National Home Ins. v. CORP. COM'N OF COM. OF VA.

• Decision Date: 03 December 1993
• Docket Number: Civ. A. No. 93-1006-A.
• Citation: 838 F. Supp. 1104
• Parties: NATIONAL HOME INSURANCE COMPANY, (a risk retention group), and Home Buyers Warranty Corporation II, Plaintiffs, v. STATE CORPORATION COMMISSION OF the COMMONWEALTH OF VIRGINIA, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

838 F. Supp. 1104

NATIONAL HOME INSURANCE COMPANY, (a risk retention group), and Home Buyers Warranty Corporation II, Plaintiffs, v. STATE CORPORATION COMMISSION OF the COMMONWEALTH OF VIRGINIA, et al., Defendants.

Civ. A. No. 93-1006-A.

United States District Court, E.D. Virginia, Alexandria Division.

December 3, 1993.

COPYRIGHT MATERIAL OMITTED

Harvey B. Cohen, R. Scott Caulkins, John C. Pasierb, John E. Gagliano, Cohen, Gettings, Dunham & Harrison, P.C., Arlington, VA, for plaintiffs.

Peter B. Smith, Sr. Counsel, Michael D. Thomas, Asst. Gen. Counsel, State Corp. Com'n, Richmond, VA, Patrick H. Cantilo, Randolph N. Wisener, Steven E. Adkins, Rubinstein & Perry, LLP, Austin, TX, for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

I.

On July 2, 1993, the Virginia State Corporation Commission ("SCC") issued an order enjoining National Home Insurance Company ("NHIC"), a Colorado-based risk retention group, from conducting any new or additional business in Virginia. NHIC then brought this action challenging the SCC's authority to issue the injunction. Specifically, NHIC argues that the SCC injunction is invalid because the Product Liability Risk Retention Act, 15 U.S.C. § 3901 et seq., (hereinafter "federal Risk Retention Act" or "Act"), permits only a "court of competent jurisdiction" to issue orders enjoining risk retention groups, and the SCC does not fit this description.

This matter originally came before the Court on NHIC's motion for a Temporary Restraining Order ("TRO") and Preliminary Injunction. After two hearings, the Court denied NHIC's request for a TRO, finding that the requirements for a TRO were not met. To expedite resolution of this dispute, the Court, with the parties' concurrence and pursuant to Rule 65(a)(2), Fed.R.Civ.P., ordered that consideration of this matter on the merits be advanced and consolidated with the hearing on the motion for a preliminary injunction. The parties have agreed that the record is adequate to support a decision on the merits without further discovery or argument.

NHIC's motion for a TRO and preliminary injunction raises the novel question of whether the SCC is a "court of competent jurisdiction" under the federal Risk Retention Act. Addressing this question requires the Court to construe the Act, consider the extent to which it preempts state regulation of risk retention groups, and then consider whether any degree of abstention is appropriate in the circumstances.

II.

A risk retention group is a corporation or other limited liability entity organized for the primary purpose of spreading the risks of liability exposure among its group members. See 15 U.S.C. § 3901(a)(4)(A)-(C) (1993); VA.CODE § 38.2-5101 (Supp.1992). NHIC is a risk retention group domiciled in Colorado. As such, it is subject to a tripartite scheme of concurrent federal and state regulation. Federal regulation is provided by the federal Risk Retention Act.¹ Next, NHIC is regulated by Colorado, its domiciliary state, under Colo.Rev.Stat. § 10-3-1401 to 43 (1993). And finally, NHIC and other risk retention groups operating in Virginia are regulated pursuant to Va.Code §§ 38.2-5100 et seq. (Supp.1992).

NHIC insures residential home builder-members in forty-eight (48) states and the District of Columbia. It issues "warranties" or policies to cover the liability risks of these builders, namely claims for losses resulting from structural and workmanship defects in the construction of new residential housing. Builder-members are the insured party under the warranties, while individual homeowners are the beneficiaries.

From NHIC's organization in 1986 until 1992, the company's reserves were calculated and certified by a professional actuarial firm. In connection with the company's 1991 audit and for reasons not disclosed in this record, NHIC retained a second firm to review the company's financial condition. This second firm concluded that NHIC was under-reserved for unearned premiums. Yet a third firm performed an actuarial review and concurred with this finding.² NHIC reported the deficiency in unearned premium reserves to the Colorado Division of Insurance ("CDI"). On January 14, 1993, the CDI issued an ex parte Summary Suspension Order ("Order") placing NHIC under the CDI's direct supervision. This Order, as later modified, required NHIC to "cease and desist" from the further transaction of insurance such that (i) no new builders could become group members; (ii) no single risk or hazard covered by NHIC could exceed $200,000 and; (iii) builder-members slated for annual renewal of group membership would henceforth be considered only for quarterly approval.

