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LETTER FROM WASHINGTON - GAO Report on RRGs Seriously Flawed


On December 8, 2011, the U.S. Government Accountability Office (“GAO”) issued a report to Congress entitled “Clarifications Could Facilitate States’ Implementation of the Liability Risk Retention Act” (“GAO Report”).  The GAO had been charged by Congress with examining: (1) the regulatory health of the RRG industry and; (2) the extent to which non-domiciliary states were exceeding their authority under federal law.  The report concluded that: (1) the industry was healthy from a regulatory and financial perspective and; (2) Congress should “clarify” the registration requirement, fee and coverage provisions of the Liability Risk Retention Act, 15 U.S.C. § 3901 et seq. (“LRRA”). 

However, the GAO’s underlying analysis for its findings regarding non-domiciliary state behavior imprecisely conflates multiple issues and is not substantiated by existing case law.  In short, the GAO finds “silence” and “ambiguity” under the LRRA’s current provisions, when such provisions are indisputably clear and upheld as such by federal courts.

Registration Requirements

The GAO Report incorrectly states that the “LRRA does not provide for a specific process for RRGs to register to conduct business in non-domiciliary states.”  GAO Report at 24.  In fact, the LRRA is quite clear that the registration requirements in a non-domiciliary state are limited to submitting the documents enumerated under 15 U.S.C. § 3902(d)(2).  All other state laws are broadly preempted, unless expressly excepted under 15 U.S.C. § 3902(a)(1).

The only federal court to address the issue of registration requirements under the LRRA also has found that the plain language of the LRRA limits registration requirements to those provided under § 3902(d).  In National Risk Retention Association v. Brown, 927 F. Supp. 195 (M.D. La. 1996), the court expressly rejected Louisiana’s attempt to impose extensive extra-statutory application requirements on a non-domiciliary RRG.  Louisiana conditioned registration of a non-domiciliary RRG upon submission of a $600 fee, policy forms and applications, articles of incorporation, bylaws, biographical affidavits and fingerprints of directors and officers, a certificate of compliance from the domiciliary state, a domiciliary state certificate of authority, responses to interrogatories and a completed questionnaire from a domiciliary state regulator.

The court held the Louisiana application requirements were “broader than is allowed by the LRRA.”  927 F. Supp. at 201.  Instead, the court found that § 3902(d) specifies the registration requirements for a non-domiciliary RRG and that provision limits the requirements to a copy of the RRG’s plan of operation or feasibility study and an annual statement.  Id.  Although the court held the non-domiciliary regulator also may require documents necessary to show compliance with the state’s unfair claim settlement practice laws, it concluded that RRGs “are exempted from any further requirements under § 3902(a)(1).”  Id.

No other published case has considered the issue of non-domiciliary registration requirements.  Thus, there is no ambiguity as to the meaning of the plain language of the LRRA.


The GAO Report also mischaracterizes the LRRA’s provisions regarding fees by stating:

LRRA allows non-domiciliary states to require RRGs to pay premium and other taxes but does not explicitly state whether non-domiciliary insurance regulators can or cannot charge fees.  The silence of LRRA on fees has prompted state insurance regulators and RRG representatives to interpret the law differently.

GAO Report at 27.

The LRRA is not “silent” on fees.  The GAO Report’s analysis is directly contrary to the plain language of the LRRA which broadly and expressly exempts non-domiciliary RRGs from any law other than those exempted under § 3902(a)(1).  Among the laws expressly exempted from preemption are those relating to premium and other taxes.  Thus, the plain language of the LRRA specifies the monies that may be levied against RRGs and the only type permitted are premium taxes.

Again, of the federal courts that have addressed the issue of fees under the LRRA, none has held that fees other than premium taxes are permissible.  The GAO Report acknowledges the court findings in Brown and Attorneys’ Liability Assurance Society, Inc. v. Fitzgerald, 174 F. Supp. 2d 619 (W.D. Mich. 2001) wherein fees assessed by non-domiciliary regulators were barred under the LRRA.  Although the GAO Report attempts to narrow the application of those decisions by stating that the courts did not hold that “all fees” charged by non-domiciliary regulators were barred, it concedes theFitzgerald court held the fees that were not a “tax” and used for regulatory purposes only were impermissible under the LRRA.  See GAO Report at 29.  Thus, implicitly, the GAO Report recognizes any fee that cannot be characterized as a tax is barred by the LRRA.

In Fitzgerald, the court correctly reasoned:

The LRRA’s purpose would be thwarted if every state could exact a regulatory fee this large from non-resident risk retention groups, since that fee collectively affects prices for coverage, and thus affects the ability to operate.  Congress could have provided an exception for non-chartering states to collect a fee sufficient to cover costs of permitted regulation, over and above allowing collection of premium taxes.  But it did not, which require the conclusion that the regulatory fee was preempted.

Fitzgerald, 174 F. Supp. 2d at 636.

Accordingly, the provisions of the LRRA relating to fees and federal case law interpreting those provisions unanimously conclude regulatory fees that are not “taxes” are barred under the LRRA.

Financial Responsibility and Non-Discrimination

Because the LRRA permits states to specify “acceptable means of demonstrating financial responsibility” under § 3905(d), some state regulators have relied upon § 3905(d) as a basis for regulating non-domiciliary RRGs.  However, § 3905(d) is subject to the non-discrimination provisions of § 3902(a)(4) and thus, any required demonstration of financial responsibility must be non-discriminatory against RRGs. 

The GAO Report correctly recognizes a split in federal courts’ interpretation of the LRRA’s financial responsibility and non-discrimination provisions.  See GAO Report at 31-33.  In Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062 (7th Cir. 1998) and Mears Transp. Group v. Dickinson, 34 F.3d 1013 (11th Cir. 1994), the courts held state financial responsibility requirements that did not “intentionally” discriminate against RRGs did not violate the LRRA’s non-discriminatory provision.  However, the GAO Report failed to recognize that the Musser and Mears decisions are in direct conflict with express Congressional intent of the LRRA, as recognized in the more recent case of National Warranty Ins. Co. RRG v. Greenfield, 214 F.3d 1073 (9th Cir. 2000); see also Charter Risk Retention Groups Ins. Co. v. Rolka, et al., 796 F. Supp. 154 (M.D. Pa. 1992).


The GAO generally addresses its work with thoroughness and impartiality.  It succeeded in its analysis of the financial and regulatory health of the RRG industry, but failed in its analysis of state regulatory behavior.  Why?  The meaning of the federal law and the cases interpreting it could not be more clear regarding the prohibitions on the states charging fees and imposing excess registration requirements.  The GAO’s unwillingness to state the obvious regarding state behavior is an unqualified failure.