For decades, group insurance coverage has been an attractive vehicle for the placement of certain property and casualty insurance products. On the carrier side, loss experience may be more favorable when aggregating similar insureds under a master insurance policy, resulting in cheaper premiums for consumers. On the producer side, the use of group P&C coverage helps achieve product distribution efficiencies and may result in fewer regulatory burdens and paperwork, in addition to the added benefit of marketing an aggregated risk platform to an insurer rather than presenting risks on an individual basis.
When the 1980s rolled around, the lack of affordable and available commercial liability insurance coverage become sufficiently apparent that Congress passed the Federal Liability Risk Retention Act of 1986 to increase the availability of such coverage and decrease associated costs. A driving impetus for the passing of the LRRA was to minimize state-law barriers to marketing commercial liability insurance on a group or group-like basis. To achieve these ends, the LRRA provides a degree of federal preemption from state insurance regulation through the establishment of risk purchasing groups (RPGs) and risk retention groups (RRGs). The LRRA does not set forth a regulatory framework under which RPGs and RRGs must operate, but rather allows for the operation of such groups free from certain state insurance laws that would otherwise apply and act as hurdles for achieving the desired effects of the LRRA.
The LRRA does not, however, allow for RPGs to procure on behalf of their members or RRGs to provide to their members property insurance coverage. Furthermore, many of today’s commercial insurance liability products are offered through non-LRRA groups operating exclusively under state law without the benefit of the LRRA’s state law preemption. As a result, the marketplace is teeming with a variety of P&C group insurance structures offering a variety of coverages and subject to different, and perhaps in violation of some, state insurance regulatory requirements or prohibitions.
While there are many different forms P&C insurance groups can take, one common theme among all of them is the desire to avoid burdensome state insurance regulation. As a result, there has been an increasing trend in the industry to defer to the “home state” of the master or group insurance policyholder to determine which jurisdictions’ laws governing the group (whether it be a RPG or RRG under the LRRA, or an association or similar insured aggregation entity under state insurance law), and to interpret both federal and state law to preempt the jurisdictional reach of other states where members of the group may reside.
Recently, some states have been taking a closer look at some of the group P&C insurance coverage arrangements. This article identifies some of the important issues for insurers and producers to consider, both in the admitted and surplus lines insurance markets, as to the regulation of LRRA and permissible state insurance law groups in connection with commercial insurance programs.
RPGs and RRGs Under LRRA
Scope of RPG Preemption and Applicability of Local State Law
If a group is established as a RPG under the LRRA, it may purchase (although, as it not an insurance carrier, may not itself provide) commercial liability insurance coverage on a group basis for its members and is “exempt from any State law, rule, regulation or order to the extent that [it] would ... otherwise discriminate against a purchasing group or any of its members.”1 The LRRA also preempts states from, among other things, prohibiting insurers from providing insurance coverage and rates exclusive to RPGs based on collective loss experience or from applying seasoning requirements to the minimum tenure of existence of a RPG. However, other than the specifically enumerated preempted actions under the LRRA, states generally have the right to regulate RPGs.
It is important to note, however, that simply determining that a RPG has complied with the laws of its home state that are not preempted by the LRRA is not always sufficient to comply with all applicable laws. For example, on the admitted side, guidance in a number of states indicates that such states impose their insurance rate and policy form filing requirements on coverage issued to RPGs for their members that reside in their states. As a result, because surplus lines insurance carriers need not generally file insurance rates and policy forms, multistate programs underwritten by surplus lines insurers through RPGs will likely reach the market faster as forms and rates will not need to be approved in every state.
While the surplus lines insurance route is sometimes more expeditious and efficient, RPGs do face some regulatory issues unique to the surplus lines insurance market when coverage is procured on a nonadmitted basis. Many RPGs act under the (often incorrect) assumption that surplus lines insurance requirements only apply to the state of the RPG’s domicile. In fact, most states have specific laws requiring that the market unavailability affidavit and declination requirements applicable to surplus lines insurance brokers be fulfilled as to each certificate holder residing in such state that purchases coverage through the RPG, as opposed to fulfilling the affidavit and declination requirements only once for the RPG itself in its domiciliary state.2 Furthermore, state law establishing additional restrictions on surplus lines insurance placements, depending on the jurisdiction, may also apply in the RPG context as well, such as local requirements that certain kinds of coverages be procured from the admitted market.
RPGs also face surplus lines insurance tax implications that will often require taxes to be allocated among states in proportion to where the insured risks reside. For example, the Excess Lines Association of New York notes that “other states may handle [RPG] filings differently and consider the ‘insured’s home state’ to be the state where the [RPG] is headquartered” but nevertheless requires that surplus lines broker taxes be paid “only to New York for New York ‘home stated’ [RPG] members.”3 By contrast, some other states take the opposite view that surplus lines broker taxes need only be paid to the home state of the RPG, the master policyholder.
