When Congress passed the Federal Liability Risk Retention Act of 1986 in response to skyrocketing insurance premiums being charged for, and the lack of available, commercial liability insurance, a new regime was born. Seemingly, gone were the days of state “fictitious group” insurance laws prohibiting the grouping of individuals or entities for the purposes of buying insurance, replaced by a federal framework intended to provide consistent, economical and affordable coverage to commercial liability insureds across the United States.
The LRRA had come to save the day by allowing for the establishment of risk retention groups (a species of a group captive insurance company that offer group liability insurance to their members) and the more common risk purchasing groups, or “RPGs.” RPGs, unlike risk retention groups, are not insurance companies at all, but rather are entities formed for the sole purpose of purchasing commercial liability insurance, which makes them easier (and cheaper) to establish and take to market than their risk retention group counterparts.
Yet, a generation later, the utilization of group property and casualty insurance policies remains a misunderstood and often impermissible method to deliver insurance coverage, and RPGs can often raise just as many questions as they solve. Increasingly, in recent years, states have begun to take a second look at RPGs and how they are utilized in light of each state’s own particular statutes and regulations, and this article serves to examine some of the most consistent misconceptions and mistakes permeating the group P&C insurance space, as well as to explore the ambiguities that state insurance laws sometimes fail to address.
RPGs Limited to Commercial Liability Insurance Only, Leaving Commercial Property Insurance Coverage in Limbo
When the LRRA was originally passed, Congress strongly considered allowing for RPGs to purchase group property insurance coverage, but ultimately settled on allowing for the purchase by RPGs of insurance for its members covering only liability risks arising out of “any business (whether profit or nonprofit), trade, product, services (including professional services), premises or operations)” or any state or local government activity.
In 2010, Congress introduced the Risk Retention Modernization Act that would have allowed for, among other things, RPGs to purchase property insurance coverage as well. The bill was never passed, and earlier this year the National Association of Insurance Commissioners reiterated its position that the LRRA should not be expanded to allow for the purchase of group property insurance, noting that “[u]nlike the market conditions that led to the LRRA, there is no evidence of a crisis in the commercial property insurance market … .”
The consequence of the foregoing is that “non-LRRA” commercial property insurance groups are being formed, often in contravention of applicable state law. For example, the Excess Lines of Association of New York, on June 17 of this year, issued Bulletin No. 2019-19, noting that unaffiliated group property and casualty coverages are impermissible “unless the group fits into an exception expressed in a statute such as risk purchasing groups … . There are no group insurance policy exceptions for ‘property programs’ under New York law.” (Emphasis in original). While the LRRA has been around for decades, it is telling that the ELANY bulletin declares that “[i]mpermissible groups have been a focal point for fines by [New York] in recent years.”
Another strategy often utilized by enterprising insurance brokers and insurers is to “squeeze” commercial property insurance coverage into an RPG, although such strategy is unlikely to be successful for insurance regulatory purposes on a nationwide basis. Most states require that an RPG identify the types of coverage that will be written through the RPG on the state RPG registration form, and while some states may allow for incidental property coverage, it is highly unlikely that every state will approve an RPG with property covers and, moreover, such provision of coverage likely runs afoul of the LRRA.
Applicability of State-Specific Statutes and Regulations
Perhaps the largest misconception that persists to this day is that states are preempted from exercising jurisdiction over RPGs and the certificates of insurance coverage issued to RPG members. A risk retention group, by contrast to an RPG, is largely subject to the exclusive jurisdiction of its domiciliary state. While RPGs under the LRRA are exempt from any state statute or regulation that would prohibit the establishment of an RPG or otherwise make it unlawful for an RPG to purchase commercial liability insurance on a group basis, the prevailing view is that nondomiciliary states can regulate insurance certificates issued under an RPG structure just as they would any other “individual” insurance policy issued in the state.
The consequences of this distinction are far-reaching. As noted in the ELANY bulletin, “disclosure notices, cancellation rights and rules for misrepresentations apply to each individual insured under New York law.” Therefore, a state like New York would likely apply, for example, its own cancellation and nonrenewal requirements (permissible reasons and prior notice periods) as to each member of an RPG residing in the state, even if the state where the master insurance policy is issued (likely the RPG’s state of incorporation or principal place of business) has enacted less stringent standards. This issue is further exacerbated when surplus lines policies are issued to RPGs, as the states often differ as to what statutes will apply to surplus lines policies at all.
Surplus Lines Insurance Premium Tax Allocation
Fortunately, RPGs are allowed to purchase insurance from unauthorized, surplus lines insurance companies. Unfortunately, confusion between the interplay of federal laws has resulted in inconsistent tax treatment of premiums paid to a RPG by its members between the states and misapplication of statutory principles by surplus lines insurance brokers and insurers.
Under the Nonadmitted and Reinsurance Reform Act of 2010, only the “home state” of the insured may levy surplus lines premium taxes on a surplus lines policy, usually payable by the surplus lines broker. With respect to affiliated groups, the NRRA indicates that the home state of the group insurance policy shall be the state where the largest member, by percentage of overall premium, resides.
