WASHINGTON—Congress could begin considering legislation that would allow risk retention groups to offer property coverage to their members as early as this month.

That would be welcome news for the Risk & Insurance Management Society Inc., which includes allowing RRGs to provide property coverage on its legislative agenda.

It also would be good news for risk retention groups, which sometimes find themselves in legal battles with nondomiciliary states that seek to regulate them in contravention of federal law.

Reform legislation appears likely to come sooner than later.

For example, Sen. Jon Tester, D-Mont., told a legislative conference of the Self Insurance Institute of America Inc. in Washington in March that he intends to introduce legislation that would allow RRGs to offer property coverage to their members. He also said he wants to develop a process to settle disputes between RRGs and nondomiciliary states.

Rep. John Campbell, R-Calif., is expected to introduce companion legislation in the House.

“We've made progress from the point of just talking about legislation” to introducing a bill in the House last year and now looking to having bills being introduced in both houses soon, said Mike Ferguson, chief operating officer of the SIIA in Simpsonville, S.C. He said SIIA is working to add co-sponsors to the bills and then have bipartisan legislation move forward.

The original 1981 Product Liability Risk Retention Act allowed RRGs to write product liability coverage for member policyholders in any state after meeting the licensing requirements of one state.

In 1986, Congress responded to a hard liability insurance market by passing the Liability Risk Retention Act, which allowed RRGs to write all types of commercial liability insurance except workers compensation. But RRGs remained barred from writing property coverage under federal law.

Although recent attempts to allow RRGs to write property coverage have failed, RRG supporters say the current Congress may provide the best chance yet for success.

A reform bill likely will contain three components, said Mr. Ferguson. In addition to allowing RRGs to offer property coverage, it would set up a common corporate governance structure for RRGs as well as establish a mechanism to handle disputes between nondomiciliary state regulators and RRGs, he said.

“I think that the outlook is better this year than last year, which is better than the outlook the year before. This is a cumulative process,” said Robert H. Myers Jr., general counsel of the Herndon, Va.-based National Risk Retention Assn.

That's despite the fact that the continuing soft market means fewer captives are being formed. In addition, when Congress considers insurance, the focus tends to be on health insurance rather than property/casualty insurance, said Mr. Myers, who also is a partner with law firm Morris, Manning & Martin L.L.P. in Washington.

He noted that the National Assn. of Insurance Commissioners has been working for years on trying to create parity or uniformity among captive domiciles that regulate RRGS. That process, which he said is near completion, would stifle any argument that RRGs are poorly regulated by the states.

“It helps us turn our attention to the behavior of the nondomiciliary states,” said Mr. Myers. Some nondomiciliary states have ignored federal law and attempted to regulate RRGs domiciled in other states. Because the NAIC cannot require states to treat RRGs in a specific way, the case for a federal law is bolstered, he said.

“It's like playing Whac-A-Mole—hit it once and it comes up somewhere else,” he said of nondomiciliary states attempting to regulate RRGs. “This is a federal statute with no agency oversight.”

Jon Harkavy, vp and general counsel with captive manager Risk Services L.L.C. in Washington and a former director of governmental affairs and general counsel at RIMS, said the idea of “lead state regulation” is not as alien as it was in 1981 and 1986.

Mr. Harkavy, who was involved in winning passage of the 1986 law, noted that the Nonadmitted and Reinsurance Reform Act, which became part of last year's Dodd-Frank Wall Street Reform and Consumer Protection Act, embraces the concept of lead-state regulation.

SIIA's Mr. Ferguson said proponents of allowing RRGs to offer property coverage will argue that the measure “is not necessarily an insurance bill, but this is a small-business bill.”

It would provide more options for small businesses and would apply not only to buildings but to automobiles as well, he said.

“How can you reduce the cost of companies doing business?” asked Mr. Ferguson. He said there's “obviously sensibility” about taxes. “Our point is if you can help a company lower its insurance cost, that's every bit as good as a tax credit or tax cut,” he said.