A move by North Carolina to limit use of risk retention groups in the state has provoked a letter of protest from the National Risk Retention Association.

The Washington, D.C.-based NRRA sent a letter to the North Carolina Insurance Department stating that if passed in its current form, House Bill 645, adopted in the House May 12 and sponsored by Hugh Holliman, D-Davidson, would "discriminate against risk retention groups in a manner prohibited by federal law."

Under the Risk Retention Act groups of companies can band together as self-insurers to provide coverage for hard-to-insure and homogeneous risks.

Robert H. "Skip" Myers Jr., general counsel for NRRA and an attorney with Morris, Manning & Martin LLP in Washington, D.C., said, "Some states just don't want to give up on trying to exclude RRGs."

He explained that the bill includes a provision that "in order to issue a contract liability insurance policy or service agreement reimbursement insurance you have to be a licensed admitted insurer or a surplus lines company," adding that, "The definition of insurer they mention expressly excludes RRGs."

Mr. Myers said a similar letter was sent to North Dakota just a few months ago. "The issue arose in North Dakota, but it was resolved," he said. "North Dakota took the offending provision out of the legislation after they received the letter."

Some of the states, he explained, may not realize the Risk Retention Act is a federal act. He said he hopes the letter will "make them cognizant that to do this would be a violation of federal law, and we cite them to the National Warranty Case in Oregon in 1999, by the U.S. Court of Appeals."

In Oregon, he noted, "they said you had to be a member of the guaranty fund, which is what North Dakota said." The impact of being required to be a member of the guaranty fund, he added, meant it indirectly excluded RRGs, which are prevented by federal law from being members of guaranty funds.

In N.C., however, "they just go straight at it and say RRGs are not 'insurance companies' for this purpose."

Their reasoning, Mr. Myers said, is to keep RRGs from issuing contract liability or service agreement reimbursement policies. The theory is that RRGs "aren't financially stable, but the facts don't bear that out," he said.

North Carolina is trying to prevent a situation like that of the National Warranty Insurance Risk Retention Group, headquartered in Lincoln Neb., which was declared insolvent in 2003.

"That RRG had problems at a lot of levels," he said. National Warranty "was originally domiciled in the Caymans. It had an office in Nebraska, and basically Cayman didn't regulate it and neither did Nebraska."

The real problem with service warranty agreements and auto warranty contracts, he added, is that "there is not adequate regulation at the primary level--the service contract issuer level. These insurance contracts are reimbursements and they almost attach at an excess level, when the company reaches a certain level of payments out. So it is an excess contract, a backup."

Problems ensue, he said, because administrators "don't always reserve enough money at their level and then they turn to the insurance company, which is only liable over certain limits."

From the regulator perspective, he explained, the problem is that most insurance departments don't have jurisdiction over the administrators.

"What the insurance regulator is trying to do is protect consumers and gain some control, but they need to deal with it at the primary level--at the contract administrator level--and in many cases they cannot," Mr. Myers added.

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