Insurance Corporate And Regulatory - Pre-emption Of State Insurance Laws For Risk Retention Groups: Proposals For Regulatory Clarity

A risk retention group (RRG) has successfully asserted the right to sell its members primary first-dollar automobile liability insurance policies in Nevada, overcoming objections by the Nevada Commissioner of Insurance and the Nevada Department of Business and Industry Division of Insurance (Insurance Division) that such insurance can only be offered by "authorized insurers" and not by RRGs. On July 22, 2011, the federal district court in Nevada held that Nevada's financial responsibility statutes were preempted under the Liability Risk Retention Act of 1986 to the extent that the state law prohibited RRGs from issuing first-dollar automobile liability coverage. The court also permanently enjoined the state insurance regulator from enforcing the financial responsibility statutes based upon the issuance of first-dollar automobile liability coverage by the RRG to its members. The case has been appealed, so the U.S. Court of Appeals for the 9th Circuit may have the final say in the current litigation. However, if pending federal legislation is enacted, the newly created Federal Insurance Office will be charged with resolving preemption disputes under the Liability Risk Retention Act of 1986.

The Nevada dispute began in early 2010, when the Nevada Department of Motor Vehicles (DM") requested that the Nevada Insurance Division provide a list of insurers authorized to write automobile liability insurance. The Nevada Motor Vehicle Code requires that owners of motor vehicles registered in Nevada who are not self-insured must obtain a "motor vehicle liability policy," which is defined as a policy issued by "an insurer authorized to transact business" in Nevada. Nev. R. Stat. § 485.055(1). Because Section 679A.030(1) of the Nevada Insurance Code defines an "authorized" insurer as a company holding a certificate of authority, the Insurance Division provided the DMV with a list of authorized insurers; this list did not include registered RRGs. Beginning in April 2010, the DMV began to notify members of the Alliance of Nonprofits for Insurance, Risk Retention Group (ANI) that they could not register their vehicles in Nevada because they were not in compliance with their obligation to obtain and maintain insurance from an authorized insurer.

Thereafter, on May 20, 2010, the Nevada Insurance Division notified ANI that it was not authorized to issue primary first-dollar automobile liability insurance policies in Nevada. The Insurance Division did not object to RRGs writing auto liability insurance in excess of the minimum financial responsibility limits required under Nevada law because, under Nevada's laws, coverage in excess of the mandatory financial responsibility limits is not required to be provided by an authorized insurer. Nev. R. Stat. § 485.055(2).

Following a hearing, on July 21, 2010, the Nevada commissioner issued Findings of Fact, Conclusions or Law and an Order (the opinion) finding that only companies who hold a "certificate of authority" are "authorized" insurers. The Nevada commissioner ruled that because ANI, a Vermont domestic...