Opinion ID: 2667783
Heading Depth: 3
Heading Rank: 2

Heading: Language and Structure of the LRRA

Text: Even given the general presumption, specifically reinforced by the McCarran-Ferguson Act,7 that insurance regulation is generally left to the states, the language and purpose of the LRRA clearly announce Congress’s explicit intention to preempt state laws regulating risk retention groups. Section 3902 of the LRRA provides, in relevant part, that (a) Except as provided in this section, a risk retention group is exempt from any State law, rule, regulation, or order to the extent that such law, rule, regulation, or order would –
indirectly, the operation of a risk retention group . . . . 15 U.S.C. § 3902(a)(1) (emphasis added).8 7 “Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of [insurance] by the several States.” 15 U.S.C. § 1011. 8 The section goes on additionally to preempt state legislation that would
participate in any insurance insolvency guaranty association to which an insurer licensed in the State is required to belong;
15 Section 3902(a)(1) then goes on to provide general authority for “the jurisdiction in which it is chartered [to] regulate the formation and operation of such a group.” Id. In stark contrast, the Act authorizes nonchartering states to require risk retention groups to comply only with certain basic registration, capitalization, and taxing requirements, as well as various claim settlement and fraudulent practice laws. See 15 U.S.C. § 3902(a)(1)(A)-(I). It is undisputed that APIC is a risk retention group formed and functioning under the LRRA and that it is domiciled in Arizona. Therefore, § 3902(a)(1), insofar as it relates to the powers of nondomiciliary states, governs the authority of New York to impose regulations on APIC’s operations in New York. Further, Wadsworth does not argue that New York’s direct action provision falls within the ambit of the specific exceptions from preemption set forth in subsections retention group or any member of the group to be countersigned by an insurance agent or broker residing in that State; or (4) otherwise, discriminate against a risk retention group or any of its members, except that nothing in this section shall be construed to affect the applicability of State laws generally applicable to persons or corporations. 15 U.S.C. § 3902(a)(2)-(4). 16 3902(a)(1)(A)-(I).9 Instead, she argues for a narrow construction of the preemption provision itself. Reasoning that Congress was concerned with “discrimination by the states against alternative insurance providers,” Wadsworth contends that Congress’s main purpose in passing the Act “was to ensure further state discrimination would not occur.” Appellant Br. 15. On this reading of the LRRA, N.Y. Ins. Law § 3420 would be a generally applicable, nondiscriminatory statute that does not conflict with or frustrate 15 U.S.C. § 3902(a)(1), and is therefore not preempted. The LRRA’s language and structure, however, as well as our prior decisions, render Wadsworth’s reading of the statute untenable. Plainly, §§ 3902(a)(2) and (3) are not directed toward placing risk retention groups “on equal footing” with traditional insurers. To the contrary, both of those provisions excuse risk retention groups from certain requirements that states may and typically do impose upon insurers licensed within that state. Moreover, 9 Such an argument would be implausible. The highly specific and limited exceptions to preemption under that provision support the conclusion that if Congress had intended to exempt direct action statutes from preemption, it would have said so. See United States v. Smith, 499 U.S. 160, 167 (1991) (“Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent.”) (internal quotation marks omitted). 17 § 3902(a)(4) expressly prohibits discrimination against risk retention groups. If the entire purpose of the preemption provision was solely to invalidate discriminatory state laws, Congress could have enacted a far less complex statute that simply adopted the language of subsection (a)(4) without more, and thus prohibited all state laws, and only those, that discriminate against risk retention groups. Instead, however, Congress specifically preempted “any” law, rule, or regulation by a nondomiciliary state that would “regulate, directly or indirectly, the operation of a risk retention group.” 