Wadsworth v. Allied Professionals Insurance

13-1163-cv
Wadsworth v. Allied Professionals
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2013
(Argued: February 3, 2014 Decided: April 4, 2014)
Docket No. 13-1163-cv
RENATA WADSWORTH,
Plaintiff - Appellant,
— v. —
ALLIED PROFESSIONALS INSURANCE COMPANY, A RISK RETENTION GROUP, INC.,
Defendant - Appellee.
B e f o r e:
LEVAL, CALABRESI and LYNCH, Circuit Judges.
__________________
Plaintiff-appellant Renata Wadsworth sued defendant-appellee Allied
Professionals Insurance Company (“APIC”), a nondomiciliary risk retention
1
group, under New York’s direct action statute, N.Y. Ins. Law § 3420, to recover
an unsatisfied state court judgment that had been entered against APIC’s
insured. The United States District Court for the Northern District of New York
(Norman A. Mordue, Judge) granted summary judgment to APIC finding that
any construction of New York law that would impose § 3420's direct action
requirement on foreign risk retention groups was preempted by the Liability Risk
Retention Act of 1986 (“LRRA”), 15 U.S.C. § 3901, et seq. We hold that the LRRA
preempts the application § 3420 to foreign risk retention groups.
AFFIRMED.
MICHAEL C. PEREHINEC JR., Holmberg, Galbraith & Miller, LLP, Ithaca,
New York, for Plaintiff-Appellant Renata Wadsworth.
RICK A. CIGEL (Michael B. Kadish, on the brief), The Cigel Law Group,
P.C., Los Angeles, California, for Defendant-Appellee Allied
Professionals Insurance Company, a Risk Retention Group, Inc.
Jeffrey B. Randolph, Law Offices of Jeffrey Randolph, Glen Rock, New
Jersey, for Amicus Curiae National Risk Retention Association.
2
GERARD E. LYNCH, Circuit Judge:
The federal Liability Risk Retention Act of 1986, 15 U.S.C. § 3901, et seq.
(“the LRRA” or “the Act”), 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. Id. § 3902(a). A provision of
New York’s insurance law requires that any insurance policy issued in that state
contain a provision permitting, under certain circumstances, an injured party
with an unsatisfied judgment to maintain a direct action against her tortfeasor’s
insurer for the satisfaction of that judgment. N.Y. Ins. Law § 3420(a)(2). This case
requires us to determine whether the LRRA preempts the application of
§ 3420(a)(2) to a risk retention group that is domiciled in Arizona, but issues
insurance policies in New York. We hold that it does.
BACKGROUND
In 2005, plaintiff-appellant Renata Wadsworth sought treatment from Dr.
John Ziegler, an Ithaca, New York chiropractor. During her four visits with him,
Ziegler repeatedly touched Wadsworth in an inappropriate, sexual manner
without her consent. Wadsworth reported Ziegler’s conduct to local authorities,
3
who arrested him. Ziegler later pled guilty to third-degree assault for his actions
against Wadsworth.
Wadsworth subsequently filed a civil action against Ziegler seeking
damages for emotional injury and lost income stemming from the sexual assault.
Following a bench trial, the Supreme Court of Tompkins County, New York (M.
John Sherman, Judge), entered a $101,175 judgment in Wadsworth’s favor, which
Ziegler failed to satisfy. Invoking N.Y. Ins. Law § 3420, and satisfying the
conditions precedent of that provision, see infra p. 12, Wadsworth then sued
defendant-appellee Allied Professionals Insurance Company (“APIC”), which
was Ziegler’s insurance carrier at the time of the sexual assault. APIC is
registered in New York as a federal risk retention group,1 and is recognized as
such by the New York Department of Financial Services. Domiciled in Arizona,
APIC has over 4,000 insureds in New York, including acupuncturists,
chiropractors, and massage therapists.
1
A risk retention group is a liability insurance company owned and operated by
its members, and those members are its insureds. Risk retention groups offer
commercial liability insurance for the mutual benefit of those owner-insureds,
who must be exposed to similar risks and be members of the same industry. See
15 U.S.C. § 3901(a)(4).
4
APIC removed the case to the United States District Court for the Northern
District of New York, and the parties cross-moved for summary judgment. In a
Memorandum-Decision and Order, the district court (Norman A. Mordue, Judge)
granted APIC’s motion and denied Wadsworth’s, concluding that any
construction of New York law that would impose § 3420's direct action
requirement on foreign risk retention groups was preempted by the LRRA.2
Wadsworth timely appealed, and upon de novo review of the district
court’s grant of summary judgment, Swatch Grp. Mgmt. Servs. Ltd. v. Bloomberg
L.P., 742 F.3d 17, 24 (2d Cir. 2014), we now affirm.
