Overview

Summary: The Liability Risk Retention Act of 1981, provided businesses with the ability to form purchasing groups (PGs) through which products liability or completed operations liability coverage could be purchased on a group basis. In 1986, the law was amended to expand its scope by removing the restriction that coverage could only be purchased for product liability and completed operations. Purchasing groups were specifically exempted from state laws that restricted insurance purchasing groups based on a number of factors such as the number of members or the length of time the group has been in existence.

This article offers a general overview of the purchasing groups law and some court cases pertaining to the nature of the regulatory climate that affects purchasing groups.

Topics covered:
Purchasing group defined
Requirements for PGs
PG exemptions from state regulations

Purchasing Group Defined

A purchasing group (PG) is an organization that has as one of its purposes the purchase of liability insurance on a group basis. Purchases of such insurance are limited to its group members and only to cover their similar or related liability exposures. Groups must be composed of members whose businesses or activities are similar or related with respect to the liability to which members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations. Members may be domiciled in any state of the United States or the District of Columbia.

Now while Congress intended to clearly define and restrain the authority of state insurance regulators over risk retention groups, confusion persisted as to what constituted a product for the purposes of product liability coverage. To clarify the situation, in 1983 Congress amended the 1981 law to provide that “the definitions of product liability and product liability insurance under any state law shall not be applied for the purposes of this Act, including recognition or qualification of risk retention groups or purchasing groups.”

A PG can purchase coverage only for its members. Like an RRG, the exposure of the purchasing group members must be similar or related and the members must be in businesses that are similar or related. A purchasing group must be domiciled in the United States.

Requirements for PGs

When a purchasing group wants to commence operations in a non-domiciliary state, it must furnish notice of its intention to do so with the state insurance commissioner. The notice must:

1. identify the PG's domiciliary state;

2. identify the lines and classes of liability insurance to be purchased;

3. identify the insurance company selling coverages to the PG (The domiciliary state of the insurer must also be identified in the notice.); and,

4. identify the principal place of business of the PG.

Changes in the items required in the notice must be reported to the states in which the PG operates.

Like an RRG, a PG must register with and designate the insurance commissioner of each state in which it operates as its agent for service of process or legal documents. Purchasing groups were “grandfathered” under the Liability Risk Retention Act of 1986 and several types do not have to meet the registration requirements. These types are PGs that: were domiciled before April 1, 1986 and were still domiciled after the enactment of the Act in any state; that purchased insurance coverage from an insurer licensed in any state before and after the enactment of the Act; and, that acted as a purchasing group under the Product Liability Risk Retention Act of 1981. However, the grandfathered PG can purchase only those coverages that were authorized under the 1981 act (unless it registers with each state in which it operates). However, this does not apply to a purchasing group which was domiciled on or after October 27, 1986 in any state of the United States.

Under the law, a PG generally cannot purchase coverage from an RRG or an insurer not chartered or licensed in a state in which the PG is located. There is an exception. Coverage can be purchased in these situations if it is sold through a licensed surplus lines agent or broker in the state where the PG is domiciled.

PG Exemptions from State Regulations

The regulatory authority of state insurance commissioners over purchasing groups is limited. A state cannot have any law, rule, or regulation which would:

1. prohibit the establishment of a PG;

2 .prohibit rate reductions or coverage benefits for a PG based on loss and expense experience;

3. prohibit a PG from purchasing coverage on a group basis;

4. prohibit a PG from purchasing coverage because it or its members have not operated for a minimum period of time or because any member has not belonged to the group for a minimum period of time;

5. require that a PG have a minimum number of members, a common ownership or affiliation, or a specific legal form;

6. require that a certain percentage of the group obtain coverage on a group basis;

7. require that a policy sold to a PG be countersigned by a licensed resident agent or broker; or

8. otherwise discriminate against a PG or any of its members.

Firms providing services relating to liability insurance for PGs also enjoy the exemptions cited above.

The nature of the regulatory exemption afforded PGs was defined by a federal court in an Iowa case, Swanco Insurance Company v. Hoger, 879 F.2d 353 (8th Cir. 1989). Until then, PGs contended they could purchase coverage for their members from any insurance company, as long as the insurer was licensed in the state where the group was domiciled. They also contended that the insurer did not have to be licensed in the states where the members were located, other than the PG's state of domicile. This belief was based on the section of the 1986 Risk Retention Act which reads that “a purchasing group may not purchase insurance from a risk retention group that is not chartered in a State or from an insurer not admitted in the state in which the purchasing group is located.”

However, the federal court ruled in Swanco that an insurer licensed in a PG's state of domicile is still subject to the licensing laws of any state in which coverage is sold to the PG's members. For a later case affirming this decision, see, State of Florida Department of Insurance v. National Amusement Purchasing Group, Inc., 905 F.2d 361 (11th Cir. 1990).

In a related New York case, The Insurance Company of the State of Pennsylvania v. James P. Corcoran, 850 F.2d 88 (2nd Cir. 1988), another federal court reinforced the states' right to regulate some aspects of purchasing group operations. In this case, the Insurance Company of the State of Pennsylvania (company), an insurer authorized to operate in New York, planned to offer coverage to the Nurse Practitioners Professional Liability Purchasing Group. The company planned to use the same policy form and rates throughout the United States. The New York Superintendent of Insurance took the position that neither the 1981 Risk Retention Act nor the 1986 amendments prevented the application of New York's policy form and rating requirements to purchasing groups.

The company contended it was not subject to the policy form and rating requirements of New York and based its position on §3903(a)(2) of the Risk Retention Act. The section exempts purchasing groups from any state law, rule, regulation, or order to the extent that such law, rule, regulation, or order would make it unlawful for an insurer to provide or offer to provide insurance on a basis providing to a purchasing group or its members, advantages, based on their losses and expense experience, not afforded to other persons with respect to rates, policy forms, coverages, or other matters.

The United States District Court for the Southern District of New York and the United States Court of Appeals for the Second Circuit agreed with the Superintendent. The Appeals Court held that §3903 (a)(2) expressly preempts only those state laws that prohibit insurers from offering purchasing groups advantages, based on their loss and expense experience. It does not purport to prevent state regulators from rejecting a policy form differing from that used for non-members of a purchasing group or from rejecting a lower rate than is generally available to non-members if these differences are not based on their loss and expense experience.

On its face, therefore, §3903 (a)(2) does not preempt all state regulatory authority over policy forms and rates where purchasing groups are involved.