Risk Retention Groups Call for Changes to Federal Liability Act

The Liability Risk Retention Act of 1986 (LRRA) was enacted to help solve the crisis of the 1980s created by the unavailability of affordable commercial liability insurance. The LRRA gave risk retention groups (RRG) the freedom to do business nationally when licensed in a single state. As RRGs grew, some states imposed burdensome requirements on RRGs not licensed in their states. Unfortunately, the 1986 LRRA did not provide for an enforcement mechanism. The time has come to amend the LRRA to allow RRGs to function as Congress intended.

The National Risk Retention Association (NRRA) has joined with related industry groups to mount a campaign to build support for HR 4802, the Risk Retention Modernization Act that was introduced in the House this year. The bill would give the Treasury Department rulemaking authority to oversee the RRG sector and resolve interstate disputes regarding RRG operating authority. The proposed amendments to the LRRA also would allow RRGs to write commercial property insurance and create uniform corporate governance standards.

Creating a federal dispute resolution mechanism will transition the risk retention industry to a playing field that is more workable and more equitable. A federal statute that promotes a single regulatory framework for RRGs but has no federal enforcement mechanism is simply legislation that is not finished.

The 1986 legislation provided, essentially, that RRGs could be licensed in one state, known as the state of domicile, and write insurance across the nation simply by registering in each state. With a few limited exceptions, the LRRA required that non-domiciliary states defer regulatory authority to the state of domicile.

In the severe hard market of the mid 1980s the LRRA was immediately embraced by consumers of commercial insurance who had seen their premiums rising steeply, often 100 percent or more in a single year. Today, there are more than 250 RRGs that generate over $2.5 billion in premiums. This is a strong testimonial to their success in fulfilling liability insurance needs that were unmet by the traditional industry. RRGs are heavily concentrated in health care, followed by property development, transportation, manufacturing and commerce, along with government agencies.

The lack of a dispute resolution mechanism has steadily undermined the intent of Congress. The time to correct this deficiency is long overdue. The Risk Retention Modernization Act provides a way for a federal agency (the Treasury) to address the illegal fees and assessments, unduly restrictive state registration requirements, and coverage interpretations that conflict with authority granted by the LRRA.

The only dispute resolution avenue presently available to RRGs is the federal court system. The federal court system is not only slow and prohibitively expensive for RRGs to use, but short of the Supreme Court, decisions do not have a binding, national reach. This is an essential feature of any effective mechanism to resolve disputes between RRGs and non-domiciliary states.

The current judicial mechanism is not workable as a practical matter and clearly favors the non-domiciliary states that can overwhelm typical RRGs by driving up their costs due to the mountain of dollars required to pursue a complaint through the federal court system. When RRGs are denied an affordable means to defend their rights, the intent of the LRRA itself is eroded. That is what has happened.

The time has come to once again amend the LRRA. NRRA and our coalition partners will pursue this goal vigorously in the next Congress. HR 4802, by providing for the much needed dispute resolution mechanism, adding the option to provide commercial property coverage, and strengthening governance is a good bill and the industry deserves its enactment.