Preferred Physicians Mut. Risk Retention Group v. Pataki

• Decision Date: 30 May 1996
• Docket Number: Nos. 1598,D,2198,s. 1598
• Parties: PREFERRED PHYSICIANS MUTUAL RISK RETENTION GROUP and U.S. Physicians Mutual Risk Retention Group, Plaintiffs-Appellees, v. George E. PATAKI, Governor of the State of New York, Dr. Barbara De Buono, Commissioner of Health of the State of New York and Edward J. Muhl, Superintendent of Insurance of the State of New York, Defendants-Appellants, Physicians' Reciprocal Insurers, Medical Liability Mutual Insurance Company and Catholic Medical Center of Brooklyn & Queens, Inc., Defendants. ockets 94-9224, 94-9322.
• Court: U.S. Court of Appeals — Second Circuit

Page 913

85 F.3d 913

PREFERRED PHYSICIANS MUTUAL RISK RETENTION GROUP and U.S.

Physicians Mutual Risk Retention Group, Plaintiffs-Appellees, v. George E. PATAKI, Governor of the State of New York, Dr.

Barbara De Buono, Commissioner of Health of the State of New

York and Edward J. Muhl, Superintendent of Insurance of the

State of New York, Defendants-Appellants,

Physicians' Reciprocal Insurers, Medical Liability Mutual

Insurance Company and Catholic Medical Center of

Brooklyn & Queens, Inc., Defendants.

Nos. 1598, 2198, Dockets 94-9224, 94-9322.

United States Court of Appeals, Second Circuit.

Argued July 21, 1995.

Decided May 30, 1996.

Phyllis H. Weisberg, New York City (Kurzman Karelsen & Frank), for Plaintiffs-Appellees.

August L. Fietkau, Assistant Attorney General, New York City (Dennis C. Vacco, Attorney General of the State of New York and Frederic L. Lieberman, Assistant Attorney General, Jon G. Rothblatt, Associate Attorney, New York State Insurance Department, of counsel), for Defendants-Appellants.

Philip C. Olsson, Washington, D.C. (Olsson, Frank and Weeda, on the brief), for Amicus National Risk Retention Association.

Ellen Dollase Wilcox, Kansas City, Missouri, for Amicus National Association of Insurance Commissioners.

Before WINTER, LEVAL, and CALABRESI, Circuit Judges.

LEVAL, Circuit Judge:

Preferred Physicians Mutual Risk Retention Group ("Preferred"), plaintiff-appellee, is a risk retention group ("RRG") chartered under Missouri law, which offers insurance to doctors practicing in the State of New York. ¹ Preferred is not licensed by the State of New York's Commissioner of Insurance. It brought this action to challenge the lawfulness of New York's Excess Insurance Law ("EIL"), ² because it gives a commercial advantage to insurers who are licensed in New York. Plaintiff contends principally that the federal Liability Risk Retention Act ("LRRA"), 15 U.S.C. § 3901-04, by exempting RRGs from most regulation by non-domiciliary states and barring discrimination against them, protects it from the injurious effects of the EIL. Judge Leisure granted summary judgment in plaintiff's favor. For the reasons set forth below, we vacate and remand for further proceedings.

Background

RRGs are groups of risk-bearers, in this case anesthesiologists, who have banded together in an insurance cooperative to share liability. See 15 U.S.C. § 3901(a)(4). RRGs function pursuant to a federal statute, the 1986 LRRA. 15 U.S.C. § 3901-04. We have had occasion to review the LRRA's history once before. See Insurance Company of the State of Pennsylvania v. Corcoran, 850 F.2d 88, 89-90 (2d Cir.1988). In brief, the LRRA was an expansion of the 1981 Product Liability Risk Retention Act ("PLRRA"), Pub.L. No. 97-45, 95 Stat. 949 (1981), which allowed RRGs to insure industry against product liability injuries only. Congress's intention in passing the LRRA was to decrease insurance rates and increase the availability of coverage by promoting greater competition within the insurance industry. See H.R.Rep. No. 99-865, 1986 U.S.C.C.A.N. 5303, 5304-06 (report accompanying Risk Retention Amendments of 1986, Pub.L. No. 99-563, 100 Stat. 3170) [hereinafter "House Report"].

Under the McCarran-Ferguson Act, 15 U.S.C. § 1012, the business of insurance is regulated by the states, rather than the federal government. Most states did not allow RRGs prior to the LRRA's passage. However, the LRRA partially preempts state regulation of RRGs and prohibits states from excluding RRGs chartered under the laws of another state. See 15 U.S.C. § 3902(a)-(b)(exemptions from state law); Corcoran, 850 F.2d at 89-90 (describing history and functioning of LRRA); National Home Ins. Co. v. State Corp. Comm'n, 838 F.Supp. 1104, 1110 (E.D.Va.1993)(same). An RRG's state of domicile may "regulate the formation and operation" of the group. 15 U.S.C. § 3902(a)(1). Non-domiciliary states retain some regulatory authority under the LRRA, but it is highly limited. National Home, 838 F.Supp. at 1111.