On May 24, 1993, NHIC and the CDI entered into a Stipulated Agreement and Order that created a Plan of Abatement ("Plan"). The Plan continues CDI's direct supervision of NHIC.³ To this end, a CDI direct supervisor was placed in NHIC headquarters and remains there today. All NHIC expenditures must be approved by this CDI supervisor. Also pursuant to the Plan, NHIC received an initial infusion of 2.5 million dollars ($2,500,000). Further, the company must meet additional positive surplus targets by December 31, 1993 and July 1, 1994. As part of the Plan's monitoring program, NHIC must provide the CDI with financial projections in September and December of 1993 and March, 1994, and must submit semi-annual and annual financial statements reflecting not only loss and loss adjustment expenses, but also unearned premium and deficiency reserves. The Plan permits NHIC to insure warranties, provided net premiums written in any one quarter do not exceed four million dollars ($4,000,000), and provided no single risk exceeds $750,000. Significantly, the limitations contained in the Plan apply to NHIC's operations nationwide, not just its operations in Colorado. Pursuant to the Plan, the CDI issued a one-year stay concerning a finding of "financial hazard"⁴ at NHIC.⁵

Rehabilitation of financially troubled risk retention groups is a major focus of Colorado's risk retention group regulations. To this end, Colorado's regulations contemplate remedial steps "with the purpose in mind that insurance companies committing or suffering a delinquency be rehabilitated where and whenever possible with no loss of public confidence in the companies." COLO.REV. STAT. § 10-3-401 (1993). Consistent with this, the Plan was drafted to effectuate NHIC's rehabilitation, and gives NHIC seven months, from May until December, 1993, to meet its first surplus target. In order to allow time for the Plan to operate, a number of states, including Maryland, Florida, and Illinois, have apparently either rescinded cease and desist orders against NHIC, or have refrained from issuing such orders.

Virginia, in contrast to Colorado, takes a more restrictive regulatory stance. Testimony at SCC hearings indicates that Virginia regulators were uncomfortable with Colorado's Plan. Indeed, one witness from the Virginia Bureau of Insurance ("Bureau") testified, "I guess I have a problem as a regulator plugging the hole in the Company by allowing the Company to put on new business and bring in new policyholders when the Company is statutorily insolvent and impaired." This Colorado-Virginia conflict in regulatory philosophy underlies much of the current controversy.

On April 9, 1993, the Bureau filed a motion seeking a ninety (90) day temporary injunction against certain NHIC activities in the state. On May 18, 1993 the Bureau amended its motion, and sought to enjoin NHIC from issuing any new or renewal policies or certificates, or altering coverage under existing documents, until NHIC restored its capital and surplus to the minimum levels required by Colorado. SCC hearings on the petition were scheduled. NHIC then filed a motion to dismiss the pending SCC action. First, NHIC argued that the federal Act preempted the SCC's ability to examine NHIC's financial condition. NHIC further argued that the SCC was not authorized to issue the requested injunction because it was not a "court of competent jurisdiction" within the meaning of the Act. The SCC, after denying NHIC's motion to dismiss, conducted a two-day hearing on the merits. At the close of hearing the SCC followed the Bureau's recommendations and issued an Order partially enjoining NHIC operations in Virginia until NHIC met Colorado's minimum surplus requirements.⁶

On July 8, 1993, NHIC filed a petition for suspension of the Order. NHIC also offered to post up to one million dollars ($1,000,000) in the form of a supersedeas bond.⁷ The SCC denied this petition, and NHIC subsequently appealed the SCC Order to the Supreme Court of Virginia.⁸ The Supreme Court, on recess during the month of August, did not immediately rule on NHIC's appeal. On August 2, 1993, while action was still pending in the Virginia Supreme Court, NHIC filed a motion for declaratory judgment in this Court.⁹ The SCC responded by filing a motion to dismiss, stay, or abstain. On September 1, 1993, the Supreme Court of Virginia rejected NHIC's request for suspension of the SCC Order. One week later, NHIC filed additional pleadings with the SCC, seeking dissolution or, in the alternative, vacation of the Order. These additional pleadings before the SCC are apparently still pending. In addition, NHIC's appeal on the merits of the SCC Order is currently pending before the Supreme Court of Virginia.

III.

The preemptive thrust of the Risk Retention Act is pellucidly clear. Section 3902(a)(1) of the federal 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) (1993). Thus, the Act's structure and language make clear that "the express preemption of state law with respect to risk retention groups is expansive." City Cab Co. v. Edwards, 745 F.Supp. 757, 761 (D.Me. 1990); see Swanco...