J&S Liability

Mr. Osborne pointed out the critical importance of accurate terminology in the risk management business. While risk retention and purchasing groups may have some similarities to self-insurance groups, there are differences.

Risk retention groups originally were enabled by the Product Liability Risk Retention Act of 1981 and its 1986 amendments, now known as the Liability Risk Retention Act of 1986. The LRRA also permits the formation of purchasing groupsgroups that have as one of their purposes the purchase of liability insurance on a group basis.

The intent of the LRRA was and still is to make it easier for businesses to obtain liability insurance for their operations. For example, a number of groups have formed recently in response to the failure of standard markets to provide reasonably available and affordable professional liability insurance to medical professionals.

RRGs and purchasing groups formed under this federal law may write only liability insurancenot workers compas provided by the AIK self-insured group.

An RRG is structured as a corporation or other limited liability association that is taxable as a corporation or an insurance company. Under the federal law, an RRG must be chartered and licensed in one state, which is known as its state of domicile, and it is regulated by that state's insurance department.

An RRG may be licensed as a domestic insurer, but some states have passed laws that permit an RRG to be licensed as a captive insurer. Licensing requirements may be less stringent for RRGs than for standard domestic insurers. The phrase "risk retention group" must appear in the name of the RRG.

Joint and several liability is not a requirement. As Mr. Osborne pointed out, there may be situations in which risk retention group members are assessed additional premium, but the provision is not a requirement.

On the other hand, workers comp self-insurance groups are enabled on a state-by-state basis. The vast majority of states require that employers either buy workers comp from an insurance company or be approved as a self-insurer.

While some practitioners may refer to such self-insured groups as "risk retention groups," they are not formed under the LRRA and are regulated by the individual states in which employee exposures exist.

Besides the fact that both typically are developed from trade or professional groupsin which the exposures among members are similarRRGs and workers comp self-insurance groups often are able to focus loss control and claims management issues in areas specific to the group membership. Since the participants typically have similar exposures, the groups frequently offer risk management expertise that is more specialized than what is available in the traditional insurance marketplace.

One of the first group "pools" that I encountered early in my career provided coverage for municipalities, which had unique exposures ranging from law enforcement to sewer and water services. Although the group formed in response to the liability insurance crisis of the 1980s, it offered more than a risk financing mechanism. Loss control specialists with particular expertise in municipal exposures could offer prevention and control advice and programs that may not have been readily available in the traditional market.

Members had to agree to implement certain loss control initiatives or be denied coverage. The same is true of many current workers comp self-insurance groups, which often are formed due to problems with coverage availability and cost.

Just as with traditional insurance programs, the best of the risk retention and self-insurance groups maintain stringent underwriting and claim investigation standards. The best not only offer these services but require participation to maintain group membership.

The best groups rigorously enforce the regulations established by the LRRA or state workers comp regulators and are strict about limiting participation to homogeneous businesses. In fact, a group that allows any business in or tries to extend the boundaries of "homogenous" members may not be the best group for your business.

Those organizations considering a group risk financing venture should realize that the costs in any one year may not necessarily be the lowest available. Just as with other alternative risk financing ventures, the goal should be to stabilize premium costs and to separate from market swings seen in the traditional insurance arena.

It's also important to understand that RRGs are not protected by state guaranty associations, and many states require that members of workers comp self-insurance groups pledge joint and several liability.

According to a recent survey by the A.M. Best Co., having some skin in the game in the guise of joint and several liability may not necessarily be a bad thingas long as the group is well run.

The Best analysis focused on 16 self-insurance pools and trusts that had been rated by A.M. Best. According to the report, the combination of members actually having capital at risk, as well as joint and several liability, were instrumental in controlling losses, minimizing frictional expenses and ferreting out fraud.

As with any comprehensive risk management approach, the important lesson to be learned from both the successes and the failures is that a good understanding of the programpositive and potentially negative aspectsis necessary when joining. To do less may result in an ugly surprise for those not paying attention to how their group arrangement is both set up and managed.

Diana Reitz, CPCU, is editor of the National Underwriter Company publication, "The Tools & Techniques of Risk Management & Insurance" as well as the "Risk Funding" and "Self-Insurance" Bulletins, both available at www.nationalunderwriter.com/nucatalog.

Reproduced from National Underwriter Edition, December 10, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.