While the LRRA contains no waiting period, under California Insurance Code Section 132, RRGs must wait 60 days from the date that the California Department of Insurance determines required documentation has been submitted. The provision has not been challenged in court, although some RRG experts assert that it is clearly preempted by the LRRA.

According to Richard Goff, managing member of The Taft Companies, which serves as the RRG's captive manager, Ad-Comp Med RRG's application was filed in April, and after complying with the 60-day waiting period, the RRG began writing business.

Mr. Goff, who is also president-elect of the Self-Insurance Institute of America, said that "life was good until sometime in October," when the RRG received notice that it was not registered. He noted that "California has not told us not to operate," and he has advised his clients to "continue business as usual."

Mr. Goff said that the RRG and California are in ongoing discussions, adding, "We are confident that we are going to work through this with California [so that] everybody wins."

In response to questions to the CDI seeking the legal basis for the denial, the insurance department stated that: "Given California's legal framework for the insurance industry," the RRG's "request for registration" was denied on several grounds.

The first is that "Ad-Comp has not established that it is licensed exclusively as a liability insurance company in a state in the United States." Jill Jacobi, CDI senior staff attorney overseeing RRGs, said Ad-Comp's certificate of authority "does not evidence that it is licensed as a liability insurance company."

Under the LRRA, RRGs are required to insure the liability exposures of group members.

Tal Redpath, captive analyst with the Montana Department of Insurance, explained that certificates of authority or licenses issued by Montana for domiciled RRGs do not specify lines of authority and thus do not explicitly state that the RRG is insuring "liability."

He noted, however, that the name includes the words "risk retention group" on the license, and that Montana law defines an RRG "as a captive insurance risk retention group formed under the laws of this chapter and pursuant to Title 33, chapter 11," which require that an RRG provide liability to its members.

The CDI also denied the application on the grounds that "Ad-Comp proposes to write and issue insurance policies in California that are not liability insurance authorized by the federal act but are, in fact, first-party coverage." Ms. Jacobi said the CDI reviewed the RRG's business plan and concluded that "it did not demonstrate that the RRG was writing liability insurance."

She asserted that the stop-loss coverage provided by the RRG does not meet the LRRA's definition of "liability," because RRG insureds do not have "legal liability for damages because of injuries to other persons" but rather are insuring themselves on a first-party basis.

Another basis for the CDI's denial is that "the proposed policies would actually constitute an excess layer of disability/health insurance and, as such, they are not authorized under applicable federal and California law to be written by an RRG," citing the California Insurance Code, Section 106.

Ms. Jacobi explained that, prior to formation of the RRG, stop-loss coverage for the auto franchise dealers was provided by life insurance companies as Class 6 disability under California law. She added that Class 6 is deemed to be a first-party coverage.

Moreover, she said the LRRA requires that RRG insureds be engaged in similar or related businesses "with respect to the liability" to which the members are exposed, and that "insuring employee benefits is not a liability arising from the uniqueness of their common business exposure, which is the auto dealer business."

Finally, Ms. Jacobi noted that even if the coverage were deemed to be third-party liability, it would fail under the LRRA's exclusion of an "employer's liability with respect to its employees."

Mr. Goff said he believes the "very positive dialogue" currently taking place with Ms. Jacobi and others at the CDI will resolve the matter.

He declined to discuss RRG rebuttals to the legal issues raised by California in denying the application for registration.

If the parties cannot resolve the issues, the ball is in California's court to take the next step. Stay tuned.