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COURT PRE-EMPTS LOUISIANA LAW

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NEW ORLEANS-Risk retention groups licensed in other states do not have to comply with a Louisiana law that set numerous standards for groups writing business in the state, a federal appeals court has ruled.

In a one-paragraph decision, a three-judge panel of the 5th U.S. Circuit Court of Appeals last week unanimously affirmed a 1996 federal court ruling striking down the Louisiana law (BI, June 10, 1996).

The Louisiana law required risk retention groups to maintain at least $5 million in capital and surplus, post a $100,000 bond or cash deposit and pay a $1,000 fee before they could operate in Louisiana.

In addition, Louisiana's risk retention group application procedures required a group's officers and directors to submit to state regulators a set of fingerprints and biographical affidavits.

The 5th Circuit ruling is a victory for risk retention groups' ability to operate nationwide.

Risk retention group advocates say it upholds the foundation of the federal Risk Retention Act: allowing risk retention groups to provide coverage to members throughout the country after meeting the licensing requirements of one state.

"The Risk Retention Act is the embodiment of lead state regulation. Congress wanted to facilitate the formation of these self-help policyholder-owned captives," and it did so through the pre-emption of non-domiciliary state laws and regulations, said Jon Harkavy, a vp with USA Risk Services Inc. in Arlington, Va., and chairman of the governmental and industry committee of the National Risk Retention Assn.

The NRRA, along with several individual risk retention groups, challenged the Louisiana law and application procedures.

"The importance is not only the decision itself. It is important because it sends a clear message to the states that the federal act means what it says and is not to be meddled with," added Karen Cutts, managing editor of The Risk Retention Reporter in Pasadena, Calif.

Others note that if the Louisiana law had not been struck down, other states would have passed measures imposing similar rules and restrictions on risk retention groups, effectively ending the principle of regulation by a group's domiciliary state and pre-emption of other states' rules.

"If the decision had gone the other way, pre-emption for risk retention groups would have been nullified and rendered meaningless, as I assume other states would have followed" Louisiana's lead, said Philip Olsson, a principal with Olsson, Frank & Weeda in Washington and the NRRA's general counsel.

And if that had happened, "the bottom line would have been: Why bother to have a Risk Retention Act," said Mr. Harkavy, noting that the net effect of having to comply with a maze of state requirements would have been to preclude risk retention groups from operating nationally.

The Louisiana Department of Insurance is now reviewing the decision and will consult with the state attorney general on whether or not to seek an appeal, said Deputy Commissioner Kip Wall in Baton Rouge.

Earlier, though, in court papers, the Insurance Department said it was not trying to regulate non-domiciliary risk retention groups, but "rather satisfy itself that they are financially suitable to conduct business and provide liability coverage in the state.

The appellate decision should be a deterrent for state regulators to develop rules that are clearly pre-empted by the Risk Retention Act and utilize the authority federal law gives them to regulate the groups, risk retention group supporters say.

"What I hope happens is that the regulatory community stops bemoaning the powers they don't have under the RRA and focus on what they can do to regulate the groups," Mr. Harkavy said.

For example, the Risk Retention Act allows any insurance commissioner-not just the commissioner in the group's domicile-to obtain a court order shutting down a risk retention group nationwide if the regulator can prove the group is in a financially hazardous condition, he said.

The origins of the Risk Retention Act go back to the late 1970s when the cost of product liability insurance soared and coverage became scare. A federal interagency task force found that insurers in many cases were irrationally pricing coverage.

In response, Congress passed legislation in 1981 giving manufacturers a new alternative to the commercial market: risk retention groups. After meeting the licensing requirements of one state, a group, which could only provide coverage for its own members and not for the public, could do business in any state and not have to comply with other states' rules.

Initially, the groups could only write product liability coverage, but in 1986 the law was expanded to allow risk retention groups to provide all types of liability coverage except workers compensation.

Sixty-seven risk groups are now operating. Last year, the groups generated an estimated $755 million in premiums, according to a survey by The Risk Retention Reporter.

National Risk Retention Assn. et al. vs. James H. Brown, 5th U.S. Circuit Court of Appeals; No. 96-30752.