Opinion ID: 2667783
Heading Depth: 2
Heading Rank: 1

Heading: The Liability Risk Retention Act of 19863

Text: Under the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., the business of insurance is generally regulated by the states rather than the federal government. In the late 1970s, however, Congress perceived a seemingly unprecedented crisis in the insurance markets, during which many businesses were unable to obtain product liability coverage at any cost. And when businesses could obtain coverage, their options were unpalatable. Premiums often amounted to as much as six percent of gross sales, and insurance rates increased manyfold within a single year. See Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1463 (11th Cir. 1985). After several years of study, Congress enacted the Product Liability Risk Retention Act of 1981 (“the 1981 Act”),4 which was meant to be a national response to the crisis. As relevant here, the 1981 Act authorized persons or businesses with similar or related liability exposure to form “risk retention 3 We have previously discussed the history of the LRRA in two opinions. See Preferred Physicians Mut. Risk Retention Grp. v. Pataki, 85 F.3d 913, 914 (2d Cir. 1996)[hereinafter “Preferred Physicians”]; Ins. Co. of Pa. v. Corcoran, 850 F.2d 88, 89-90 (2d Cir. 1988). 4 For an exhaustive history of the 1981 Act, see Home Warranty Corp., 777 F.2d at 1456-79. 6 groups” for the purpose of self-insuring. 15 U.S.C. § 3901(a)(4). The 1981 Act only applied to product liability and completed operations insurance, but following additional disturbances in the interstate insurance markets, in 1986, Congress enacted the LRRA, and extended the 1981 Act to all commercial liability insurance. See 15 U.S.C. §§ 3901-3906 (1982 & Supp. IV 1986); Preferred Physicians, 85 F.3d at 914. At the time of the LRRA’s passage, however, most states, exercising their traditional power over the business of insurance, did not permit such risk retention groups. Preferred Physicians, 85 F.3d at 914. Rather than enacting comprehensive federal regulation of risk retention groups, see Corcoran, 850 F.2d at 91, Congress enacted a reticulated structure under which risk retention groups are subject to a tripartite scheme of concurrent federal and state regulation. First, at the federal level, the Act preempts “any State law, rule, regulation, or order to the extent that such law, rule, regulation or order would . . . make unlawful, or regulate, directly or indirectly, the operation of a risk retention group,” 15 U.S.C. § 3902(a)(1), language that we have previously described as “expansive,” Preferred Physicians, 85 F.3d at 915, and “sweeping,” Corcoran, 850 F.2d at 91. That preemption is not universal. The second part of the scheme secures 7 the authority of the domiciliary, or chartering, state to “regulate the formation and operation” of risk retention groups. 15 U.S.C. § 3902(a)(1). Federal preemption, therefore, functions not in aid of a comprehensive federal regulatory scheme, but rather to allow a risk retention group to be regulated by the state in which it is chartered, and to preempt most ordinary forms of regulation by the other states in which it operates. Thus, the Act “provides for broad preemption of a non-domiciliary state’s licensing and regulatory laws.” Fla., Dep’t of Ins. v. Nat’l Amusement Purchasing Grp., Inc., 905 F.2d 361, 363-64 (11th Cir. 1990). Similarly, the Act prohibits states from enacting regulations of any kind that discriminate against risk retention groups or their members, but does not exempt risk retention groups from laws that are generally applicable to persons or corporations. 15 U.S.C. § 3902(a)(4). While the Act assigns the primary regulatory supervision of risk retention groups to the single state of domicile, the third part of its regulatory structure “explicitly preserves for [nondomiciliary] states several very important powers.” Fla., Dep’t of Ins., 905 F.2d at 364. The Act specifically enumerates those reserved powers in subsequent subsections, with many powers of the nondomiciliary state being concurrent with those of the chartering state. See 15 U.S.C. 8 §§ 3902(a)(1)(A)-(I), 3905(d). In particular, subject to the Act’s anti-discrimination provisions, nondomiciliary states have the authority to specify acceptable means for risk retention groups to demonstrate “financial responsibility” as a condition for granting a risk retention group a license or permit to undertake specified activities within the state’s borders. 15 U.S.C. § 3905(d). Additionally, any state may, after an investigation of the group’s financial condition, commence a delinquency proceeding. 15 U.S.C. § 3902(a)(1)(F)(i).5 Any state may also require a risk retention group to comply with any order resulting from such an investigation, or from a voluntary dissolution proceeding. 15 U.S.C. § 3902(a)(1)(F)(i)-(ii). In short, as compared to the near plenary authority it reserves to the chartering state, the Act sharply limits the secondary regulatory authority of nondomiciliary states over risk retention groups to specified, if significant, spheres. 5 Underscoring that primary regulatory and enforcement authority rests with the chartering state, a nondomiciliary state may not initiate an investigation of a risk retention group unless the chartering state declines to do so. 15 U.S.C. § 3902(a)(1)(E)(i)-(ii). 9