The Liability Risk Retention Act (“LRRA”), 15 U.S.C. § 3901 et. seq., authorizes risk retention groups (“RRGs”) to charter in one state and to then, after a specified filing, operate in any other state. The authority of the chartering states is not limited in any respect by the federal law; however, the regulatory authority of a non-domiciliary state is limited. 15 U.S.C. § 3902(a)(1).
This regulatory structure, sometimes referred to as “lead state” regulation, has resulted in friction with the laws of some of the non-domiciliary states. The LRRA does not establish oversight authority in any federal agency. Nonetheless, it envisions there may be conflicts and assumes litigation may ensue. The LRRA authorizes states to “make use of any of its powers to enforce the laws of such State with respect to which a risk retention group is not exempt under this chapter.” 15 U.S.C. § 3902(f)(1). However, if a state seeks an injunction (which would include a cease and desist order), “. . . such injunction must be obtained from a Federal or State court of competent jurisdiction.” 15 U.S.C. § 3902(f)(2).
Over the past 25 years, there have been more than a dozen reported cases dealing with RRGs. Although the holdings of such cases generally have been favorable to RRGs, there is good reason why RRGs are reluctant to go to court. First, litigation is extremely expensive. Second, some states prefer to ignore the holdings of cases brought in federal courts sitting in other states. In fact, some states prefer not to be bound by dispositive precedent in their own U.S. Circuit Court of Appeals.
Such was the case in Alliance of Nonprofits for Insurance, Risk Retention Group v. Brett J. Barratt, Nev. Case No. 2:10-CV-1749 (July 22, 2011). In brief, Alliance of Nonprofits for Insurance (“ANI”) is an RRG domiciled in Vermont and registered in numerous other states, including Nevada. ANI issues affordable commercial auto policies to non-profit organizations and has done so since 2001. ANI is rated A- (excellent) by A.M. Best.
On September 13, 2010, the Nevada Division of Insurance (“NV DOI”) issued a cease and desist order to ANI for writing “first dollar” automobile liability. ANI filed an action in the federal district court of Nevada in Las Vegas. The gravamen of the complaint was that the NV DOI’s order clearly violated the LRRA prohibition against a non-domiciliary state directly or indirectly regulating the operations of an RRG or discriminating against RRGs. U.S.C. §§ 3902(a), 3905(d).
The parties agreed the issues could be resolved by cross motions for summary judgment. In its court papers, ANI asserted that the Court of Appeals for the Ninth Circuit (which includes Nevada) already had established binding precedent on this issue in National Warranty Insurance Company RRG v. Greenfield, 214 F.3d 1073 (9th Cir. 2000), cert. denied 531 U.S. 1104 (2001). In Greenfield, the Court of Appeals affirmed the district court decision and held that the LRRA preempted those provisions of the Oregon Service Contract Act which unlawfully discriminated against RRGs by requiring automobile dealers to obtain liability insurance from a member of the Oregon Insurance Guaranty Association. Because RRGs are prohibited by the LRRA from becoming members of state guaranty associations, the court held this effectively excluded RRGs from providing liability insurance to automobile dealers. The court held that a state “may exclude coverage from a particular [risk retention group] if it can show that a particular [risk retention group] is financially unsound or otherwise dangerous to those who rely on insurance purchased pursuant to the Oregon Service Contract Act, but it may not categorically exclude coverage from all [risk retention groups].” Greenfield, 214 F.3d at 1082.
In its pleadings, NV DOI argued that Greenfield was not binding because RRGs were not, in fact, discriminated against under Nevada law. First, it argued that ANI could redomesticate from its domicile (Vermont) to Nevada and become “licensed,” in which case it could offer first dollar coverage in Nevada. Nevada law permits RRGs domiciled in Nevada to offer such coverage without belonging to the state guaranty fund. Of course, this was no remedy at all because, in order to employ it, ANI would have to redomesticate to each state in which its out-of-state status was challenged. Second, NV DOI argued that each member (i.e., each non-profit) could become “self insured” and utilize ANI for reinsurance. Again, this was no remedy because the non-profits served by ANI did not meet the net worth and other requirements for “self insured” status.
The case was heard before Judge James C. Mahan on July 21, 2011. Judge Mahan ruled from the bench in favor of ANI on all matters and incorporated his ruling into a written order dated July 22, 2011. The order mandated the phrase “authorized insurer” be interpreted under Nevada law to include a registered RRG; it permanently enjoined NV DOI from enforcing the existing Nevada statute against ANI; and it awarded ANI its attorneys’ fees under 42 U.S.C. § 1983.
All of the above was reasonably predictable (except the far fetched arguments that ANI was not discriminated against because it could redomesticate to Nevada or its members could become “self insureds”). However, the response of NV DOI and the Office of the Attorney General was not. Rather than acknowledging defeat from a highly respected federal judge, it appealed. It also contested the award of attorneys’ fees.
The presumed purpose of these post judgment actions is simply to run up costs for the RRG. In at least two prior cases, this tactic had resulted in such increased costs that the RRGs elected not to continue litigation. In Auto Dealers, RRG v. Poizner, Case No. 07-2666 (E.D. Cal. Mar. 7, 2008) (order granting preliminary injunction), the RRG had received a very favorable preliminary injunction against the California Insurance Commissioner. Because the Insurance Commissioner contended material facts were in dispute (though there were none), the RRG was forced to proceed with discovery. Auto Dealers decided the cost of continuing discovery and litigation was too great. In the case of Attorneys’ Liability Assurance Society, Inc. v. Fitzgerald, 174 F.Supp. 2d 619 (W.D. Mich. 2001), the court awarded attorneys’ fees to the plaintiff RRGs. The state regulator appealed, and the parties settled the case under undisclosed terms.
Congress stated that the purpose of the LRRA was to allow the operation of RRGs across state lines unfettered by duplicative and overlapping state regulation. H.R. Rep. No. 99-865, at 12 (1986). The appeal by NV DOI in ANI simply is inconsistent with Congressional intent. It demonstrates there is a need for Congress to amend the LRRA to create a more efficient dispute resolution process.