However, the NRRA does not address nonaffiliated groups, and a number of states have taken the position that surplus lines insurance premium taxes should be allocated to each state where an RPG member resides. For example, the Excess Lines Association of New York requires that surplus lines premium taxes be remitted “only to New York for New York ‘home stated’ [RPG] members” while recognizing that “other states may handle [RPG] filings differently and consider the ‘insured’s home state’ to be the state where the [RPG] is headquartered . . . .”
The practical implications can be devastating to surplus lines insurance brokers, who are often the parties responsible for marketing and establishing RPGs as a commercial liability insurance solution. In the instance where a surplus lines insurance broker remits all surplus lines insurance taxes to a single “master policy” home state, the broker runs the risk that any number of other states in which the RPG’s members reside may ask for their slices of the tax pie.
Not only may a surplus lines insurance broker be forced to request a tax refund from the “master policy” home state taxing authority (usually the state insurance department or surplus lines insurance “stamping office”, but, in some cases, the state department of revenue), but if another state has a higher surplus lines insurance premium tax rate, the broker may need to make up the difference out of its own pockets or otherwise attempt to extract further tax payments from certain RPG members, making them unhappy insurance customers.
Insurance Policy Form and Rate Filings; Surplus Lines Insurance Diligent Search Requirements
Increasingly, insurance producers and insurers tend to view RPGs as a way of avoiding burdensome compliance-related requirements across varying jurisdictions and instead focus on making sure that all requirements in the state where the “master policy” is issued and delivered to the RPG are satisfied. With respect to admitted insurance companies, insurers will sometimes be tempted to file insurance policy rates and forms solely where the RPG is located. With respect to surplus lines insurance brokers placing surplus lines insurance policies with an RPG, the diligent search of the admitted insurance market is often only performed in the “master policy” home state.
Unfortunately, such practices will expose insurers and insurance brokers to considerable risk in states that treat insurance certificates issued to RPG members as their own individual insurance policies subject to such states’ insurance statutes and regulations. Fortunately, a few states have promulgated guidance to alleviate some of these burdensome requirements as to each certificate holder. For example, in New York, a surplus lines insurance broker need only perform one diligent search of the admitted insurance market “on behalf of more than one member of [an RPG], where liability insurance for such members was procured during the 30 days’ prior to the filing of the affidavit.” By contrast, some states will not require the diligent search as to RPG members residing in the state. For example, in Delaware, under Del. Code Ann. tit. 18, § 1912, “[a]n insurance producer or surplus lines broker is exempt from the diligent effort requirements of this section if the producer or surplus lines broker is procuring insurance for a risk purchasing group . . . .”
Shared Limits of Insurance Coverage
Another commonly held misconception is that RPGs allow for group insurance coverage to contain “shared limits” such that losses as to one RPG member can deplete the limits of insurance coverage applicable to another RPG member. In reality, many states have statutes expressly prohibiting the use of shared limits in the context of coverage issued to an RPG. For example, in Illinois, under 215 Ill. Comp. Stat. 5/123B-9, “[n]o [RPG] may purchase insurance providing for a deductible or an aggregate limit unless the deductible or aggregate limit applies separately to each individual member of the purchasing group.” Similarly, the ELANY bulletin cites a class action lawsuit in New York over an impermissible shared limit.
Not all states prohibit shared limits. For example, in New Jersey, a shared limit may be utilized as to RPGs provided, in part, that the insurer “use a policyholder’s disclosure statement approved by [New Jersey] which clearly explains in plain English and simplified language that the policy is subject to a group aggregate limit and that coverage for each individual insured could be exhausted by claims from other insureds.”
Unlike risk retention groups that must be owned by its members, nowhere does the LRRA stipulate that an RPG must be owned or controlled by any particular person or entity. However, a number of states are generally wary of insurance companies exercising direct control of an RPG under the theory that the LRRA was established in order to provide attractive options for prospective insureds and, as such, should operate independently of insurance companies.
For example, in Pennsylvania, under 40 Pa. Code § 991.1511, “[n]o insurer, or director, officer or employee of an insurer, may have any interest in [an RPG] … . Prohibited interest includes, but is not limited to, soliciting members for the [RPG] … .” Nevertheless, while insurance producers more commonly market and establish RPGs, many insurance companies continue to do so as well and face theoretical risk in this regard in a number of states that may take the view that insurance companies will owe a fiduciary duty to the RPG members if exercising control over an RPG, which may present an internal conflict of interest.
Increasingly, RPGs, per the terms of their membership agreements with prospective insureds, charge membership fees separate and apart from the insurance premium required to be paid by members for their insurance coverage. For example, in Texas, under 34 Tex. Admin. Code § 3.820, “[m]embership fees collected from [RPG] members and not paid to insurance companies or surplus lines agents are not subject to premium tax when coverage is obtained from a licensed company or surplus lines agent.”