DISCUSSION
Before turning to the preemption analysis, we briefly outline the history
and structure of the various statutory schemes implicated by this case.
2
The district court had earlier denied both motions with leave to renew,
concluding that on the record then before it, it was “unable to determine with
specificity how section 3420(a)(2) of the New York Insurance Law would affect
the operation of risk retention groups and whether it would have sufficient
impact on their operation to constitute direct or indirect regulation thereof.” J.A.
509. The parties then filed renewed motions with additional supporting
materials.
5
I. The Liability Risk Retention Act of 19863
Under the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., the business of
insurance is generally regulated by the states rather than the federal government.
In the late 1970s, however, Congress perceived a seemingly unprecedented crisis
in the insurance markets, during which many businesses were unable to obtain
product liability coverage at any cost. And when businesses could obtain
coverage, their options were unpalatable. Premiums often amounted to as much
as six percent of gross sales, and insurance rates increased manyfold within a
single year. See Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1463 (11th Cir.
1985).
After several years of study, Congress enacted the Product Liability Risk
Retention Act of 1981 (“the 1981 Act”),4 which was meant to be a national
response to the crisis. As relevant here, the 1981 Act authorized persons or
businesses with similar or related liability exposure to form “risk retention
3
We have previously discussed the history of the LRRA in two opinions. See
Preferred Physicians Mut. Risk Retention Grp. v. Pataki, 85 F.3d 913, 914 (2d Cir.
1996)[hereinafter “Preferred Physicians”]; Ins. Co. of Pa. v. Corcoran, 850 F.2d 88,
89-90 (2d Cir. 1988).
4
For an exhaustive history of the 1981 Act, see Home Warranty Corp., 777 F.2d at
1456-79.
6
groups” for the purpose of self-insuring. 15 U.S.C. § 3901(a)(4). The 1981 Act
only applied to product liability and completed operations insurance, but
following additional disturbances in the interstate insurance markets, in 1986,
Congress enacted the LRRA, and extended the 1981 Act to all commercial liability
insurance. See 15 U.S.C. §§ 3901-3906 (1982 & Supp. IV 1986); Preferred
Physicians, 85 F.3d at 914. At the time of the LRRA’s passage, however, most
states, exercising their traditional power over the business of insurance, did not
permit such risk retention groups. Preferred Physicians, 85 F.3d at 914.
Rather than enacting comprehensive federal regulation of risk retention
groups, see Corcoran, 850 F.2d at 91, Congress enacted a reticulated structure
under which risk retention groups are subject to a tripartite scheme of concurrent
federal and state regulation. First, at the federal level, the Act preempts “any
State law, rule, regulation, or order to the extent that such law, rule, regulation or
order would . . . make unlawful, or regulate, directly or indirectly, the operation
of a risk retention group,” 15 U.S.C. § 3902(a)(1), language that we have
previously described as “expansive,” Preferred Physicians, 85 F.3d at 915, and
“sweeping,” Corcoran, 850 F.2d at 91.
That preemption is not universal. The second part of the scheme secures
7
the authority of the domiciliary, or chartering, state to “regulate the formation
and operation” of risk retention groups. 15 U.S.C. § 3902(a)(1). Federal
preemption, therefore, functions not in aid of a comprehensive federal regulatory
scheme, but rather to allow a risk retention group to be regulated by the state in
which it is chartered, and to preempt most ordinary forms of regulation by the
other states in which it operates. Thus, the Act “provides for broad preemption
of a non-domiciliary state’s licensing and regulatory laws.” Fla., Dep’t of Ins. v.
Nat’l Amusement Purchasing Grp., Inc., 905 F.2d 361, 363-64 (11th Cir. 1990).
Similarly, the Act prohibits states from enacting regulations of any kind that
discriminate against risk retention groups or their members, but does not exempt
risk retention groups from laws that are generally applicable to persons or
corporations. 15 U.S.C. § 3902(a)(4).
