In the 1970s, manufacturers began forming insurance cooperatives, known as risk retention groups (RRGs), in response to increased premiums on product liability insurance. Congress encouraged the trend by passing the Product Liability Risk Retention Act of 1981, which limited state regulation of RRGs. Five years later, the trend was accelerated by the Liability Risk Retention Act, 15 U.S.C. § 3901 et seq. (LRRA), which permits RRGs to offer additional insurance lines. The LRRA expressly exempts RRGs from the application of “any State law, rule, regulation, or order to the extent . . . [it] would . . . make unlawful, or regulate, directly or indirectly, the operation of” an RRG. Last week, in a decision that sharpens a conflict with other circuits, the U.S. Court of Appeals for the Ninth Circuit held that the LRRA invalidates an order that prohibited an out-of-state RRG from selling “first dollar” auto insurance to its members in Nevada.

“First dollar” automobile insurance is coverage that satisfies the financial responsibility requirements of state automobile laws. In Nevada, owners who want to register their vehicles must provide proof of a first dollar liability policy issued by a carrier that is “authorized to transact business” in the state. The Alliance of Nonprofits for Insurance, Risk Retention Group (“ANI”), an RRG chartered in Vermont that provides various lines of insurance (including business auto) to not-for-profit member organizations, is registered in Nevada, but not authorized to do business there. In general, membership in the Nevada Insurance Guaranty Association (an unincorporated legal entity that assumes responsibility for claims against insolvent property-casualty insurers) is a condition on the issuance of a Nevada certificate of authority, and RRGs are prohibited from participating in such groups by the LRRA. (There is some evidence that domestic RRGs are exempt from participation in the Guaranty Association, but this exemption apparently does not apply to out-of-state companies like ANI.)

In Alliance of Nonprofits for Insurance, Risk Retention Group v. Kipper, Nos. 11-16836, 11-17871 (9th Cir. April 8, 2013), ANI challenged an Order from the Commissioner of the Nevada Department of Motor Vehicles, directing the company to stop writing first dollar auto policies on vehicles registered in Nevada. (ANI was permitted to write excess coverage.) The issues that the case presented were essentially identical to those in Mears Transp. Group v. State of Florida, 24 F.3d 1013 (11th Cir. 1994), which involved a Florida statute under which operators of vehicles-for-hire were required to maintain first dollar insurance with a member of the Florida Insurance Guaranty Association. In upholding that statute, the Eleventh Circuit held that it was “precisely the type of state law that Congress expressly exempted from” preemption under Section 3905(d) of the LRRA. Section 3905(d) states that the statute does not “preempt the authority of a State to specify acceptable means of demonstrating financial responsibility . . . as a condition for obtaining a license.”

The exception established by Section 3905(d) is itself subject to the terms of Section 3902(a)(4), which exempts RRGs from any state law or regulation that would “discriminate against a risk retention group.” In Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062 (7th Cir. 1998), the Seventh Circuit heard an argument that this anti-discrimination provision voided a Wisconsin statute that required health care providers to maintain liability insurance issued by carriers authorized in Wisconsin. The court held that Section 3902(a)(4) preempts only those laws and regulations that are adopted with the intention to “thwart RRGs.” In Musser, it found no evidence of such intent.

In Kipper, the Ninth Circuit declined to follow those decisions, adhering instead to its own prior ruling in National Warranty Ins. Co. v. Greenfield, 214 F.3d 1073 (9th Cir. 2000). Under the Ninth Circuit’s construction, Section 3905(d) authorizes states to enact rules that exclude some RRGs, but not RRGs as a class.

The court also held that a state law runs afoul of Section 3902(a)(4), unless it differentiates between an RRG and an authorized insurer in a way that is “justified by the desire to protect those who would benefit from the purchase of insurance.” The burden of establishing that justification rests with the state.