15 U.S.C. § 3902(a)(1) (emphasis added). A clearer prohibition would be hard to devise. The express preemption of any regulation simply cannot be read as preemption only of discriminatory regulation.10 For these reasons, we have read the LRRA’s preemption language broadly. In enacting the LRRA, we have held, Congress desired “to decrease insurance 10 Wadsworth argues that inclusion of the word “otherwise” in § 3902(a)(4) implies that the provisions that precede it must also be limited to regulation that discriminates. But such a reading fails. Wadsworth does not explain, for example, how § 3902(a)(2), which would also be affected by her reading, could coherently be limited only to discriminatory laws; that provision expressly prohibits subjecting risk retention groups to a requirement identical to that imposed on other insurers. The weak implication from the word “otherwise,” in any event, cannot trump the broad express language of § 3902(a)(2)’s prohibition of any regulation of risk retention groups by nondomiciliary states. 18 rates and increase the availability of coverage by promoting greater competition within the insurance industry.” Preferred Physicians, 85 F.3d at 914, citing H.R. Rep. No. 99-865, 1986 U.S.C.C.A.N. 5303, 5304-06.11 “[T]he legislative history of the Act makes clear that Congress intended to exempt [risk retention groups] broadly from state law ‘requirements that make it difficult for risk retention groups to form or to operate on a multi-state basis.’” Id. at 915-16, citing 1986 U.S.C.C.A.N. 5303, 5305.12 An expansive reading of the preemption language furthers the Act’s purpose. Id. at 915. 11 See also Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062, 1067 (7th Cir. 1998) (“Congress enacted the PLRRA (and, later, the LRRA) because it felt that the tangle of myriad state regulations choked off RRGs . . . .”); Mears Transp. Grp. v. State of Fla., 34 F.3d 1013, 1017 (11th Cir. 1994) (noting that purpose of preemption provisions was to facilitate “the efficient operation of risk retention groups by eliminating the need for compliance with numerous non-chartering state statutes that, in the aggregate, would thwart the interstate operation [of] product liability risk retention groups”), quoting H.R. Rep. No. 190, 97th Cong. 1st Sess. 12 (1981), reprinted in 1981 U.S.C.C.A.N. 1432, 1441. 12 Our sister circuits have similarly recognized the breadth of the LRRA’s preemption provisions. See, e.g., Nat’l Warranty Ins. Co. RRG v. Greenfield, 214 F.3d 1073, 1077 (9th Cir. 2000) (“[Section] 3902(a) plainly preempts most regulation of RRGs by non-chartering states.”); Ophthalmic Mut., 143 F.3d at 1067 (finding preemptive language of § 3902(a) “explicit”); Nat’l Amusement Purchasing Grp., Inc., 905 F.2d at 363 (noting that Act’s “sweeping preemption language,” largely preempts “the authority of non-domiciliary states to license and regulate risk retention groups”). 19 C. Effects of Applying § 3420(a)(2) to Foreign Risk Retention Groups The effects that application of N.Y. Ins. Law § 3420(a)(2) would have on nondomiciliary risk retention groups further buttress our conclusion. That section, which is in derogation of the common law, allows an injured party with an unsatisfied judgment against an insured party to sue the insurer for satisfaction of the judgment in some circumstances. Cont’l Ins. Co v. Atl. Cas. Ins. Co., 603 F.3d 169, 174 (2d Cir. 2010); Lang v. Hanover Ins. Co., 3 N.Y.3d 350, 353-54 (2004).13 “The effect of the statute is to give to the injured claimant a cause 13 Section 3420(a) requires all New Your insurance contracts to “contain[] in substance the following provision or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors . . . (2) A provision that in case judgment against the insured . . . in an action brought to recover damages for injury sustained or loss or damage occasioned during the life of the policy or contract shall remain unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment upon the attorney for the insured, or upon the insured, and upon the insurer, then an action may . . . be maintained against the insurer under the terms of the policy or contract for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy or contract. N.Y. Ins. Law § 3420(a). Section 3420 also contains provisions regarding notice, insolvency or bankruptcy of the insured, and the insurer’s right or obligation to bring a declaratory judgment action. 20 of action against an insurer for the same relief that would be due to a solvent principal seeking indemnity and reimbursement after the judgment had been satisfied.” Lang, 3 N.Y.3d at 354-55 (internal quotation marks and alteration omitted). Although the statute does not increase the amount of the insurer’s liabilities, the rights of the injured party are independent of the rights of the insured, and in some circumstances, more favorable. See Cont’l Ins., 603 F.3d at 176 (“Th[e] separate standard, used to determine the reasonableness of the injured party’s notice, is more lenient than the standard for the insured party’s notice.”). Application of those provisions to APIC or to any other foreign risk retention group would undoubtedly “regulate, directly or indirectly,” those groups by subjecting them to lawsuits filed in New York by claimants who are not parties to APIC’s contracts with insureds. 