Home Warranty Corp. v. Elliott

• Decision Date: 22 September 1983
• Docket Number: Civ. A. No. 83-230-WKS.
• Citation: 572 F. Supp. 1059
• Parties: HOME WARRANTY CORPORATION, Home Owners Warranty Corporation, and HOW Insurance Company, Plaintiffs, v. David H. ELLIOTT, Insurance Commissioner of the State of Delaware, Defendant.
• Court: U.S. District Court — District of Delaware

572 F. Supp. 1059

HOME WARRANTY CORPORATION, Home Owners Warranty Corporation, and HOW Insurance Company, Plaintiffs, v. David H. ELLIOTT, Insurance Commissioner of the State of Delaware, Defendant.

Civ. A. No. 83-230-WKS.

United States District Court, D. Delaware.

September 22, 1983.

Stephen E. Herrmann, Richards, Layton & Finger, Wilmington, Del., Hamilton H. Boykin, Peter C. Schaumber, Gerald F. Ivey, Esquire, Colton & Boykin, Washington, D.C., Terence S. Cooke, HOW Insurance Company, Washington, D.C., for plaintiffs.

Catherine S. Mulholland, Regina Mullen, Deputy Attys. Gen., Dept. of Justice, Wilmington, Del., for defendant.

OPINION

STAPLETON, District Judge:

Home Warranty Corporation, Home Owners Warranty Corporation, and HOW Insurance Company ("plaintiffs" or "HOW") brought this action against David Elliott, Insurance Commissioner of the State of Delaware ("the Commissioner"), seeking injunctive relief and a declaratory judgment that HOW Insurance Company is a "risk retention group" under the provisions of the Product Liability Risk Retention Act of 1981, 15 U.S.C. § 3901 et seq. ("the RRA" or "the Act"). Cross-motions for summary judgment have been briefed and argued and are now ripe for decision.

I. BACKGROUND

Home Warranty Corporation is a mutual company owned by builders of new homes who participate in the Home Owners Warranty program ("the HOW program"). Home Warranty Corporation is the sole stockholder of the Home Owners Warranty Corporation, which administers the HOW program and owns HOW Insurance Corporation. HOW Insurance provides what plaintiffs claim to be product liability insurance for the home builders who own the Home Warranty Corporation.

Plaintiffs claim that HOW Insurance Corporation qualifies as a risk retention group under the provisions of the RRA and is, therefore, entitled to the benefit of the Act's preemption of state law. The Commissioner disagrees. He claims that HOW Insurance is not a risk retention group as defined by the RRA and has directed it not to use its filing with his office as authority to operate on an interstate basis as a risk retention group.

The RRA And Its Background

During the 1970's, it became increasingly difficult for many types of businesses to obtain product liability insurance. During the period from 1975 to 1978, many companies recorded premium escalations of three hundred percent which were not attributable to their claims experience. Others were unable to obtain product liability coverage at any price.¹ The RRA evolved in 1981 as Congress's answer to this problem.

The RRA was not the first attempt to address this problem. The insurance industry attempted to respond voluntarily with Marketing Assistance Programs ("MAP's") in 1977. Unfortunately, MAP's assisted only those businesses that could not obtain product liability insurance at any price. They did not help businesses whose premiums had risen sharply, regardless of good claims records, or businesses for whom product liability insurance was unaffordable and therefore unavailable as a practical matter. Id. In addition to this unsuccessful initiative by the industry, a number of states tried to make product liability insurance more affordable by enacting laws designed to encourage the formation of various kinds of risk pooling entities. These efforts also proved ineffective in large part because such entities were subject to multiple sets of state regulations if they engaged in business on an interstate basis. Id. at 1434. As a result, Congress decided that federal intervention was justified. The House Report, id. at 1434-35, put the matter succinctly.

Federal action is necessary because experience has shown that individual state legislation cannot facilitate the formation of self-insurance groups. Individual states can only enact legislation affecting their respective insurance law requirements. The practical effect of these laws is to prevent product sellers located in several states from forming such groups.... In product liability, because of the geographical dispersion of firms with similar risk interests, it is inevitable that more than one state jurisdiction becomes involved in insurance-oriented solutions. Therefore, federal action must be taken....