While the Act assigns the primary regulatory supervision of risk retention
groups to the single state of domicile, the third part of its regulatory structure
“explicitly preserves for [nondomiciliary] states several very important powers.”
Fla., Dep’t of Ins., 905 F.2d at 364. The Act specifically enumerates those reserved
powers in subsequent subsections, with many powers of the nondomiciliary state
being concurrent with those of the chartering state. See 15 U.S.C.
8
§§ 3902(a)(1)(A)-(I), 3905(d). In particular, subject to the Act’s anti-discrimination
provisions, nondomiciliary states have the authority to specify acceptable means
for risk retention groups to demonstrate “financial responsibility” as a condition
for granting a risk retention group a license or permit to undertake specified
activities within the state’s borders. 15 U.S.C. § 3905(d). Additionally, any state
may, after an investigation of the group’s financial condition, commence a
delinquency proceeding. 15 U.S.C. § 3902(a)(1)(F)(i).5 Any state may also require
a risk retention group to comply with any order resulting from such an
investigation, or from a voluntary dissolution proceeding. 15 U.S.C.
§ 3902(a)(1)(F)(i)-(ii). In short, as compared to the near plenary authority it
reserves to the chartering state, the Act sharply limits the secondary regulatory
authority of nondomiciliary states over risk retention groups to specified, if
significant, spheres.
5
Underscoring that primary regulatory and enforcement authority rests with the
chartering state, a nondomiciliary state may not initiate an investigation of a risk
retention group unless the chartering state declines to do so. 15 U.S.C.
§ 3902(a)(1)(E)(i)-(ii).
9
II. New York Insurance Law
A. General Provisions
New York Insurance Law, as it pertains to risk retention groups, largely
mirrors the structure of federal law. Article 59 of the New York Insurance Law
expressly recognizes the limits imposed by the LRRA, noting that its purpose is
“to regulate the formation and/or operation . . . of risk retention groups . . .
formed pursuant to the provisions of the federal Liability Risk Retention Act of
1986, to the extent permitted by such law.” N.Y. Ins. Law § 5901 (internal citation
omitted). In keeping with those limits, New York cleanly distinguishes between
the broad regulatory authority it exercises over those risk retention groups that
seek to be chartered in New York, and the more limited regulations it is
permitted to adopt with respect to nondomiciliary risk retention groups. Section
5903, entitled “Domestic risk retention groups,” commands that such groups
“shall comply with all of the laws, regulations and orders applicable to
property/casualty insurers organized and licensed in this state,” id. § 5903(a)
(emphasis added). In contrast, § 5904, applicable to “[r]isk retention groups not
chartered in [New York],” requires that such groups “comply with the laws of
[New York]” set out in ten subsequent subsections, largely tracking the powers
10
reserved to nondomiciliary states by 15 U.S.C. § 3902(a)(1)(A)-(I). Those ten
subsections do not include the provisions of New York law that are at issue in
this case, N.Y. Ins. Law §§ 3420(a)(2) & (b)(1), or indeed any part of § 3420.
B. New York Insurance Law § 3420
Section 3420(a)(2), in its current form, was codified in 1918 and has
remained unchanged ever since. See Richards v. Select Ins. Co., 40 F. Supp. 2d
163, 168 (S.D.N.Y. 1999).6 In derogation of the common law, § 3420 vests a
substantive right in an injured party against a tortfeasor’s insurer. See State
Trading Corp. of India Ltd. v. Assuranceforeningen Skuld, 921 F.2d 409, 416 (2d
Cir. 1990) (noting that a direct action statute is substantive); accord Lang v.
Hanover Ins. Co., 3 N.Y.3d 350, 354 (2004) (noting that § 3420(a)(2) remedied
“inequity” of common law “by creating a limited statutory cause of action on
behalf of injured parties directly against insurers”).
Section 3420 requires that every insurance policy issued in New York
contain, among other required provisions, a provision “that the insolvency or
bankruptcy of the person insured, or the insolvency of the insured’s estate, shall
6
A previous version of the direct action statute permitted the injured party to sue
the insurer before obtaining a judgment against the insured. See Richards, 40 F.
Supp. 2d at 168, citing 1917 N.Y. Laws ch. 524.
11
not release the insurer from the payment of damages for injury sustained or loss
occasioned during the life of and within the coverage of such policy or contract.”