Scope of RRG Preemption and Applicability of Local State Law
RRGs, in contrast to RPGs, are captive insurers controlled by their owners and provide coverage to members through the diffusion of liability risks across such members. The LRRA affords RRGs federal preemption protection, and such preemption is in many ways much broader than what the LRRA affords to RPGs. The general rule as to RRGs is that all nondomiciliary state insurance laws are preempted other than express exceptions identified in the LRRA. In particular, all states (other than the domiciliary state of the RRG) are preempted from regulating the operation of a RRG, except for specifically noted purposes, such as mandating compliance with unfair insurance claims practices statutes and registration requirements.
However, LRRA also provides that “[t]he terms of any insurance policy provided by a [RRG] ... shall not provide or be construed to provide insurance policy coverage prohibited generally by State statute ... .”4 As such, LRRA specifically recognizes the rights of nondomiciliary states to enforce at least some local insurance laws other than as expressly permitted under Section 3902 of LRRA.
The result has been two decades of sparse, but telling, court decisions reflecting the ability of states to enforce state-specific restrictions on RRGs notwithstanding the LRRA’s preemption language. For example, under Wadsworth v. Allied Prof’ls Insurance Co., 748 F.3d 100 (2d Cir. 2014), the Second Circuit was asked to determine whether a New York insurance statute giving an injured party the right to sue an insurer for satisfaction of a judgment obtained by the injured party against the insurer’s customer, the insured tortfeasor, applies to RRGs. The court found that this statute “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 thus is preempted. By contrast, Zeigler v. Hous. Auth. Of New Orleans, (La. App. 4 Cir., 2016) addressed a substantially similar fact pattern as seen in Wadwsorth and found that the LRRA does not preempt a state’s right to impose a “direct action” statute on a RRG. Some courts have tried to draw a distinction between laws actually affecting coverage under an insurance policy versus laws affecting procedure or form; under Speece v. Allied Professionals Insurance Co., 853 B,W,2d 169 (Neb., 2014), the court found that the LRRA preempted a state prohibition against the inclusion of mandatory predispute arbitration clauses in insurance policies, concluding that the LRRA’s preemptive scope does not extend to laws affecting actual coverage, but that an arbitration clause “does not concern much less prohibit the coverage provided, but instead governs how disputes between the parties are to be resolved.”
What do the RRG cases tell us? In short, that courts differ throughout the country on the preemptive scope of the LRRA regarding when states may enforce their insurance laws as to an RRG’s members residing within their borders. The existing case law suggests that the LRRA preempts state regulation of insurance policy terms that do not impact the coverage itself (such as anti-arbitration provisions and cancellation/non-renewal provisions), whereas statutes targeting specific scope of coverages (such as prohibitions against insuring punitive damages, which have broad, localized public policy implications) would not be preempted by the LRRA. Congressional reports prepared before passage of the LRRA evidence this intent.5 However, such distinction is certainly not uniform throughout the country.
Non-LRRA Groups Established under State Law
Many P&C insurance programs continue to operate outside of the scope of LRRA for a variety of reasons, including curtailing costs and expediting entry into the marketplace by avoiding RPG registrations in member states, and the inclusion of types of coverages outside the scope of LRRA, such as property or any other type of nonliability commercial insurance. Furthermore, a handful of states lack robust statutory insurance group frameworks, which may lead to the impression that non-LRRA groups are minimally regulated. This assumption, however, can lead to major pitfalls down the road.
One practical implication of the LRRA’s preemption of state prohibitions on selling group commercial liability insurance is that, when coverage is issued through an RPG or by a RRG, grouping of unrelated member insureds without common insurable (jointly owned) interests is permissible. A non-LRRA group, which thus lacks the federal preemption protections of LRRA, must be wary of state “fictitious group” insurance laws that vary across jurisdictions. Some states generally prohibit the use of fictitious grouping for insurance purposes without defining what a “fictitious group” actually is, while other states have more specific definitions. For example, in Georgia, a fictitious group is considered “any grouping by way of membership, nonmembership, license, franchise, employment contract, agreement, or any other method or means resulting in unfair discrimination.”6 Many states go a step further than Georgia and prohibit any P&C insurance grouping unless there is a common insurable interest among the members of the insured group.7 There are even states that identify only certain kinds of coverages that may be offered on a group insurance basis. For example, in New York, “group” P&C insurance coverage may only be written through a “safety group”, a “mass merchandising” or a similar plan where policies are individually underwritten as to each group member; otherwise, P&C insurance group programs in New York may only be written with respect to groups comprised solely of public entities, nonprofit organizations and educational not-for-profit corporations.8
When a group intends to procure property insurance coverage on behalf of its members, additional state insurance law restrictions may apply. For example, a number of states expressly prohibit the procurement of property insurance coverage in the group context altogether, irrespective of whether such coverage is issued to a bona fide group, and will often expressly extend such prohibition to the surplus lines insurance market as well.9 Some jurisdictions, even if their statutes are silent, have internal “desk drawer” rules whereby state insurance departments take the position that group property insurance coverage is impermissible.