It is important to consider, however, that Texas is a state that generally allows for insurance producers to charge fees to insureds that are separate and apart from the insurance premium. A number of states, by contrast, restrict or prohibit the charging of producer or “policy” fees. Therefore, RPG membership fees that serve as a means to provide a broker additional compensation for providing insurance may be found invalid in a number of states. Often, membership agreements will be carefully drafted in order to stipulate that membership fees are not charged for the purpose of purchasing insurance but rather for paying bona fide RPG administrative expenses.
In order for RPG members to obtain insurance, they must be ”engaged in business or activities similar or related with respect to the liability to which such members are exposed by virtue of any related, similar or common business, trade, product, services, premises, or operations … .”
How broad the “homogeneity” test under the LRRA can be interpreted is sparsely addressed in applicable insurance statutes, regulations and departmental guidance. New York has issued opinions generally recognizing wide latitude for determining a group to be sufficiently homogenous; under New York OGC opinion dated Dec. 26, 2001, a group policy issued to an association comprised of “Waiters, Waitresses, Bartenders, Motion Picture and Television Production Staff, Stage Performers and Dancers” was deemed unacceptable because the association did not meet New York’s seasoning requirement, but the opinion notes that “[a]ssuming the association’s members have the same profession, trade, or occupation, this Department would regard the members of the association as constitution as sufficiently homogeneous group … .”
By contrast, Texas appears to expand on the LRRA’s homogeneity requirement and requires that RPG members actually provide the same or similar services that are the subjects of the insurance purchased by the RPG. Under 29 Tex. Admin. Code § 13.308, “[i]f a group’s membership consists of businesses, all those businesses must be tied to the same kind of product or service. By way of example only, if a group’s membership includes manufacturers and repairers, they all must manufacture or repair the same kind of product.”
Clearly, RPGs may purchase certain forms of commercial liability insurance policies for their members. But can they also perform other activities, such as the marketing of insurance and issuance of certificates?
A number of states provide limited flexibility for unlicensed individuals and entities to conduct marketing and administrative insurance activities under the “group enroller” exception from insurance producer licensing requirements. For example, in Connecticut, under Conn. Gen. Stat. § 38a-702c, no insurance producer license is required for “a person who (A) secures and furnishes information for the purpose of … group property and casualty insurance … (ii) enrolling individuals under plans, or (iii) issuing certificates under plans or otherwise assisting in administering plans; or (B) performs administrative services related to mass marketed property and casualty insurance; provided no commission is paid to the person for the services performed under subparagraphs (A) and (B) of this subdivision.”
However, states are divided as to whether certificates may be issued by a nonlicensee (such as an RPG) with respect to commercial liability policies and, moreover, whether RPGs may take an active role in the marketing of insurance coverage.
RPGs continue to provide reasonably priced commercial liability insurance coverage on a group basis to insureds nationwide. However, over 30 years later, neither the NAIC nor the states have adopted consistent, uniform standards relating to the regulation and enforcement of state-specific laws as to RPG members, brokers and insurers alike. Moreover, the failure of Congress to expand the LRRA has sent other forms of insurance coverage into “non-LRRA” groups that are often subject to further state-specific restrictions and prohibitions. Hopefully, in the ensuing years, the NAIC and the states will continue to strive to provide clarity as to the sampling of issues identified in this article.
Zachary N. Lerner is a partner at Locke Lord LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Case law has also interpreted the LRRA as excluding workers’ compensation from the scope of coverage that may be purchased by risk retention groups and RPGs. See Attorney’s Liab. Assurance Society, Inc. v. Fitzgerald, 174 F.
Supp.2d 619 (W.D. Mich. 2001).
 https://www.naic.org/documents/government_relations_190116_rrg_expansion_issue_brief.pdf. The NAIC’s stance only expressly applies to risk retention groups, but most initiatives to expand LRRA, including the Risk Retention Modernization Act, have contemplated allowing for both risk retention groups and RPGs to operate in the commercial property space. Despite the NAIC’s view, many industry participants view property insurance as well as other emerging coverages, such as cannabis and cybersecurity products, as lines of insurance with sufficient group demand to warrant legislative consideration.
 There is a body of case law addressing instances where non-domiciliary states may nonetheless exercise jurisdiction and enforce their insurance laws and regulations on policies issued by risk retentions groups. See, e.g., Zachary Lerner, Group P&C Insurance: Admitted and Surplus Lines Issues, Law360, April 11, 2017, available here: https://www.law360.com/articles/912315/group-p-c-insurance-admitted-and-surplus-lines-issues
 ELANY Bulletin No. 2011-29.
 N.Y. Comp. Codes R. & Regs. tit. 11, § 301.06.
 Per the ELANY Bulletin, “[i]n many instances policy limits are not separate and specific to each insured which would mean that one more insureds could exhaust the policy coverage limits for other unrelated insureds. In one case an insured within a group sued the excess line producer seeking class action status over this very issue.”
 New Jersey Bulletin 87-1 (April 20, 1987).
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