a conundrum. The very bill brought to correct the wrongful conduct of the FOIR could simultaneously create a potential disaster for the entire industry in the state.
With the legislative session set to conclude on May 5, 2023, NRRA found itself facing a legislative emergency; and one that could have implications beyond Florida. Other states are poised to take notice: what better way to control (ie, regulate) RRGs than by placing rating and surplus capital requirements upon them?
Ultimately, the bill passed the House but the lesislative session ended without it being passed by the Senate, a prerequisite before going to the Governor. . However, Deems warns, the new legislative session will open in a few months and the bill threatens to be resurrected—and possibly copied by other states.
The context here is important. At least 32 states have state insurance laws which prescribe registration processes, registration fees and other regulatory requirements upon RRGs, which are simply illegal and pre-empted by the federal Liability Risk Retention Act (LRRA),” he says.
“Not only has the NRRA documented this to the National Association of Insurance Commissioners (NAIC), we have also demonstrated that virtually all, if not most, of these illegal laws either copied for the most part or are substantially based upon the actual language in the NAIC so-called ‘model laws’ issued in the 1990s,” Deems says..
“So how can anyone expect a state insurance regulator to follow the federal law when he or she has a state law that allows them to wholesale engage in doing what they do best: regulating things?”
Historically also, when the US Government Accountability Office (GAO) reports concerning RRGs came out 18 and 12 years ago, respectively, NRRA authored two substantively documented white paper oppositions to those incorrect findings. “Who did the GAO listen to? Certainly not us!” he says.
While things have now come a long way since then, including the NAIC’s newest “Best Practices, FAQs, and its new model Registration Form” for non-domiciliary states, which do finally conform to the federal law, in part due to contributions from NRRA, there remains much left to be done.
“We are trying in Florida to do something NRRA should have taken on more than 30 years ago: finding a cure for the misinformation that has its roots in the inertia of ideological bias,” says Deems.
“Evidence of the absence of proper RRG education for regulators was best demonstrated last year when the association sponsored one of its NRRA-In-Vision special webcasts on October 20, 2022, to which only insurance regulators were invited. The topic was the ‘Liability Risk Retention Act (LRRA) as Interpreted by the Courts Nationwide’. When the webcast started, 92 regulators were in attendance. When it finished 86 of them were still on the show.”
“Any bill proposed in any state that will damage an entire industry, such as FL H57/S516, needs to be vigorously opposed lest other states see the opportunity to ‘copycat’ such initiatives,” Deems says. “Again, context is important here. Illegal registration fees simply get paid by RRGs following the ‘cost-benefit’ analysis: it is cheaper to pay the illegal fees, or await the frustrating illegal dilatory handling of some registration than it is to pay a law firm to fight these in court. On the other hand, laws, whether intentionally or not, that blatantly give regulators the ripe opportunity to turn those against a greater percentage of the industry, do not pose a threat just in the particular state, but in other states looking for an opportunity to do the same,” Deems warned. “And some states are either doing this or planning to. Florida became not simply a “one-off” anecdote of someone making a mistake, drafting unintentionally the wrong language in this bill—it became a partisan political train coming down the tracks.”
The NRRA Campaign
He stressed that this is an industry where partisan politics, whether intentionally or not, can damage the interests of small businesses which desperately need insurance that is either unavailable or unaffordable in today’s market—the precise reason why Congress invented this ingeniously simple form of insurance 42 years ago: to address a crisis of unavailability and unaffordability. “We see this happening not just for RRGs. It is happening with many types of insurance nationwide,” says Deems.
He points out, however, that his sense is that the majority of the states either know enough to show some level of understanding of what’s going on here, or they just don’t get enough information to pay attention to RRGs. He attributes a serious component of NRRA’s success to what he calls its ‘toolkit’ available to NRRA members. “We write our own and have filed numerous amicus curiae briefs before state and federal appellate courts, challenging state insurance laws and orders that attempt to regulate the business and/or operations of RRGs,” he says. (Amicus Curiae translated means “friend of the court.”)
Subject to licensing and admission approval by the companies’ lead states of domicile, quite astutely designed by Congress in the LRRA, RRGs can have great flexibility in provisions they put in their insurance policies. As a result, these policy provisions have been upheld as “pre-empted” by the federal LRRA, which also, coincidentally, pre-empts conduct by states that discriminates against RRGs.
