Topics covered: Introduction Coverages that can be written by an RRG Requirements imposed on RRGs Advantages and disadvantages of RRGs Factors in deciding to form an RRG RRG formation decisions

Introduction

A risk retention group is defined in the risk retention act as any corporation or other limited liability association taxable as a corporation, or as an insurance company, formed under the laws of any state with the following characteristics:

1.     primary activity consists of assuming and spreading all, or any portion, of the product liability or completed operations liability risk exposure of its group members;

2.     entity is organized for the primary purpose of conducting the activity described under subparagraph (1);

3.     entity is chartered or licensed as an insurance company and authorized to engage in the business of insurance under the laws of any state, or which is so chartered or licensed and authorized before January 1, 1985, under the laws of Bermuda or the Cayman Islands, except that any group so chartered or licensed and authorized under the laws of Bermuda or the Cayman Islands shall be considered to be a risk retention group only after it has certified to the insurance commissioner of at least one state that it satisfies the capitalization requirements of such state. Such a group shall be considered a risk retention group only if it has continuously been in business for the purpose of providing insurance to cover product liability or completed operations since before October 27, 1986;

4.     entity does not exclude any person from membership in the group solely to provide for members of such a group a competitive advantage over such a person; and

5.     entity is composed of members each of whose principal activity consists of the manufacture, design, importation, distribution, packaging, labeling, lease, or sale of a product or products.

Risk Retention Groups chartered under the laws of Bermuda or the Caymen Islands that met the capitalization requirements of one state prior to January 1, 1985 are the only offshore RRG's permitted.

The 1981 Product Liability Risk Retention Act defines completed operations liability as those liabilities arising from the installation, maintenance or repair of any product on a site not owned or controlled by l) a person performing the work or 2) any person who hires an outside or independent contractor to perform that work. Completed operations liability coverage also includes liability for activities completed or abandoned prior to the date of the occurrence that brings about an exposure to liability.

Ownership of an RRG is restricted. An RRG can be owned only by the members who are provided coverage. An ownership interest in an RRG is exempt from the registration requirements of the federal securities laws and is exempt from state "Blue Sky" laws. This does not mean that those forming an RRG do not have to fully and truthfully disclose the nature of the undertaking. Owners of an RRG are subject to those securities laws dealing with attempts to defraud the public.

The 1986 Risk Retention Act states that an RRG can be a corporation or other limited liability association. Examples of other limited liability associations include reciprocals and mutual companies. Thus far, most RRGs have been stock corporations.