A discussion of the Risk Retention Act 0f 1986

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The Risk Retention Act of 1986 greatly expanded the alternative insurance mechanisms established in the Products Liability Risk Retention Act of 1981. It now permits all types of businesses, not just manufacturers and professionals, to create groups to purchase liability coverage as a Purchasing Group or to self-insure through a Risk Retention Groups organized in a single state.

Section 4(a) (2) of the Act establishes the fundamentals of pre-emption of state law applicable to RPG's. It exempts RPG's from:

Any State law, rule, regulation or order to the extent that such law, rule, regulation, or order would -

(1) prohibit the establishment of a purchasing group;

(2) make it unlawful for an insurer to provide or offer to provide insurance on a basis providing, to a purchasing group or its members, advantages, based on their loss and expense experience, not afforded to other persons with respect to rates, policy forms, coverage, or other matters;

(3) prohibit a Purchasing Group or its members from purchasing insurance on the group basis described in paragraph (2) of this subsection;...
15 U.S.C. S 3903 (a) (1) - (3).

Congress intended to free RPG's of multiple and inconsistent state regulation which results when each state tries to exercise jurisdiction over the RPG's policy forms and coverage charge rates. Only the state where the group is located has authority to regulate the policy form and rates. Even that states authority is limited because the state may not impose requirements that undermine the ability of the members to create meaningful group coverage. On the other hand, 'RPG'sí are prohibited from offering coverage which is unlawful under state law or been "declared unlawful by the highest court of the state whose law applies to such policy". 15 U.S.C. S 3905(C). The legislative history provides examples of what was intended by this section of the Act. The Act identifies coverage for punitive damages, and for intentional, fraudulent or criminal conduct as unlawful. Finally, states may regulate the terms of a liability policy to the extent necessary to satisfy motor vehicle financial responsibility laws as per 15 U.S.C. 5 3905(a). So long as the state does not discriminate against the insurer of the group, because the insurer of the Group is not an admitted insurer, a state can assert its Financial Responsibility Laws as to the "TERMS THE POLICY MUST PROVIDE".

Most state laws define, "doing an insurance business", that is subject to state regulation as noted below. Most state insurance laws require insurance companies "doing insurance business within this state" to obtain a certificate of authority or approval as a non-admitted insurer. State laws list certain acts that constitute the "doing of an insurance business" in the state. Thus a state may require an insurer to obtain a license or be approved as a Surplus Lines Insurer before conducting business in the state. Most state laws have a list of certain acts which are "exempt" from statutory licensing because they do not constitute "doing insurance business". A sample of one such exemption is noted:

The provisions of this section shall not apply:

To transactions in this state, except group credit life or group credit accident and health insurance transactions, involving group or blanket insurance policies or group annuity contract where the group policy or contract is issued and developed pursuant to the group or blanket insurance laws of the jurisdiction in which the insurer is authorized to do business and the policyholder has its principal place of business. or otherwise has a bona fide status.

Thus in most states the issuance of a certificate of participation to a member in the state where the member resides, to become a member of a group insurance program issued in another state, does not constitute "doing an insurance business" in that state.

An Insurance Company is not "doing business in a state", when the insurer provides coverage to a member located in a specific state other than the state where the Master Policy is issued. When the Purchasing Group is located in another state, and merely issues a participation certificate from the Master Group Contract Policy to a member in another state, under most state GROUP laws this would not constitute "doing business in that state".

A. The Group Master Policy Contract, independently drafted and developed by the Industry Association as a freely negotiated non-adhesive agreement under contract law, provides that:

1. The members are made aware by signing an agreement of acceptance and being issued a coverage contract that identifies their coverage contract as being a limited and restricted coverage contract. The members believe that a principal benefit of any liability insurance policy is being able to purchase coverage only for those exposures, activities, risks, hazards, location, acts, error, omissions, and services, which the Master Policy and participating certificate; (1) SPECIFICALLY identifies, (2) for which the member directly pays a premium, and (3) which is listed as a coverage provided under the coverage contract agreement form issued to the member as a participant in the Associations Group Master Policy. The RPG members believe that the limited and restricted aspects of the Master Policy, enables them to reach a more reasonable and responsible settlement with claimants. The RPG Master Policy program has far fewer coverage disputes between the Insurance Company, The Named Insured industry Association, and the RPG Associations participating members, because of the signed agreements and contractual understandings required to be acknowledged by each participating member when signing the coverage contract Receipt form.

The principal contracting parties, i.e., the RPG Industry Association, and the insurance company issuing the Master Policy to the Named Insured Risk Retention Purchasing Group Industry Association, mutually agree to effect the manuscript liability coverage contract agreement developed independently by the industry Association. The Master Policy is a freely negotiated agreement, developed as a non-adhesive contract between the parties, and issued by one or more insurance companies to the Named Insured Purchasing Group. The RPG Master Policy only provides coverage for the named perils and specifically identified risks and exposures quoted, issued to the member, and separately noted on the coverage endorsement form issued to each member. Only the LISTED risks and exposures noted on the coverage endorsement form, will be considered as insured activities or services under the coverage contract. To eliminate the Purchasing Group, and the insurers, ability to limit and restrict coverage to only those listed as insured activities, locations, or risks covered by the coverage contract would significantly impact the rates and future availability of coverage for RPG Association members. The Industry Association and its members have reviewed the trade off factors to traditional insurance and unanimously decided in favor of securing and controlling their own future availability and affordability of coverage to Industry Association members. By developing and effecting their own insurance program, under the Federal Risk Retention Act, the RPG Association and its members believe they can control their own future insurance needs and services.