To date, NRRA can point to its impressive bibliography of court cases where the majority of those court opinions in the US now strongly support the notion that the federal law was carefully and intuitively drafted by Congress to simplify and restrict the states from improperly trying to overregulate RRGs, with a law that, for a change, simplified the insurance for smaller businesses by pre-empting state laws which would otherwise thwart their opportunity to operate, while at the same time preserving those states’ ability to otherwise continue to apply their regulatory oversight over the remaining insurance companies.
The second important feature of the LRRA, Deems points out, “is its Congressional intent in pre-empting any other actions by laws, rules, enactments or orders which have the effect of discriminating against RRGs.
“The association has perennially helped communicate the established law on this. Thus, in addition to filing amicus briefs, NRRA has drafted numerous letters to various state departments, regulatory agencies, legislators, etc, articulating how this law actually works, and by producing its NRRA-In-Vision video podcasts which educate on this subject. Our written communication campaigns proved particularly useful during COVID-19.”
“A prime example of how effective NRRA’s correspondence is can be seen in the 45-plus letters sent in Florida alone to the bill sponsors, senate and house leadership, members of every involved senate and house committee(s), and state regulatory agencies, such as the FOIR and FDOT, etc.” In response to one inquiry posed to him, however, as to the question of why bother to send letters that no-one might read? “Because some day, someone very important is going to read those letters, and I’m hoping it will be a sitting justice on the 11th Circuit Federal Court of Appeals!” Deems replied.
Deems emphasised that “The ingenious features of the LRRA RRG Strategy include its abject simplicity, the lead-state regulatory scheme, its intent to help small businesses avoid the incredible expense and problems associated with having to comply with 50 different states’ laws, its inclusion of certain rules and restrictions governing the regulation of RRGs, such as the prohibition against writing illegal coverages in some states, e.g., punitive damages, and nine categories of activities where the non-domiciliary states are permitted or required to regulate these companies.”
The NRRA Florida strategy in real time showed the legislators how the Florida Bill violated both provisions of the LRRA pre-emption: (1) it would regulate the business of 96 percent of RRGs in Florida (by requiring the AM Best rating and $100 to $250 million in capital surplus); and (2) it potentially discriminates against RRGs by forcing them to do what no other insurance companies are required to do (the AM Best ratings, etc).
An occasional question NRRA receives is how can the LRRA pre-empt so many laws? Deems points out that is an incorrect perception, particularly since the LRRA absolutely does NOT pre-empt any laws of general application. Examples of this would be state laws requiring driving licences, or workers’ compensation laws and rules.
On the other hand, laws that dictate what can or cannot be included in a liability policy clearly regulate the business of the insurer are pre-empted. For example, included in NRRA’s cases are state laws prohibiting arbitration clauses in insurance policies (which RRGs are clearly allowed to include), or state laws allowing an injured plaintiff to bring a “direct action” by naming an insured defendant’s liability insurance company in the lawsuit. These prevent the carrier being able to challenge coverage, and are activities which regulate the business of the carrier and are pre-empted, and are otherwise, as he puts it, “an invitation to the jury to just tell the carrier to write the cheque.”
Other examples involve unique specialty laws, such as one involving the ALPS RRG case in the 9th Circuit. Alaska has a statute that disallows any insurance company from recouping its fees and costs after winning a declaratory relief action resulting in a finding of no insurance coverage. ALPS had a provision in its policy allowing them to recover their fees and costs. The 9th Circuit held that, while the Alaska law could be enforced against any other type of insurance company, it was pre-empted as to RRGs.
Five or six federal circuit courts of appeal and some state supreme courts are enforcing this proposition. RRGs do not sell their liability insurance policies to members of the public. They sell only to their members who/which belong to the same business or profession. The contract of insurance is obviously the integral document controlling the business or operations of the RRG.
According to the NRRA, where most RRGs are at a disadvantage is that the majority of judges and lawyers do not understand RRGs, much less the laws governing them. Superimpose that, therefore, over state laws which are, on their face, either illegal or pre-empted, and life gets more complicated. One of NRRA’s roles over the years has been to try to show its members how they can “un-complicate” these matters.
“We are now engaged in Phase Two of our campaign. SB516 was not passed by the senate before the session ended on May 5, 2023, so while its proponents pledge that they intend to take another stab at it this coming legislative session, this time we are ready,” Deems concludes. “Our ground campaign has already started. A comprehensive letter has gone out to the FDOT, urging that agency to not be ‘duped’ into getting themselves sued for violating federal law at the behest of the FOIR which is letting its other state agencies do its dirty work for them. During this same time, we are also actively pursuing an initiative to convince the FOIR to allow us to help them amend the pop-up, once and for all.”