The question of whether a nonchartering state has the authority to issue a unilateral cease-and-desist order against a risk retention group licensed by another state was recently answered by the California U.S. District Court.
The U.S. District Court, Eastern District of California, ruled on March 7, enjoining California's insurance commissioner from taking any action to enforce its cease-and-desist order issued against a Montana-domiciled risk retention group, and from issuing any other orders or decrees concerning the RRG in question.
In the order issued by Judge Frank C. Damrell Jr., the court found "serious questions raised, regarding whether the [California] commissioner had the authority to issue the cease-and-desist order at issue in this motion."
Congress also may weigh in on the issue, if proposed amendments to the Liability Risk Retention Act introduced in Congress on April 15 are enacted.
A provision in H.R. 5792–the Increasing Insurance Coverage Options for Consumers Act–prohibits nondomiciliary states from "issuing a cease-and-desist order to any risk retention group or purchasing group not chartered or licensed in such state, or otherwise attempting to regulate such group directly or indirectly, except as specifically permitted under this act."
In making its determination as to whether California's issuance of the cease-and-desist order was tantamount to indirect regulation of an RRG licensed in another state, which the LRRA prohibits, the court cited "the broad purpose of the [LRRA] and the similarly broad preemption of state laws that affect the regulation," which, the ruling added, "support plaintiff's contention that a challenge to the validity of [Auto Dealers Risk Retention Group] status as an RRG is the type of indirect regulation the LRRA was intended to proscribe."
California had argued that the cease-and-desist order is valid, and that the commissioner has the authority to regulate the operation of the risk retention group through such an order "because AD-RRG is not a valid RRG under the LRRA."
In its court documents, Auto Dealers Risk Retention Group–a Montana-domiciled RRG that provides stop-loss contractual liability for California auto dealers–argued that the California commissioner had exceeded the scope of his authority under federal law.
The group argued that once it was licensed as an RRG by Montana, "any regulation of AD-RRG or dispute regarding its validity as an RRG must have been sought through a court of competent jurisdiction, not through a unilateral order by the commissioner of a nonchartering state."
The court found that "neither plaintiff, nor defendant," nor any outside interested parties filing a friend-of-the-court brief "has cited to any authority that has either addressed the issue of, or provides guidance as to whether a nonchartering state may regulate a purported RRG by challenging its status as a valid RRG under the LRRA."
The court stated that in essence, the "defendant argues that Montana's interpretation of the LRRA and licensing of AD-RRG was incorrect. However, the structure and purpose of the LRRA seemingly do not allow such 'second-guessing' by a nonchartering state."
Rather, the court ruled, "the LRRA provides that only the chartering state may regulate the formation and operation of an RRG. The structure of the LRRA seems to suggest that if the [California] commissioner believed that AD-RRG should not have been licensed by Montana, he was required to have initiated an action in a state or federal court of competent jurisdiction."
Therefore, the court concluded, "in light of plaintiff's evidence regarding the licensing application process and approval by Montana, and in light of the broad purpose of the LRRA to decrease direct or indirect regulation of RRGs by nonchartering states, the court finds that there are serious questions raised regarding the commissioner's authority to issue the cease-and-desist order."
The court granted AD-RRG's motion for a preliminary injunction and allowed the RRG to begin writing new business in California, which it had been barred from doing under the temporary restraining order previously issued.
The court also relieved the RRG of any need to "appeal, challenge, or otherwise comply with the cease-and-desist order." The court further stayed the initiation of any other proceeding, apart from the current federal action, concerning the order until the case is heard on its merits.
While AD-RRG has won the first round on the issue of the cease-and-desist order, other issues remain, which California will in all likelihood continue to pursue.
Jason Kimbrough, a representative for the California Department of Insurance, said "CDI continues to believe the plaintiff's program is not liability insurance as that term is defined by the federal Liability Risk Retention Act and, therefore, does not qualify for protection under the act."
Mr. Kimbrough added that "CDI, having recently received the written decision, is reviewing its options for proceeding and looks forward to presenting the merits of the case before the court."
In other words, stay tuned!
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