2. The Industry Association and its members are convinced that the prompt reporting of potential losses leads to prompt claim settlements and lower insurance costs. Claims administration is an essential part of the Industry Associations Insurance program. Because the Industry Risk Retention Purchasing Group is not in the business of insurance, the Association does not look for ways to deny coverage. Accordingly, the Executive and/or Claims Committee will not deny coverage where an individual insured member is provided coverage under the intent and purpose of the Manuscript industry developed coverage contract. The RPG Association, however, will insist that coverage be denied where no coverage was intended or a premium was paid by the member for such coverage.

The RPG Associations Master Policy Contract has been effected in the state of Utah, under Utah Laws, Rules, and Regulations. Coverage is freely chosen, and "INDIVIDUALLY PROCURED" by each member as a participant in a Group Master Policy Contract, already issued and in effect in the state of Utah, with the RPG Association as "THE Named Insured". All coverage matters are reviewed by one or more Association committees, prior to any review by the Insurance company. The RPG Association, as THE NAMED INSURED, has the right and obligation to identify and be involved in any claim made against the Master Policy contract to which the Association is The Named Insured. The Industry Association Purchasing Group has elected and agreed that coverage disputes will only be considered in Utah. The coverage contracts Forum Selection clause, and the Risk Retention Acts single state regulation, dictate where coverage disputes will be determined.

Coverage provided to members is based on the actual risk and exposures developed by the member and agreed to be insured by the Named Insured Purchasing Group. The Association will only quote and provide coverage for those risks and exposures qualified to be insured under the Master Policy. The actual risks and exposures rated and insured may not be measured by time. The risk and exposure rate charge is based on the actual risk and exposure, which the Association determines, based on the DISCOVERY QUESTIONNAIRE and any separate inspection.

3. The RPG Association requires participating members to; (1) follow certain operating standards, (2) may have clients or participants sign release forms, and (3) provide certain disclosures or warnings to clients or participants as may be suggested by the activity or service. The RPG Association requires each member to accept certain warranties and coverage contract limitations which are essential to the integrity of the Group Program. The RPG Industry Association expects all participating members to effect those risk management and loss prevention programs recommended by the Industry Association. To meet the minimum standards developed by the Industry Association a member must complete a Discovery Questionnaire and receive a formal quotation. The Discovery Questionnaire and quotation become a part of any coverage contract issued to the member.

The Industry Association understands that states would prefer persons who participate in the commercial business of insurance to meet certain qualifying standards in order to protect consumers in their state. The members of this Association, "as consumers" themselves, believe that the Industry Risk Retention Purchasing Group is the vehicle by which the member can protect himself. The RPG Industry Association is not at the mercy or will of any insurance company, the insurance industry, or any licensed insurance agent. The Purchasing Group is organized, managed, and operated by the industry Association members. Any state action to regulate the Industry Risk Retention Purchasing Group Association represents action directly against the Risk Purchasing Group and the consumers the states claim to represent.

If RPG Association members lose confidence in their Executive Committee, they may elect a new committee. If the members become unsatisfied with any of the independent contractors employed by the RPG Association they can be replaced. If any member is still unsatisfied with the insurance program, the member may withdraw from the RPG Association program and seek coverage from a more highly regulated standard commercial insurance carrier.

Conclusion

State insurance laws were designed to regulate "the business of insurance". They were established to regulate the conduct of insurance companies that have unequal bargaining powers and issue the industry designed and developed ADHESIVE POLICY CONTRACT under insurance law. The Industry Risk Retention Purchasing Group and the consumer members themselves have designed, authored, and developed their own insurance program to fit their industries own specific needs. This Industry developed insurance program is administered and operated by the members themselves. It is not logical to apply various state insurance laws to the operations of a single state issued Group Master Policy.

State Insurance Departments, and various state licensing agencies, have attempted since 1986 to regulate the activities of RPG's by asserting state regulation over the RPG's insurer, or by regulating the Group through a state licensed insurance agent. By asserting state laws, rules and regulations against the Risk Retention Purchasing Group Association, states will ultimately be adversely regulating the free choice of consumers in their state.

Industries were provided the opportunity by the U.S. Congress to develop insurance programs developed and designed by the Industry itself which meet the specialized insurance needs of their particular industry. Any attempt by state regulation to limit the choice of consumers in their state by regulating RPG Groups will produce a negative consumer effect. Limiting consumers choice is not the desired result or in the best interest of the consumers for whom state regulation has been developed.