This case requires that we determine whether New York's EIL regulates or discriminates against Preferred in a manner prohibited by the LRRA. The EIL provides a substantial benefit to certain medical practitioners who obtain primary insurance coverage from a New York-licensed insurer. Under the EIL, physicians and dentists with hospital admitting privileges are provided--at no expense to the practitioners--a free layer of excess insurance coverage. ³ Practitioners qualify for the insurance only if their primary coverage is with a New York-licensed insurer and the primary policy provides at least $1 million of coverage for each individual claimant, with a total protection of $3 million for all claims. See N.Y. Comp.Codes R. & Regs. tit. 10, § 91.1(a). ⁴ Participating physicians receive excess coverage sufficient to provide them with total coverage of $2 million per claimant, and $6 million for all claims.

Because Preferred is not licensed in New York, physicians insured by it--or any other out-of-state RRG or insurer--are not eligible to receive the free excess insurance coverage provided by the EIL. Preferred brought this action in the district court against various New York State defendants. When the defendants' moved for summary judgment, Preferred cross-moved for partial summary judgment. Preferred argued that the EIL violates the provisions of the LRRA which make RRGs "exempt" from any State law that either: (1) "regulate[s], directly or indirectly, the operation of a risk retention group," 15 U.S.C. § 3902(a)(1), ⁵ or (2) "otherwise discriminate[s] against a risk retention group," id. § 3902(a)(4). ⁶ Preferred also claimed that the EIL impermissibly burdens interstate commerce. The district court found there to be no disputed issue of material fact, and granted Preferred's motion for partial summary judgment. Subsequently, the trial judge ordered injunctive relief requiring, inter alia, that physicians insured by out-of-state RRGs be allowed to participate in the EIL program as if covered by state-licensed insurers. New York appeals.

Discussion

I. Indirect Regulation Under 15 U.S.C. § 3902(a)(1)

Preferred argues that the EIL constitutes indirect regulation of RRGs, and as such is prohibited by the LRRA. See 15 U.S.C. § 3902(a)(1)(exempting RRGs from any state law that would "regulate, directly or indirectly," their operation) (emphasis added). It contends that, by granting a competitive advantage to regulated competitors, New York's EIL effectively compels Preferred to submit to regulation by New York, and thus indirectly regulates it. The district court agreed, and granted Preferred's motion for summary judgment. Summary judgment is, of course, appropriate only where there is no genuinely disputed issue of material fact, and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). Without prejudice to any findings that the district court may make on remand, we think the district court's determination was based on a misunderstanding of the showing required of Preferred in order to make out a claim of indirect regulation under the LRRA.

We agree with the district court that the LRRA's preemption language is expansive. Both direct and indirect regulation of RRGs by non-domiciliary states are forbidden. 15 U.S.C. § 3902(a)(1). This expansiveness is emphasized by the structure of the Act, which sets forth a broad preemption followed by certain limited exceptions. ⁷ See 15 U.S.C. § 3902(a)(1)(A-I); Corcoran, 850 F.2d at 91 (predecessor statute, PLRRA, "carved out specific exceptions to ... broad preemption"); State of Florida v. National Amusement Purchasing Group, Inc., 905 F.2d 361, 363 (11th Cir.1990)(same).

Furthermore, the legislative history of the Act makes clear that Congress intended to exempt RRGs broadly from state law "requirements that make it difficult for risk retention groups to form or to operate on a multi-state basis." House Report, at 5305; see New York Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., --- U.S. ----, ----, 115 S.Ct. 1671, 1677, 131 L.Ed.2d 695 (1995)(consideration of text, structure, and legislative history of federal statute proper in determining whether state law is preempted). The House Committee Report explains that the Act is a response to the policies of many states that had "prevent[ed] insurance purchasing groups from achieving the advantages in rates and terms derived from the economic efficiency of collective purchasing that could contribute to resolving affordability and availability problems [in the insurance industry]." House Report, at 5305. Hence, the Congress "exempt[ed] risk retention ... groups from State law, in the respects specified in the [Act], in order to achieve [these] beneficial effects." Id. at 5305-06.

Preferred urges us to consider the economic impact of the EIL on its ability to compete in the New York malpractice insurance market a form of indirect regulation forbidden under the LRRA. There is no disagreement between the parties that the EIL constitutes, in effect, a subsidy by New York to insurers licensed in that state who sell insurance to those EIL-eligible medical practitioners who are also in the market for excess coverage. Preferred argues, and the district court found, that this subsidy constitutes a "powerful incentive, bordering on compulsion, to out-of-state RRGs to receive New York accreditation."

Were the evidence of economic impact well-developed, we would be required to determine whether the district court was correct in finding the effect of the subsidy on Preferred's ability to compete in the New York medical malpractice market was sufficiently substantial to constitute--in essence--indirect regulation. But that question is not before us in answerable form. On the record as it now stands, the compulsive effect of the EIL on Preferred and other RRGs seeking to do business in New York is ambiguous.

To begin with, it is not clear...