N.Y. Ins. Law § 3420(a)(1). It further authorizes “any person who . . . has
obtained a judgment against the insured . . . for damages for injury sustained or
loss or damage occasioned during the life of the policy or contract” to maintain
an action against the insurer “[s]ubject to the limitations and conditions of
paragraph two of subsection (a) of this section.” Id. § 3420(b)(1). Subsection
(a)(2) states: “in case judgment against the insured . . . shall remain unsatisfied at
the expiration of thirty days from the serving of notice of entry of judgment upon
the attorney for the insured, or upon the insured, and upon the insurer, then an
action may . . . be maintained against the insurer.” Id. § 3420(a)(2).
In short, § 3420 grants an injured party a right to sue the tortfeasor’s
insurer, but only under limited circumstances – the injured party must first
obtain a judgment against the tortfeasor, serve the insurance company with a
copy of the judgment, and await payment for 30 days. Compliance with those
requirements is a condition precedent to a direct action against the insurance
company. Lang, 3 N.Y.3d at 355.
12
Given the foregoing, there is a strong argument that as a matter of New
York law, § 3420 simply does not apply to foreign risk retention groups. Section
5904 lists the specific laws and requirements with which foreign risk retention
groups must comply; that list does not include any portion of § 3420. Section
5904, moreover, largely mirrors 15 U.S.C § 3902(a), which explicitly reserves
specific regulatory authority of the states over nondomiciliary risk retention
groups; those sections themselves do not require the inclusion of a direct action
provision in such insurance contracts or expressly authorize nonchartering states
to do so. Because the declared intention of New York is to regulate risk retention
groups to the extent permitted by federal law, N.Y. Ins. Law § 5901, we are
inclined to believe that New York did not intend § 3420 to apply to risk retention
groups chartered in another state.
We are unaware, however, of any decision of a New York court so holding,
and we refrain from relying unnecessarily on that ground. The question
presented by this appeal, and to which we now turn, is whether the LRRA
preempts application of § 3420(a)(2) to foreign risk retention groups. We hold
that any construction of New York law that would impose § 3420's direct action
requirements on foreign risk retention groups is preempted by § 3902(a)(1) of the
LRRA.
13
III. Preemptive Effect of the LRRA
A. General Preemption Principles
The Supremacy Clause provides that federal law “shall be the supreme
Law of the Land; and the Judges in every State shall be bound thereby, any Thing
in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S.
Const. art. VI, cl. 2. From that constitutional principle, it follows, that when
acting within the scope of its enumerated powers, Congress may preempt state
law. In re MTBE Prods. Liability Litig., 725 F.3d 65, 96 (2d Cir. 2013). Despite its
importance, the preemption power is “sensitive,” id., and when “Congress has
legislated in a field which the States have traditionally occupied, we start with
the assumption that the historic police powers of the States were not to be
superseded by the Federal Act unless that was the clear and manifest purpose of
Congress,” Wyeth v. Levine, 555 U.S. 555, 565 (2009) (internal quotation marks
and alterations omitted). Further, “state laws enacted ‘for the purpose of
regulating the business of insurance’ do not yield to conflicting federal statutes
unless a federal statute specifically requires otherwise.” United States Dep’t of
Treasury v. Fabe, 508 U.S. 491, 507 (1993), quoting 15 U.S.C. § 1012(b).
14
B. Language and Structure of the LRRA
Even given the general presumption, specifically reinforced by the
McCarran-Ferguson Act,7 that insurance regulation is generally left to the states,
the language and purpose of the LRRA clearly announce Congress’s explicit
intention to preempt state laws regulating risk retention groups. Section 3902 of
the LRRA provides, in relevant part, that
(a) Except as provided in this section, a risk retention
group is exempt from any State law, rule, regulation, or
order to the extent that such law, rule, regulation, or
order would –
(1) make unlawful, or regulate, directly or
indirectly, the operation of a risk retention
group . . . .
15 U.S.C. § 3902(a)(1) (emphasis added).8
7
“Congress hereby declares that the continued regulation and taxation by the
several States of the business of insurance is in the public interest, and that
silence on the part of the Congress shall not be construed to impose any barrier to
the regulation or taxation of [insurance] by the several States.” 15 U.S.C. § 1011.
