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April 2013

The Liability Risk Retention Act Preempted a Nevada Order Prohibiting a Risk Retention Group from Writing "First Dollar" Automobile Liability Policies in the State

On April 8, the United States Court of Appeals for the Ninth Circuit affirmed the Nevada District Court’s grant of declaratory and injunctive relief for Plaintiff Alliance of Nonprofits for Insurance, Risk Retention Group (“Plaintiff”) because the Order by the Nevada Commissioner of Insurance prohibiting Plaintiff from writing “first dollar” liability policies in the state was preempted by the Liability Risk Retention Act (LRRA).  However, the Court vacated the attorneys’ fee award in favor of Plaintiff because the LRRA did not “unambiguously confer a right to be free from state law” enforceable under 42 U.S.C. § 1983.

Plaintiff registered with the Division of Insurance of Nevada’s Department of Business and Industry in 2001 in order to provide liability insurance in the state.  Plaintiff received a Certificate of Registration but did not obtain a Certificate of Authority.  Plaintiff sold what is known as “first dollar” automobile liability coverage, which is coverage complying with “financial responsibility minimums.”  These policies are coined “first dollar” liability policies because “the first dollars paid out on a claim (up to the coverage limits) are paid out under the policy.”

Nevada law requires automobile owners to acquire “first dollar” liability coverage from an authorized provider.  An authorized provider is an insurer with a Certificate of Authority from the Nevada Commissioner of Insurance.  Since Plaintiff did not have a Certificate of Authority, automobile owners with policies issued by Plaintiff were denied vehicle registrations by the Department of Motor Vehicles. 

Following a hearing before Nevada Insurance Commissioner, the Commissioner Scott Kipper (“Kipper”) entered an order prohibiting Plaintiff from writing “first dollar” liability policies in the state because Plaintiff was an unauthorized insurer since it lacked a Certificate of Authority. 

Plaintiff filed suit against Kipper in the United States District Court for the District of Nevada and sought declaratory and injunctive relief pursuant to 42 U.S.C. § 1983.  The District Court granted summary judgment to Plaintiff because Nevada law was preempted by the Supremacy Clause of the Constitution.  Plaintiff and its amicus, the National Risk Retention Association, were awarded their fees and costs.

Kipper appealed.  Kipper argued that the LRRA did not preempt state law and, in the alternative, even if Nevada law was preempted, Plaintiff was not entitled to attorneys’ fees.

First, the Court of Appeals evaluated the LRRA.  Citing to the LRRA’s language, the Court found that the LRRA “broadly” preempts “any State . . . order to the extent that such . . . order would . . . make unlawful, or regulate, directly or indirectly, the operation of [a risk retention group or RRG].”  Since the Order made it “unlawful” for Plaintiff, an RRG, to operate in the State, the Order was “plainly” preempted by the LRRA.  As a result, the Court found that the Commissioner’s Order was preempted unless it fell within an exception to the LRRA.

Second, the Court addressed one exception to the LRRA.  Section 3905(d) of the LRRA excludes state laws that “specify acceptable means of demonstrating financial responsibility where the State has required a demonstration of financial responsibility as a condition for obtaining a license or permit to undertake specified activities.”  15 U.S.C. § 3905(d).  The Court found that the Order was not within the scope of section 3905(d) because this section is subject to the LRRA’s anti-discrimination section. 

The Court then analyzed the LRRA anti-discrimination section relying on its test in National Warranty Insurance Co. v. Greenfield, 214 F.3d 1073 (9th Cir. 2000).  In Greenfield, the Court stated that an insurer can prove discrimination if it can show that a law “differentiates between insurance providers ‘without an acceptable justification.’”  A law is “justified” by “the desire to ‘protect those who would benefit from the purchase of insurance.’”  

Relying on its holding in Greenfield, the Court held that the Order discriminated against Plaintiff because it differentiated between Plaintiff and other insurers “without an acceptable justification.”  The Court found that the only justification given for the prohibition against writing “first dollar” policies was that Plaintiff lacked a Certificate of Authority. 

In sum, the Court found Kipper’s arguments unpersuasive.  First, the Court stated that its analysis in Greenfield was binding.  Second, the Court rejected Kipper’s claim that the state statutory scheme was not discriminatory.  The Court found that the state law at issue was not the statutory scheme, but the Order issued by the Commissioner.  Third, the Court rejected Kipper’s claim that the discrimination was justified.  A Certificate of Authority did not protect those who would benefit from the purchase of insurance.  RRGs without a Certificate of Authority must also comply with the Commissioner’s requirements for oversight.  The LRRA also allows states to protect the interests of those who benefit from the purchase of insurance by other methods.  As a result, the Court found that Kipper’s justification for treating Plaintiff differently was unjustified.

Next, the Court addressed the award of attorneys’ fees under 42 U.S.C. § 1988.  Kipper argued that Plaintiff was not entitled to attorneys’ fees because preemption under the LRRA was not a “right” enforceable under 42 U.S.C. § 1983.  The Ninth Circuit agreed.  The Court found that “Congress enacted the LRRA to increase the supply of commercial liability insurance nationwide – not to confer rights on individual RRGs.”  Therefore, the lawsuit was not an action enforcing a right under 42 U.S.C. § 1983. 

Lastly, the Court analyzed whether the District Court committed reversible error by granting motions in violation of its own local rules.  The Court found that the District Court did not commit reversible error because the errors were “slight,” “unimportant,” and therefore did not affect Kipper’s substantial rights.

Accordingly, the Court affirmed the District Court’s entry of declaratory and injunctive relief for Plaintiff, but vacated the award of attorneys’ fees.

Please click here for the opinion. 

This opinion is not final.  It may be modified on rehearing or review may be granted by the United States Supreme Court.  These events would render the opinion unavailable for use as legal authority. 

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

Insurance

Christopher R. Wagner


Insurance