Under the Liability Risk Retention Act (the “LRRA”), 15 U.S.C. § 3901, et seq., to do business in a non-domiciliary state, a risk retention group is required only to submit to that non-domiciliary state a filing containing the information delineated in Section 3902(d) of the LRRA. The LRRA expressly preempts any other non-domiciliary state regulation unless it falls within one of the specified exceptions to preemption under Section 3902(a)(1). The exceptions to preemption relate primarily to unfair trade practices, premium taxes, registration of an agent, injunctions from a court of competent jurisdiction, and notice to policyholders that the RRG may not be subject to all insurance laws of the state and is not a member of the state guaranty fund. Id. at § 3902(a)(1).
Despite these LRRA provisions, many states currently impose a variety of informational response and approval requirements on non-domiciliary RRGs. For instance, the California Department of Insurance requires foreign RRGs to (1) wait 60 days after delivery of its registration filing before it may commence operation in the state, (2) file a recurring annual registration renewal, (3) pay registration and renewal fees, (4) submit additional information for the Department’s “approval,” and (5) make changes to documents filed and approved in the RRG’s domiciliary state before the Department will “approve” the RRG’s registration in California.
These practices violate the LRRA. Two federal court decisions expressly concur with this position: Attorney’s Liability Assurance Society, Inc. v. Fitzgerald, 175 F.Supp. 2d 619 (W.D. Mich. 2001) and National Risk Retention Association v. Brown, 927 F.Supp. 195 (M.D. La. 1996).
In Fitzgerald, the court rejected a non-domiciliary state’s attempt to regulate foreign RRGs. First, the court found the state improperly concluded that the foreign RRGs did not qualify as RRGs under the LRRA. Fitzgerald, 175 F.Supp. 2d at 629-34. Secondly, the court found the LRRA preempted a regulatory fee which the non-domiciliary state attempted to assess against foreign RRGs. Id. at 636.
In Brown, a non-domiciliary state attempted to impose requirements not specified in Section 3902(d) of the LRRA as conditions for foreign RRG registration. The conditions included a required minimum capital and surplus of $5 million, posting of funds or a bond of $100,000 with the commissioner, and an annual submission of a plan of operation along with a $1,000 examination fee. The court held the non-domiciliary state exceeded its authority over foreign RRGs:
The burden imposed by the application process for a non resident risk-retention group is broader than is allowed by the LRRA. Section 3902(d) sets out the documents which are to be submitted to the insurance commissioner in the state in which it intends to do business but is not chartered … . risk retention groups are exempted from any further requirements under Section 3902(a)(1).
Brown, 927 F.Supp. at 201. Accordingly, unless a specific regulatory power has been conferred upon a non-domiciliary state under the LRRA, Section 3902 prohibits the non-domiciliary state from directly or indirectly regulating the RRG. Interestingly, the NAIC’s Risk Retention and Purchasing Handbook expressly supports these conclusions.
Impact on RRGs
The financial impact of improper state regulatory practices on RRGs has been substantial. According to a recent survey byThe Risk Retention Reporter, for an RRG operating in all states, the annual cost for registration fees is approximately $9,300, and annual renewal, filing, and/or other fees are approximately $8,150. “Impact on Risk Retention Groups of State Encroachment of Liability Risk Retention Act Preemptions,” The Risk Retention Reporter, Jan. 2009, at 8. Moreover, states that impose approval and requirements beyond the scope of the LRRA force RRGs to incur significant compliance and legal costs to satisfy individual state regulators’ demands.
The results of the Risk Retention Reporter’s survey, which received responses from captive managers representing 118 RRGs, demonstrate the prevalence of state regulatory violations of the LRRA. Sixty-one percent of respondents reported that states had “overreached” by attempting to directly or indirectly regulate the operation of a foreign RRG. The responses indicated that 39 states engage in some form of overreaching.
Lack of an Adequate Remedy
RRGs, through the National Risk Retention Association, and the captive industry generally, have worked well with the NAIC’s Risk Retention Group Task Force and Risk Retention (C) Working Group. However, when requested to include compliance with the federal law in the accreditation standards by non-domiciliary states, the Task Force declined because the NAIC’s accreditation program is limited to imposing reasonable rules upon the states of domicile for the purpose of fostering good solvency regulation. This underlines the problem that the NAIC, as currently structured, has no regulatory authority or enforcement capability over non-domiciliary states.
In some cases, non-domiciliary states will respond to a well-documented protest regarding improper laws or regulations. However, if an impasse is reached, the only recourse under the LRRA for an RRG is to seek an injunction in court. This has proven to be inadequate because (1) a decision in one federal court is not binding in another federal district court (unless in the same federal circuit on the same facts); and (2) the cost of litigation is such a deterrent that most RRGs acquiesce to demands by non-domiciliary states even though those demands are clearly not contemplated by the LRRA.
Federal law should be amended to grant federal oversight and rulemaking authority to an office within the Treasury. This would create an impartial arbiter which would have the authority to bind the states and the industry to avoid the problems referenced above. The Federal Administrative Procedure Act would apply to ensure due process, and an appeal could be taken to the federal courts.
The LRRA is one of the few federal statutes that is not subject to direct federal oversight. While the structure of the LRRA assumes the state of domicile is the “lead state” and will be able to provide the adequate regulatory oversight, the state of domicile has no authority under the Constitution over a non-domiciliary state.
Rulemaking authority and oversight by the Treasury would be fair to all parties (state regulators and the industry). All would have the opportunity to participate in any decision making. Moreover, the oversight and rulemaking authority can be modeled after the same authority granted to the Treasury under the Terrorism Risk Insurance Act, which has worked very well with the cooperation of the states and the NAIC.
Legislation embodying federal oversight and rulemaking is currently being drafted. It should be introduced soon.
Robert “Skip” Myers is Co-Chairman of the firm’s Insurance and Reinsurance Practice and focuses in the areas of insurance regulation, antitrust, and trade association law. He serves as outside general counsel to the National Risk Retention Association. Skip received his bachelor’s degree from Princeton University and his law degree from the University of Virginia.