8
The section goes on additionally to preempt state legislation that would
(2) require or permit a risk retention group to
participate in any insurance insolvency guaranty
association to which an insurer licensed in the State is
required to belong;
(3) require any insurance policy issued to a risk
15
Section 3902(a)(1) then goes on to provide general authority for “the
jurisdiction in which it is chartered [to] regulate the formation and operation of
such a group.” Id. In stark contrast, the Act authorizes nonchartering states to
require risk retention groups to comply only with certain basic registration,
capitalization, and taxing requirements, as well as various claim settlement and
fraudulent practice laws. See 15 U.S.C. § 3902(a)(1)(A)-(I).
It is undisputed that APIC is a risk retention group formed and functioning
under the LRRA and that it is domiciled in Arizona. Therefore, § 3902(a)(1),
insofar as it relates to the powers of nondomiciliary states, governs the authority
of New York to impose regulations on APIC’s operations in New York. Further,
Wadsworth does not argue that New York’s direct action provision falls within
the ambit of the specific exceptions from preemption set forth in subsections
retention group or any member of the group to be
countersigned by an insurance agent or broker residing
in that State; or
(4) otherwise, discriminate against a risk retention
group or any of its members, except that nothing in this
section shall be construed to affect the applicability of
State laws generally applicable to persons or
corporations.
15 U.S.C. § 3902(a)(2)-(4).
16
3902(a)(1)(A)-(I).9 Instead, she argues for a narrow construction of the
preemption provision itself. Reasoning that Congress was concerned with
“discrimination by the states against alternative insurance providers,”
Wadsworth contends that Congress’s main purpose in passing the Act “was to
ensure further state discrimination would not occur.” Appellant Br. 15. On this
reading of the LRRA, N.Y. Ins. Law § 3420 would be a generally applicable,
nondiscriminatory statute that does not conflict with or frustrate 15 U.S.C.
§ 3902(a)(1), and is therefore not preempted.
The LRRA’s language and structure, however, as well as our prior
decisions, render Wadsworth’s reading of the statute untenable. Plainly,
§§ 3902(a)(2) and (3) are not directed toward placing risk retention groups “on
equal footing” with traditional insurers. To the contrary, both of those provisions
excuse risk retention groups from certain requirements that states may and
typically do impose upon insurers licensed within that state. Moreover,
9
Such an argument would be implausible. The highly specific and limited
exceptions to preemption under that provision support the conclusion that if
Congress had intended to exempt direct action statutes from preemption, it
would have said so. See United States v. Smith, 499 U.S. 160, 167 (1991) (“Where
Congress explicitly enumerates certain exceptions to a general prohibition,
additional exceptions are not to be implied, in the absence of evidence of a
contrary legislative intent.”) (internal quotation marks omitted).
17
§ 3902(a)(4) expressly prohibits discrimination against risk retention groups. If
the entire purpose of the preemption provision was solely to invalidate
discriminatory state laws, Congress could have enacted a far less complex statute
that simply adopted the language of subsection (a)(4) without more, and thus
prohibited all state laws, and only those, that discriminate against risk retention
groups. Instead, however, Congress specifically preempted “any” law, rule, or
regulation by a nondomiciliary state that would “regulate, directly or indirectly,
the operation of a risk retention group.” 15 U.S.C. § 3902(a)(1) (emphasis added).
A clearer prohibition would be hard to devise. The express preemption of any
regulation simply cannot be read as preemption only of discriminatory
regulation.10
For these reasons, we have read the LRRA’s preemption language broadly.
In enacting the LRRA, we have held, Congress desired “to decrease insurance
10
Wadsworth argues that inclusion of the word “otherwise” in § 3902(a)(4)
implies that the provisions that precede it must also be limited to regulation that
discriminates. But such a reading fails. Wadsworth does not explain, for
example, how § 3902(a)(2), which would also be affected by her reading, could
coherently be limited only to discriminatory laws; that provision expressly
prohibits subjecting risk retention groups to a requirement identical to that
imposed on other insurers. The weak implication from the word “otherwise,” in
any event, cannot trump the broad express language of § 3902(a)(2)’s prohibition
of any regulation of risk retention groups by nondomiciliary states.
18
rates and increase the availability of coverage by promoting greater competition
within the insurance industry.” Preferred Physicians, 85 F.3d at 914, citing H.R.
Rep. No. 99-865, 1986 U.S.C.C.A.N. 5303, 5304-06.11 “[T]he legislative history of
the Act makes clear that Congress intended to exempt [risk retention groups]
broadly from state law ‘requirements that make it difficult for risk retention
groups to form or to operate on a multi-state basis.’” Id. at 915-16, citing 1986
U.S.C.C.A.N. 5303, 5305.12 An expansive reading of the preemption language
furthers the Act’s purpose. Id. at 915.
