Federal Appeals Court Rules Liability Risk Retention Act Preempts New York Direct Action Statute

NEW YORK, NY--(Marketwired - Apr 10, 2014) -  The U.S. Second Circuit Court of Appeals in a ruling last week held that the federal Liability Risk Retention Act (LRRA) categorically preempts a New York State statute that allows a direct action lawsuit against a risk retention group.

"The federal Liability Risk Retention Act of 1986 contains sweeping preemption language that sharply limits the authority of states to regulate, directly or indirectly, the operation of risk retention groups chartered in another state," Circuit Court Judge Gerard Lynch wrote in his opinion upholding the District Court judgment.

"The dispute in question arose from an attempt to enforce a direct action statute against Allied Professionals Insurance Company, A Risk Retention Group (APIC)," said APIC attorney Rick Cigel. "It was the position of APIC that under the Liability Risk Retention Act, a state such as New York cannot apply such a statute to a risk retention group that is not domiciled in New York. APIC is domiciled in Arizona but has over 4,000 insureds in New York."

Michael Schroeder, Chairman of APIC, said: "We are gratified by the Court's ruling. A number of states attempt to impose unreasonable and illegal forms of regulation on risk retention groups. This resounding court decision at the appellate level confirms that this attempt to apply state law to a risk retention group licensed in another state is illegal."

The National Risk Retention Association (NRRA) had filed an Amicus Brief in support of APIC before the District Court. Sanford Elsass, Chairman of NRRA, hailed the Circuit Court decision, stating that, "This decision is a huge win for the industry. It can be used in other cases involving existing state laws, proposed legislation, and regulatory violations. This ruling is an unqualified affirmation of the preemption provisions of the LRRA that allow risk retention groups to do business nationally with only limited regulation by states other than the state in which they are licensed."

In the underlying case, APIC denied renewal of coverage to a chiropractor insured who failed to disclose that he had sexually molested one of his patients. The patient secured a judgment against the chiropractor and then proceeded to file suit against APIC under the New York State direct action statute. The District Court and the Circuit Court of Appeals have now ruled that under the federal law the direct action statute cannot be applied to a risk retention group.