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LIABILITY RISK RETENTION ACT? Rosita Steele, CIC, CLU, ChFC,
CPIW. FEDERAL LIABILITY RISK RETENTION
ACT The Committee on Commerce, Science, and
Transportation, during the 99th Congress, conducted numerous hearings for the
purpose of examining the availability and cost of liability insurance. As a
result of these hearings and involvement by the Committee, the United States
Congress revised the Products Liability Risk Retention Act of 1981 through the
Risk Retention Amendments of 1986. The final Act, which was signed into law by
President Reagan on October 27, 1986 is known as the Liability Risk Retention
Act of 1986. Since its enactment, this federal law has been the subject of numerous
interpretations by various legal bodies, groups, and individuals. To understand
all of the implications under the Liability Risk Retention Act of 1986, it is
necessary to review the Congressional purpose for enacting the legislation, as
well as of the National Association of Insurance Commissioners'(NAIC) Model Risk
Retention Act. To facilitate your understanding of the Risk Retention Act (RRA),
the following outlines the components with deviations as they occur under the
NAIC Model Risk Retention Act. The Committee, supported by the administration's Tort Policy Working Groups'
report, was convinced that an expansion of the Products Liability Risk Retention
Act of 1981 was needed to facilitate group insurance programs. It was presumed
that this expansion would reduce costs, provide alternative mechanisms for
coverage, and promote greater premium competition among general liability
insurers. It was believed that this expansion would encourage insurers to set
premiums that would compete with the new formations created under the revised
law. To accomplish these goals, the Congressional history is very clear on the
absolute need of preemption from certain state laws which would hinder or oppose
the formation and interstate operation of association captive insurance
companies or Risk Retention Groups (RRG). The record also reflects the need for
preemption of prohibitive or restrictive state laws that would preclude insurers
from giving preferential rates, terms, and conditions to groups seeking
liability insurance coverage. Legislation provides the following definitions to
aid in gaining an understanding of RRGs.
Liability is defined as the legal liability for damages
(including legal fees and other claims expenses) resulting in bodily injury,
property damage, personal injury, or other types of loss or damage arising out
of any business or governmental activity. The term does not include
personal risk liability of railroads for injuries to their employees under the
Federal Employer' Liability Act (FELA). Personal risk liability is defined as liability for personal
injury or property damage resulting from personal, familiar or household
responsibilities, rather than from business-type activities. A hazardous financial condition exists when a risk retention
group appears to be unable (1) to meet its policyholders obligations regarding
known claims and reasonably anticipated claims, or (2) to pay other obligations
of business operations.
RRGs chartered or licensed under the laws of Bermuda or the Cayman Islands
that have met the capitalization requirements of one state prior to January 1,
1985, can continue to operate as RRGs. These are the only off-shore formations
permitted. Structuring of the RRG will conform to the laws of the chartering state and
can include formation as a stock or mutual company, or as a reciprocal exchange.
Members of an RRG must be engaged in businesses or activities which are
similar or related in regards to the liability exposures created by virtue of
common business or trade practices, products, services, premises or operations.
In addition, an individual or firm that meets this criteria cannot be excluded
from the group if the intent of the exclusion is to provide the group with a
competitive advantage. Owners of RRGs must be both members of and insured by the group. Indirect or
secondary ownership through a wholly-owned, single organization is permitted as
long as the organization's owners are members of and insured by the RRG.
Insurance companies cannot have an ownership interest in an RRG unless all
members of the group are insurance companies. The ownership interests of an RRG are exempt from filing registration
statements under Federal Securities Law and State Blue Sky Laws. However, in
line with the anti-fraud provisions of applicable State and Federal laws, any
solicitation for funds must disclose all material facts regarding the RRG and
its insurance operations. Except for the chartering state, an RRG is exempt from any state law, rule or
regulation that regulates or makes an RRG unlawful except, any state can require
an RRG to:
The non-chartering state has no approval authority
over rates, coverages, forms, insurance-related services, management, operation,
investment activities, or loss control and claims administration. In addition,
the Act prohibits states from otherwise discriminating against RRGs. Each RRG must submit a feasibility study or plan of operation for approval to
the chartering state before offering insurance. Under the Federal Act, the plan
or study must include coverages, deductibles, coverage limits, rates, and rating
classification systems. The NAIC Model Act defines the feasibility study as an
"analysis which presents the expected activities and results of a risk retention
group." The NAIC requires more information including historical and expected
loss experience of the members, pro forma financial statements and projections,
an actuarial opinion defining the minimum premium necessary to begin operations
and to avoid financial difficulties, information on underwriting and claims
procedures, reinsurance agreements, investment policies, and management and
marketing methods. In addition, the NAIC also requires that the RRG provide
information identifying the initial members, the organizers, the administrator
and anyone else who will otherwise influence or control the RRG. In each state in which the RRG is or plans to do business, the RRG is
required to submit a copy of the feasibility study (including revisions) and a
copy of the annual financial statement. The statement must be certified be an
independent accountant and include an opinion of loss and loss adjustment
expense reserves by an actuary or a qualified loss reserve specialist. An RRG cannot write coverage which is prohibited by state statute or by the
highest court in the state (ex: punitive damage, intentional or criminal
conduct). This is not the same as coverage which is prohibited by the state
insurance department. However, the states do have broad discretionary powers in
deciding whether coverage from an RRG is acceptable where proof of financial
responsibility is needed to obtain a license to engage in certain activities
(i.e.: hazardous waste hauling, motor vehicle operations). If an RRG is found to be "in hazardous financial condition," any state or
U.S. District Court may issue an order enjoining a RRG from soliciting, selling
insurance, or continuing operations.
A PG is exempt from any state law, rule, regulation or order that would:
Apart from these specified exemptions, a PG must comply with all other state
laws and regulations regarding its operation and procurement of insurance. A PG intending to do business in any state must give notice of intent to the
appropriate state's insurance commissioner. The notice must identify the state
of domicile and principal place of business for the PG, categorize the lines and
classifications of liability insurance to be purchased and provide the name and
domicile of the insurance company from which insurance is to be purchased. In
addition, the PG must designate the commissioner of each state as its agent of
process. It should be noted that the NAIC Model Act authorizes a monetary filing
fee in conjunction with this last provision which applies to both PGs and RRGs.
The Federal Act allows for advantages in rates, forms and coverages as long
as they are based on the PG's loss and expense experience. In addition, it makes
no reference to individual state authority regarding approval of rates, forms,
or coverages. On the other hand, the NAIC Model Act gives individual states the
right of prior approval on rates, forms, and coverages which are specifically
designed for PG members. The Federal Act does not contain any provisions regarding deductibles or
aggregate limits for PGs. The NAIC Model Act provides for separate and
individual deductibles. Group deductibles are excluded. The NAIC Act maintains
that the purchase of aggregate limits is subject to the same standards as all
other group insurance purchases within a state. For example, the Illinois
Captive Law does not allow for a group aggregate coverage level, only individual
aggregate coverage limits. A PG may not purchase insurance from an insurer that is not admitted in the
state where the PG is located, or from a RRG that is not chartered in a state
unless the purchase is through a licensed broker acting pursuant to applicable
surplus lines laws
AND BROKER LICENSING REQUIREMENTS For both RRGs and PGs, chartering and non-chartering
states may require agents who are acting on behalf of these entities to be
licensed. However, states cannot impose residency requirements for licensing,
nor can they require that the policy be countersigned by a resident agent or
broker.
For further information contact: NATIONAL RISK RETENTION ASSOCIATION 4248 Park Glen Road Minneapolis, MN 55416-4758 |
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