11
See also Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062, 1067 (7th Cir. 1998)
(“Congress enacted the PLRRA (and, later, the LRRA) because it felt that the
tangle of myriad state regulations choked off RRGs . . . .”); Mears Transp. Grp. v.
State of Fla., 34 F.3d 1013, 1017 (11th Cir. 1994) (noting that purpose of
preemption provisions was to facilitate “the efficient operation of risk retention
groups by eliminating the need for compliance with numerous non-chartering
state statutes that, in the aggregate, would thwart the interstate operation [of]
product liability risk retention groups”), quoting H.R. Rep. No. 190, 97th Cong.
1st Sess. 12 (1981), reprinted in 1981 U.S.C.C.A.N. 1432, 1441.
12
Our sister circuits have similarly recognized the breadth of the LRRA’s
preemption provisions. See, e.g., Nat’l Warranty Ins. Co. RRG v. Greenfield, 214
F.3d 1073, 1077 (9th Cir. 2000) (“[Section] 3902(a) plainly preempts most
regulation of RRGs by non-chartering states.”); Ophthalmic Mut., 143 F.3d at
1067 (finding preemptive language of § 3902(a) “explicit”); Nat’l Amusement
Purchasing Grp., Inc., 905 F.2d at 363 (noting that Act’s “sweeping preemption
language,” largely preempts “the authority of non-domiciliary states to license
and regulate risk retention groups”).
19
C. Effects of Applying § 3420(a)(2) to Foreign Risk Retention Groups
The effects that application of N.Y. Ins. Law § 3420(a)(2) would have on
nondomiciliary risk retention groups further buttress our conclusion. That
section, which is in derogation of the common law, allows an injured party with
an unsatisfied judgment against an insured party to sue the insurer for
satisfaction of the judgment in some circumstances. Cont’l Ins. Co v. Atl. Cas.
Ins. Co., 603 F.3d 169, 174 (2d Cir. 2010); Lang v. Hanover Ins. Co., 3 N.Y.3d 350,
353-54 (2004).13 “The effect of the statute is to give to the injured claimant a cause
13
Section 3420(a) requires all New Your insurance contracts to “contain[] in
substance the following provision or provisions that are equally or more
favorable to the insured and to judgment creditors so far as such provisions
relate to judgment creditors . . .
(2) A provision that in case judgment against the
insured . . . in an action brought to recover damages for
injury sustained or loss or damage occasioned during
the life of the policy or contract shall remain unsatisfied
at the expiration of thirty days from the serving of
notice of entry of judgment upon the attorney for the
insured, or upon the insured, and upon the insurer,
then an action may . . . be maintained against the insurer
under the terms of the policy or contract for the amount
of such judgment not exceeding the amount of the
applicable limit of coverage under such policy or
contract.
N.Y. Ins. Law § 3420(a). Section 3420 also contains provisions regarding notice,
insolvency or bankruptcy of the insured, and the insurer’s right or obligation to
bring a declaratory judgment action.
20
of action against an insurer for the same relief that would be due to a solvent
principal seeking indemnity and reimbursement after the judgment had been
satisfied.” Lang, 3 N.Y.3d at 354-55 (internal quotation marks and alteration
omitted). Although the statute does not increase the amount of the insurer’s
liabilities, the rights of the injured party are independent of the rights of the
insured, and in some circumstances, more favorable. See Cont’l Ins., 603 F.3d at
176 (“Th[e] separate standard, used to determine the reasonableness of the
injured party’s notice, is more lenient than the standard for the insured party’s
notice.”).
Application of those provisions to APIC or to any other foreign risk
retention group would undoubtedly “regulate, directly or indirectly,” those
groups by subjecting them to lawsuits filed in New York by claimants who are
not parties to APIC’s contracts with insureds. 15 U.S.C. § 3902(a)(1). The cost of
litigation might well result in higher attorneys’ fees, costs, and potential
recoveries. Moreover, § 3420(a)(2) is not simply a rule of civil procedure. It
specifically governs the content of insurance policies, requiring insurers to place
in their New York contracts a provision that is not contemplated by the LRRA,
and that is not required by all other states. Application of the statute would
21
therefore make it difficult for a foreign risk retention group to maintain uniform
underwriting, administration, claims handling, and dispute resolution processes.