15 U.S.C. § 3902(a)(1). The cost of litigation might well result in higher attorneys’ fees, costs, and potential recoveries. Moreover, § 3420(a)(2) is not simply a rule of civil procedure. It specifically governs the content of insurance policies, requiring insurers to place in their New York contracts a provision that is not contemplated by the LRRA, and that is not required by all other states. Application of the statute would 21 therefore make it difficult for a foreign risk retention group to maintain uniform underwriting, administration, claims handling, and dispute resolution processes. A substantial portion of state insurance regulation consists of such standardized requirements for the content of insurance policies, which vary from state to state. 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 insurance policies would, in the aggregate, thwart the efficient interstate operation of risk retention groups. See Mears Transp. Grp., 34 F.3d at 1017. Wadsworth relies on two decisions, National Home Insurance Co. v. King, 291 F. Supp. 2d 518 (E.D. Ky. 2003), and Sturgeon v. Allied Professionals Insurance Co., 344 S.W.3d 205 (Mo. Ct. App. 2011), neither binding on us, to support her argument that application of § 3420(a)(2) would not affect the interstate operation of risk retention groups.14 In both of those cases, the state 14 Wadsworth also cites an opinion of the New York General Counsel that determined that nondomiciliary risk retention groups offering medical malpractice policies have claim reporting obligations under N.Y. Ins. Law 22 statutes at issue proscribed mandatory arbitration of disputes arising from insurance contracts. See Nat’l Home, 291 F. Supp. 2d at 524, quoting Ky. Rev. Stat. Ann. § 417.050; Sturgeon, 344 S.W.3d at 210, quoting Mo. Rev. Stat. § 435.350. In both cases, the courts found that as a general matter, the Federal Arbitration Act, 9 U.S.C. § 2, preempted state anti-arbitration laws. Both courts also found, however, that the McCarran-Ferguson Act “reverse preempted” the anti-arbitration provisions. Nat’l Home, 291 F. Supp. 2d at 528; Sturgeon, 344 S.W. 3d at 212. The McCarran-Ferguson Act precludes the application of a federal statute in the face of state law “enacted . . . for the purpose of regulating the business of insurance,” if the federal measure does not “specifically relat[e] to the business of § 315(b)(1). See N.Y. Gen. Counsel Op. 7-26-2007, No. 2. That statutory provision, which requires each insurance company engaged in issuing professional medical malpractice insurance to file quarterly reports on all claims for medical malpractice made against any of its insureds, is quite different from § 3420(a)(2). The General Counsel’s opinion did not consider the application of § 3420(a)(2) to nondomiciliary risk retention groups. We express no views on the merits of that opinion which, in any event, does not bind this Court. We note, however, that in light of the retained authority of nondomiciliary states to monitor the financial condition of nondomiciliary risk retention groups and to require those groups to comply with state regulation regarding unfair claim settlement practices, 15 U.S.C. §§ 3902(a)(1)(A), (G), it is doubtful that such quarterly reporting requirements are preempted as “regulating, directly or indirectly, the operation of a risk retention group,” id. § 3902(a)(1). 23 insurance,” and would “invalidate, impair, or supersede” the state’s law. See Fabe, 508 U.S. at 500-01. The courts Wadsworth relies upon found all three of those considerations satisfied because the FAA is not a statute that specifically relates to the business of insurance, and therefore did not preempt statute antiarbitration laws to the extent that such provisions were enacted to regulate the business of insurance. To that extent, the National Home and Sturgeon decisions are inapposite. Both opinions further ruled, however, that the LRRA did not preempt the state law rules in question. Insofar as those decisions relied on an interpretation of the LRRA that differs from ours, we disagree. The LRRA is, without question, a federal statute that specifically relates to the business of insurance. Section 3420(a)(2), which, to reiterate, requires any insurance policy issued in the state of New York to contain a provision permitting a direct action against a tortfeasor’s insurer, was undoubtedly enacted to regulate the business of insurance. In sweeping preemption language, subject to certain limited exceptions, Congress chose to limit the power of nondomiciliary states to regulate risk retention groups. The McCarran-Ferguson Act does not save § 3420(a)(2) from the LRRA’s preemptive sweep. 24