The federal legislation ultimately adopted offered a market solution to the problem. Through the RRA, Congress sought to encourage the creation of risk retention groups which would permit businesses to pool their product liability risks under either a self insurance or a group insurance approach. The presence of these alternatives in the marketplace was expected to provide businesses whose favorable claims experience had not been reflected in their premium rates with an opportunity to reduce their insurance costs and to encourage commercial insurers to establish rates more closely related to actual risk.

In order to facilitate the formation of risk retention groups, the RRA preempted state law to the extent necessary to provide federal authority for interstate operation and to eliminate duplicative state regulation. It did not, however, substitute a federal regulatory scheme. The RRA does not provide for federal incorporation or establish comprehensive standards governing the operations of risk retention groups. Rather, it contemplates that such groups will be chartered under the laws of one of the states and will have their formation and operation governed by the laws of that state. Once so chartered, a risk retention group is authorized by the RRA to operate in every state. No state may prohibit the formation or operation of a risk retention group in its jurisdiction and, with limited exceptions, no non-chartering state may regulate its activities there.

With this overview of history and approach of the Act as background, I now turn to the relevant statutory text. The first section of the RRA provides the following definition of "product liability:"

"Product liability" means liability for damages because of any personal injury, death, emotional harm, consequential economic damage, or property damage (including damages resulting from the loss of use of property) arising out of the manufacture, design, importation, distribution, packaging, labeling, lease, or sale of a product, but does not include the liability of any person for those damages if the product involved was in the possession of such a person when the incident giving rise to the claim occurred.

15 U.S.C. § 3901(a)(3). For present purposes, two things are noteworthy about this definition. It includes any "liability for damages because of ... property damage ... arising out of the manufacture, design ... or sale of a product," without regard to the legal theory upon which the liability is predicated. Moreover, it expressly includes types of damage liability which would not be imposed in most states in tort actions. The House Committee Report thus "recognizes that the definition of `product liability' may be broader than the existing product liability law of many jurisdictions in several respects" and offers the following explanation for the inclusion of damage liability not recoverable in some states in product liability litigation:

The rationale for the inclusion of damages for loss of use of property and emotional harm to individuals is to allow product sellers to protect themselves through risk retention groups against these types of damages in jurisdiction where recoveries for such damages are permitted or where the applicable law may change in the future. The definition is permissive and concerns permissible coverage.

House Report, supra note 1, at 1438. In particular, the legislative history makes clear that liability for "consequential economic losses" was included in the definition of "product liability" even though "most courts do not allow recovery for ... them in tort cases...." Id. One such consequential economic loss that is normally unrecoverable is property damage to the product itself.²

After defining "product liability," the Act goes on to provide that this definition does not "affect either the tort law or the law governing the interpretation of insurance contracts of any State." 15 U.S.C. § 3901(b). In other words, while the Act defines product liability broadly so that all potential product liability risks can be insured, the Act does not change the tort or contract law of any state.

The RRA defines "risk retention group," in relevant part, as follows:

"Risk retention group" means any corporation or other limited liability association taxable as a corporation, or as an insurance company, formed under the laws of any State ...

(A) whose primary activity consists of assuming and spreading all, or any portion, of the product liability or completed operations liability risk exposure of its group members;

(B) which is organized for the primary purpose of conducting the activity described under subparagraph (A);

(C) which is chartered or licensed as an insurance company and authorized to engage in the business of insurance under the laws of any State ...

(D) which does not exclude any person from membership in the group solely to provide for members of such a group a competitive advantage over such a person; and

(E) which is composed of members each of whose principal activity consists of the manufacture, design, importation, distribution, packaging, labeling, lease, or sale of a product or products.

15 U.S.C. § 3901(a)(4)(A)-(E).

Partial exemption from state insurance law is afforded by Section 3902 of the Act:

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 except that the jurisdiction in which it is chartered may regulate the formation and operation of such a group ...

(2) require or permit a risk retention group to

...