A substantial portion of state insurance regulation consists of such standardized
requirements for the content of insurance policies, which vary from state to state.
A major benefit extended to risk retention groups by the LRRA is the ability to
operate on a nationwide basis according to the requirements of the law of a single
state, without being compelled to tailor their policies to the specific requirements
of every state in which they do business. Requiring compliance with various
state regulations governing the content of insurance policies would, in the
aggregate, thwart the efficient interstate operation of risk retention groups. See
Mears Transp. Grp., 34 F.3d at 1017.
Wadsworth relies on two decisions, National Home Insurance Co. v. King,
291 F. Supp. 2d 518 (E.D. Ky. 2003), and Sturgeon v. Allied Professionals
Insurance Co., 344 S.W.3d 205 (Mo. Ct. App. 2011), neither binding on us, to
support her argument that application of § 3420(a)(2) would not affect the
interstate operation of risk retention groups.14 In both of those cases, the state
14
Wadsworth also cites an opinion of the New York General Counsel that
determined that nondomiciliary risk retention groups offering medical
malpractice policies have claim reporting obligations under N.Y. Ins. Law
22
statutes at issue proscribed mandatory arbitration of disputes arising from
insurance contracts. See Nat’l Home, 291 F. Supp. 2d at 524, quoting Ky. Rev.
Stat. Ann. § 417.050; Sturgeon, 344 S.W.3d at 210, quoting Mo. Rev. Stat.
§ 435.350. In both cases, the courts found that as a general matter, the Federal
Arbitration Act, 9 U.S.C. § 2, preempted state anti-arbitration laws. Both courts
also found, however, that the McCarran-Ferguson Act “reverse preempted” the
anti-arbitration provisions. Nat’l Home, 291 F. Supp. 2d at 528; Sturgeon, 344
S.W.3d at 212.
The McCarran-Ferguson Act precludes the application of a federal statute
in the face of state law “enacted . . . for the purpose of regulating the business of
insurance,” if the federal measure does not “specifically relat[e] to the business of
§ 315(b)(1). See N.Y. Gen. Counsel Op. 7-26-2007, No. 2. That statutory
provision, which requires each insurance company engaged in issuing
professional medical malpractice insurance to file quarterly reports on all claims
for medical malpractice made against any of its insureds, is quite different from
§ 3420(a)(2). The General Counsel’s opinion did not consider the application of
§ 3420(a)(2) to nondomiciliary risk retention groups. We express no views on the
merits of that opinion which, in any event, does not bind this Court. We note,
however, that in light of the retained authority of nondomiciliary states to
monitor the financial condition of nondomiciliary risk retention groups and to
require those groups to comply with state regulation regarding unfair claim
settlement practices, 15 U.S.C. §§ 3902(a)(1)(A), (G), it is doubtful that such
quarterly reporting requirements are preempted as “regulating, directly or
indirectly, the operation of a risk retention group,” id. § 3902(a)(1).
23
insurance,” and would “invalidate, impair, or supersede” the state’s law. See
Fabe, 508 U.S. at 500-01. The courts Wadsworth relies upon found all three of
those considerations satisfied because the FAA is not a statute that specifically
relates to the business of insurance, and therefore did not preempt statute anti-
arbitration laws to the extent that such provisions were enacted to regulate the
business of insurance.
To that extent, the National Home and Sturgeon decisions are inapposite.
Both opinions further ruled, however, that the LRRA did not preempt the state
law rules in question. Insofar as those decisions relied on an interpretation of the
LRRA that differs from ours, we disagree. The LRRA is, without question, a
federal statute that specifically relates to the business of insurance. Section
3420(a)(2), which, to reiterate, requires any insurance policy issued in the state of
New York to contain a provision permitting a direct action against a tortfeasor’s
insurer, was undoubtedly enacted to regulate the business of insurance. In
sweeping preemption language, subject to certain limited exceptions, Congress
chose to limit the power of nondomiciliary states to regulate risk retention
groups. The McCarran-Ferguson Act does not save § 3420(a)(2) from the LRRA’s
preemptive sweep.
24
CONCLUSION
We conclude that any construction of N.Y. Ins. Law § 3420(a)(2) that
permits its application to risk retention groups chartered in another state is
preempted by the LRRA. The judgment of the district court is AFFIRMED.
25