Should coverage be lawfully issued to a non-LRRA insurance group, attention must also be given to the laws of each state where an insurance certificate holder resides. For example, in Washington, “[no] master policy or series of policies or certificates of insurance of property, inland marine, casualty or surety insurance” may be issued in the state without abiding by applicable group laws (emphasis added). States sometimes enforce their state-specific coverage restrictions on certificate holders as well, including prohibitions on aggregate limits and deductibles shared between members of the group, restrictions against insuring against punitive damages, and applicability of cancellation and nonrenewal standards.
Insurance producers should also be aware of local state restrictions on non-LRRA insurance groups. For example, even if the master insurance policyholder’s home state allows for the charging to an insured of insurance-related broker fees, the practice may be prohibited with respect to a certificate holder residing in a state that disallows such charge. By contrast, a number of jurisdictions will instead defer to the laws of the home state of the master policyholder altogether.
Even if all fictitious group and local state insurance law issues are reconciled, the surplus lines insurance market faces an additional challenge with respect to allocation of surplus lines insurance broker taxes, With respect to individual surplus lines insurance policies, the Nonadmitted and Reinsurance Reform Act of 2010 dictates that all surplus lines insurance broker taxes must be paid to the “home state” of the insured or, if 100 percent of the premium of the insured risk is located outside of the state in which the insured’s principal place of business or residence is located, then the state where the greatest percentage of the insured’s total premium is located. Some states interpret the NRRA to apply in the group insurance context as well and allow for surplus lines insurance broker tax to be paid solely to the home state of the master policyholder. Other states, like Tennessee, take the position that “group surplus lines certificates of insurance issued to citizens [in the state] ... are considered insurance policies ... and are subject to [the state’s] gross premium taxation payment requirements.”10 The surplus lines insurance broker is traditionally the party responsible for payment of such tax and should be aware of the positions of each state as to the taxation of surplus lines insurance premiums; however, in instances where an insured directly procures coverage on a group insurance basis through the process commonly known as “independent procurement”, the insured is usually the taxpayer responsible for the payment of an independently procured insurance tax and will need to pay special attention to the laws of each state.
Conclusion and Lessons Learned
Group P&C insurance offers many tangible advantages over traditional individualized coverage, including favorable premiums, efficiencies and economies of scale. Sometimes, group insurance programs offer the added benefit of reduced regulatory scrutiny (particularly with respect to prohibition of discrimination against LRRA-based groups by the states). However, the reality is that P&C insurance group offerings sometimes lead to more regulatory questions across both the admitted and surplus lines insurance markets and require insureds, insurers and producers alike to be acutely aware of local state law. This article is not meant to dissuade insurance carriers or producers from contemplating or offering group P&C insurance coverage, but rather to illuminate just some of the prevalent issues seen today that require a nuanced understanding of how the states view such products and where the market is heading. As group insurance continues to expand within the P&C sphere, we fully expect to see the states issue further clarity on a host of these issues through new statutes, regulations, bulletins and opinions alike in the months and years to come.
1 15 U.S.C.A. § 3903.
2 New York alleviates this requirement somewhat, allowing for the affidavit to be “executed and filed by the licensee on behalf of more than one member of a purchasing group, where liability insurance for such members was procured during the 30 days prior to the filing of the affidavit ....” N.Y. Comp. Codes R. & Regs. tit. 11, § 301.06.
3 ELANY Bulletin No. 2011-29.
4 15 U.S.C.A. § 3905(c).
5 See, e.g., House Report No. 99-865 (September 23, 1986) (indicating that a RRG “may not provide coverage prohibited by State statute or declared unlawful by the highest court of the State whose law applies. Possible examples include coverage for punitive damages, or for intentional, fraudulent, or criminal conduct.”)
6 Ga. Code Ann. § 33-6-5(4)(B)
7 See, e.g., Idaho Code Ann. § 41-1317(1) (defining a “fictitious group” as a group “in which members of such group do not have a common insurable interest as to the subject of the insurance and the risk or risks insured or to be insured.”
8 N.Y. Insurance Law § 3435(a).
9 See, e.g., Tennessee Interpretive Opinion No. 05-15 (“[t]he issuance of a group property surplus lines policy in itself makes a preference or distinction in favor of that group in so offering.
Accordingly, group property surplus lines insurance policies are generally barred under the Tennessee Unfair Trade Practices Act.”)