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NRRA Advocacy for RRGs under the Liability Risk Retention Act

Court Ruling Gavel
October 13, 2016

In 1986, Congress passed the Liability Risk Retention Act (LRRA). This Act allows homogeneous groups to form a risk retention group (RRG) in order to write liability insurance coverage. Its policyholders are the owners.

The state in which an RRG is licensed is considered its domicile, and it has the responsibility to regulate the entity, except in certain circumstances. In order for the RRG to write business in any other state, it must be registered in that state. Under the LRRA, insurance departments in states where an RRG is registered have much less authority over an RRG than the state of domicile.

The LRRA is a federal statute that provides unique benefits and opportunities to RRGs. One of the most significant benefits is that only the state of domicile can regulate what an RRG has in its insurance policy. Because of this, RRGs have the option under LRRA to add an arbitration provision applicable to claims and/or lawsuits to their insurance contracts.

This provision offers certain advantages.

  • Lower legal fees
  • Less discovery
  • No jury expenses or exposure
  • No runaway jury award
  • Arbitration can be required to happen in the state of domicile

With a properly worded arbitration clause, an RRG can challenge the plaintiff’s ability to sue under state law by referring to the LRRA preemption, compel the arbitration to occur at the state of domicile, and stay the lawsuit.

The Government Affairs Committee within the National Risk Retention Association (NRRA) has been an advocate for LRRA and RRGs with Congress and the state and federal courts. Their main goal in Congress has been to protect and expand the intent of the LRRA. In regards to court cases, their advocacy includes providing an amicus curiae brief supporting LRRA and coordinating those activities with the RRG, which it needs to accomplish a successful outcome.

In the last 3 years, the NRRA has advocated and supported two RRGs (Attorneys Liability Protection Society (ALPS) and Allied Professionals Insurance Company) with five court cases.

  • Attorneys Liab. Prot. Soc'y, Inc., v. Ingaldson & Fitzgerald, P.C., (2012 U.S. Dist. LEXIS 181486 (D. Alaska Dec. 21, 2012)
  • Wadsworth, v. Allied Prof'ls. Ins. Co., 748 F.3d 100 (2d Cir. N.Y. 2014)
  • Courville v. Allied Prof'ls. Ins. Co., 174 So. 3d 659 (La. App. 1 Cir. 2015)
  • Speece v. Allied Profs. Ins. Co.289 Neb. 75 (Neb. 2014)
  • Kong v. Allied Profs. Ins. Co., 750 F.3d 1295 (11th Cir. Fla. 2014)

In the case of Wadsworth, the court said that any construction of New York Insurance Law 3420(a)(2) that permits its application to RRGs chartered in another state is preempted by the LRRA. The court further stated, “a major benefit extended to risk retention groups by the LRRA ... is the ability to operate on a nationwide basis according to the requirements of the law of a single state, without being compelled to tailor their policies to the specific requirements of every state in which they do business. Requiring compliance with various state regulations governing the content of the insurance policies would, in the aggregate, thwart the efficient interstate operation of risk retention groups.” This ruling allowed the RRG to arbitrate the case.

The other benefit of arbitration comes into play when a plaintiff’s attorney decides to ignore an RRG’s arbitration provision and go to court. If the RRG’s policy has a provision granting attorney’s fees to the party that wins the dispute over arbitration, then when the court grants arbitration, the plaintiff attorney must reimburse the RRG for the legal cost of going to court.

The most current victory was in the ALPS case. ALPS, a Montana RRG, has a policy provision that states, if an RRG defends a claim that turns out not to be covered under a written reservation of rights, the RRG’s attorney fees could be recovered from the insured at the end of the case. The insured in the ALPS claim was in Alaska. Alaska has a law making such a policy provision unenforceable. The federal court of appeals held that the Alaska law could not be enforced against the RRG. This case again reaffirmed that RRG’s can write their own policy and are exempt from state insurance laws.

In conclusion, the smart use of the LRRA by RRGs can decrease your allocated loss adjustment expense, shorten litigation, and curtail the number of cases. Additionally, the support of the NRRA in court cases can be instrumental in influencing the outcome.

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