In 1986, responding to a host of industries that struggled to find acceptable coverage in the traditional insurance marketplace, Congress passed the Liability Risk Retention Act. The Act authorized the creation of risk retention groups – liability insurance companies owned by its members. Entities in an industry suffering through a liability crisis can form a risk retention group to provide them with the coverage they need when the wider insurance market is unwilling to.
Since the passage of the Liability Risk Retention Act, the number of registered risk retention groups as increased substantially. Over two hundred and twenty such groups exist as of September 2018. A risk retention group must be registered in one of the fifty states, but once registered in one state, it can operate in all states. The Liability Risk Retention Act provides for no independent regulation of risk retention groups. At the same time, it forbids states from regulating “foreign” (i.e. registered in another state) risk retention groups. (There is a sharply limited distinction for regulations with respect to “financial responsibility”.) This means that the entirety of the regulation of the risk retention group falls on the state in which the group is registered.
The ultimate effect of this pre-emption of a state’s right to regulate foreign risk retention groups can be seen in a recent case out of Georgia. In Reis v. OOIDA Risk Retention Group Inc., the Georgia Supreme Court addressed the conflict between the Liability Risk Retention Act and the state’s direct action law. Reis involved a truck accident with some underlying difficulties in determining the responsible driver’s employer at the time of the accident. A trucking company, Zion Train Express, Inc., owned the truck involved and had its liability coverage through the OOIDA Risk Retention Group, Inc. OOIDA refused to pay the claim because the driver was not employed by the trucking company and instead argued the driver was employed by a repair facility. The repair facility denied it employed the driver.
Georgia allows parties injured in commercial truck accidents to directly sue the insurance provider of the commercial trucking company. So, tired of the run around with respect to the responsible parties, the injured plaintiffs sued a host of people, including OOIDA. OOIDA objected, arguing that the Liability Risk Retention Act pre-empted Georgia’s direct action law and that the application of the direct action law to OOIDA constituted an impermissible attempt to regulate the conduct of a foreign risk retention group. The Supreme Court of Georgia agreed and granted OOIDA a directed verdict.
The ruling highlights the benefits that risk retention groups can provide. Registering in a friendly state can shield risk retention groups from more aggressive state regulation that traditional insurance carriers are subject to. This protection comes with a host of constraints, such as ownership and business type requirements, but risk retention groups can provide real value in industries facing a tight insurance market.