SOURCE: National Risk Retention Association

National Risk Retention Association

March 14, 2011 09:00 ET

NRRA Calls for Federal Action to Halt Interference by Some States in Risk Retention Group Operations

WASHINGTON, DC--(Marketwire - March 14, 2011) - The National Risk Retention Association is calling for federal legislation to enforce the Liability Risk Retention Act of 1986 (LRRA) against continued interference by some States in the lawful operation of Risk Retention Groups (RRG), Brian Braley, Chairman of NRRA, reported.

"The Act gave RRGs freedom to do business nationally when licensed in a single State but as the industry grew, some States imposed burdensome requirements on RRGs that violate the will of Congress. Unfortunately, the Act did not provide for enforcement, but in the face of continued actions by some States, it's time to amend the LRRA to allow RRGs to function as Congress intended," Braley stated.

In a letter to the Government Accountability Office (GAO) last week, Robert H. Myers, Jr., NRRA General Counsel, recounted burdensome requirements placed on RRG operations by some States in violation of the federal law. At the request of Congress, GAO is conducting a study of State regulation of RRGs. The legislation was enacted to create an alternative insurance mechanism for essential liability insurance. RRGs today generate more than $2.5 billion in annual premium and insure a wide range of businesses with a significant proportion in healthcare.

Myers cited the following actions by some States that obstruct legitimate operation of RRGs:

Registration Requirements - RRGs are subject to regulation by the State in which they are licensed and generally exempt from regulation in all other States, with the exception of those state laws which the federal law specifically allows. Myers pointed out that a number of States impose unlawful registration requirements that delay, prevent, or otherwise impede RRG operations. These include fees for filing and renewal, delays that take new RRGs many months to complete before they can do business, and multiple rounds of requests for information already provided to the State in which the RRG is licensed.

Discriminatory Practices - The LRRA expressly prohibits States from discriminating against RRGs, but some States impose requirements contrary to the law. For example, in the case of National Warranty v. Greenfield, Myers pointed out, the State "unlawfully discriminated against RRGs by requiring automobile service warranty providers to obtain liability insurance from a member of the  Insurance Guaranty Association. Because RRGs are prohibited by federal law from being members of State guaranty associations, the law effectively excluded all RRGs from providing such insurance." This problem was resolved in Oregon after lengthy litigation, but has reappeared in other states.

Cease and Desist Orders - In many cases, States obstruct RRG operations by imposing an administrative cease and desist order against the RRG. "This is clearly in violation of the LRRA, which requires that the regulator seek an injunction in a federal or state court," Myers wrote. The federal law "clearly requires that if a State is to challenge an RRG, it cannot do so by way of a State administrative order but rather must do so by a proceeding in a State or federal court."

Myers cited federal court decisions in some jurisdictions that found State actions in violation of the LRRA, but these have not been followed as precedents in other jurisdictions. He pointed out that RRGs have been deterred from taking cases to court by the cost of seeking relief through litigation. "In fact, even when one court has entered a decision favorable to RRGs, some non-domiciliary states have construed the decision narrowly, ignored it, or dismissed it as being binding only in the federal district or circuit in which it was issued," Myers reported.

In the letter, NRRA stated that, "Over the past 25 years, the industry has worked with the States and the National Association of Insurance Commissioners (NAIC) to educate and persuade them that some of their regulatory actions are not consistent with the federal law. When necessary, it has gone to court and engaged in time consuming and expensive litigation. The results have been discouraging. The LRRA is one of the few federal laws without any federal agency oversight. This could be remedied by Congress enacting legislation providing such oversight and rule making authority to the Federal Insurance Office (FIO)."

Proposed legislation to modernize the LRRA by adding a dispute resolution mechanism, governance standards, and authority for RRGs to write commercial property insurance died in the last Congress. Speaking for NRRA, Braley said, "Our Association will continue to campaign vigorously for legislation to eliminate imposition by various States of multiple and inconsistent regulatory hurdles for RRGs to overcome simply to be allowed to do what the federal law has permitted them to do since 1986."

The Government Accountability Office is expected to report soon to Congress on its study of State regulation of RRGs. The full text of the NRRA letter is available at the office of the General Counsel, rmyers@mmmlaw.com.

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