National Warranty Ins. Co. v. Greenfield

• Decision Date: 17 August 1998
• Docket Number: No. CV-97-1654-ST.,CV-97-1654-ST.
• Citation: 24 F.Supp.2d 1096
• Parties: NATIONAL WARRANTY INSURANCE COMPANY, RRG (a Risk Retention Group), Plaintiff, v. Mike GREENFIELD, Director, Department of Consumer and Business Affairs of the State of Oregon, Defendant.
• Court: U.S. District Court — District of Oregon

24 F.Supp.2d 1096

NATIONAL WARRANTY INSURANCE COMPANY, RRG (a Risk Retention Group), Plaintiff, v. Mike GREENFIELD, Director, Department of Consumer and Business Affairs of the State of Oregon, Defendant.

No. CV-97-1654-ST.

United States District Court, D. Oregon.

August 17, 1998.

Bruce A. Rubin, Miller Nash Wiener Hager & Carlsen, Portland, OR, M. Hannah Leavitt, P. Kevin Brobson, Buchanan Ingersoll Professional Corporation, Harrisburg, PA, for National Warranty Insurance Company RRG, Plaintiff.

William E. Brickey, Katherine G. Georges, Dept. of Justice, Salem, OR, for Kerry Barnett, Deborah Lincoln, Mike Greenfield, Defendants.

Philip C. Olsson, Nathan A. Beaver, Olsson Frank & Weeda PC, Washington, DC, for National Risk Retention Ass'n, Amicus.

OPINION

STEWART, United States Magistrate Judge.

INTRODUCTION

Plaintiff, National Warranty Insurance Company, RRG ("NWIC"), is a duly constituted risk retention group ("RRG") chartered and licensed in 1984 under the laws of the Cayman Islands, British West Indies. NWIC is a mono-line RRG which writes insurance covering only the product liability and completed operations risks of its members who consist of manufacturers, distributors, and dealers of automobiles and automotive products. NWIC challenges Oregon's prohibition against the issuance of reimbursement insurance policies by NWIC to its members in Oregon who provide service contracts to customers.

NWIC filed this action on November 20, 1997, against Kerry Barnett, the Director of the Oregon Department of Consumer and Business Affairs ("DCBA"). On July 30, 1998, defendant filed a Notice of Substitution of Party indicating that Mr. Barnett has been replaced by Mike Greenfield as Director of the DCBA ("Director"). The caption has been amended accordingly. See Minute Order dated August 3, 1998 (docket # 43).

As interpreted by the Director, ORS 646.267(5)(b) mandates that obligors on service contracts provide one of two kinds of proof of financial stability, neither of which is a reimbursement insurance policy issued by an RRG chartered outside Oregon. NWIC contends that this interpretation conflicts with and is preempted by the Product Liability Risk Retention Act of 1981 ("PLRRA"), 15 U.S.C. §§ 3901, et seq., as amended by the Liability Risk Retention Act of 1986 ("LRRA"). NWIC seeks a declaratory judgment that: (1) ORS 646.267(5)(b), and related statutes and regulations of the State of Oregon are unconstitutional as applied to NWIC, insofar as they prohibit NWIC from issuing service contract reimbursement policies in Oregon, and (2) the phrase "authorized insurer," as used in ORS 646.267(5)(b), shall be interpreted to include foreign RRGs such as NWIC. NWIC also seeks entry of a judgment enjoining the Director from enforcing ORS 646.267(5)(b) against NWIC members and seeks an award of attorney fees and costs incurred in this action.

This court has jurisdiction under 28 U.S.C. §§ 1331 and 1337(a) at a minimum, and according to NWIC (which the Director does not dispute), also under 28 U.S.C. §§ 1343(a)(3) and 1343(a)(4).

Both parties have consented to allow a Magistrate Judge to enter final orders and judgment in this case in accordance with FRCP 73 and 28 U.S.C. § 636(c). The parties have now filed cross-motions for summary judgment (dockets # 21 & # 26).

For the reasons that follow, NWIC's motion is granted and the Director's motion is denied.

DISCUSSION

FRCP 56(c) authorizes summary judgment if no genuine issue exists regarding any material fact and the moving party is entitled to judgment as a matter of law. In the pending cross-motions, there is no disputed fact. Rather, the issue turns on whether, as a matter of law, the LRRA preempts Oregon from excluding service contract reimbursement insurance issued by NWIC. An analysis of NWIC's challenge to Oregon's exclusion first requires an historical overview of the federal and state laws governing RRGs, as well as Oregon's regulation of the service contract industry.

I. Statutory Background

A. Oregon Insurance Code

In the mid-1960s, Oregon enacted a host of statutes regulating the insurance industry contained in the Oregon Insurance Code, ORS Chapters 731-752. Pursuant to those statutes, Oregon prohibits anyone from directly or indirectly transacting insurance in Oregon, "except as authorized by a subsisting certificate of authority issued to the insurer by the Director of the Department of Consumer and Business Services." ORS 731.354. Consistent with that provision, Oregon defines an "authorized insurer" as "one authorized by a subsisting certificate of authority to transact insurance in [Oregon]." ORS 731.066(1).¹ Oregon also conditions an insurer's authority to transact business in Oregon upon membership in the Oregon Insurance Guaranty Association ("OIGA"), which partially insures losses caused by insolvent insurers. ORS 734.550.

B. The Advent of Federal Law Governing RRGs

In the early 1980s when faced with escalating product liability insurance premiums, product manufacturers began to self-insure through insurance cooperatives known as RRGs. See Ophthalmic Mut. Ins. Co. v. Musser ("OMIC"), 143 F.3d 1062, 1064 (7th Cir. 1998); Garage Services & Equip. Dealers Liab. Ass'n of Am., Inc. v. Homes, 867 F.Supp. 1301, 1303 (E.D.Ky.1994). In 1981, the United States Congress enacted the PLRRA to preempt certain state laws and regulations that impeded this type of group self-insurance from operating on a multistate basis. The PLRRA was designed to "encourage the formation of [RRGs], because of the lack of product liability insurance at affordable rates." OMIC, 143 F.3d at 1064 (citations omitted). Prior to the PLRRA, an RRG would have been required to obtain full insurance licensing in every state where it wished to provide insurance to a member, making it economically prohibitive for such a group to operate in a state where it had only a few members. By preempting state laws, the PLRRA permitted RRGs to do business in every state after fully complying with the insurance laws of the chartering jurisdiction.

In 1986, Congress adopted the LRRA which amended the PLRRA to expand the availability of this alternative insurance mechanism to other businesses and all types of liability insurance. In enacting the LRRA, "Congress was effectively attempting to preclude most state regulation of risk retention groups." Id. To that end, the LRRA exempts RRGs from direct or indirect state regulation:

(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 [excepting regulation by the State in which the risk retention group is chartered and certain limited regulation by non-domiciliary states];

* * * * * *

(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)(1), (4).

The scope of this exemption is broad and applies to "laws governing the insurance business pertaining to:"

(1) liability insurance coverage provided by a risk retention group for —

(A) such group; or

(B) any person who is a member of such group;

(2) the sale of liability insurance coverage for retention group; and

(3) the provision of —

(A) insurance related services;

(B) management, operations, and investment activities; or

(C) loss control and claims administration (including loss control and claims administration services for uninsured risks retained by an member of such group);

for a risk retention group or any member of such group with respect to liability for which the group provides insurance.

15 U.S.C. § 3902(b).

RRGs are not exempt from all state regulation, however. In order to operate under federal law, an RRG must be chartered in at least one state and be subject to that state's insurance regulatory laws, including adequate rules and regulations allowing for complete financial examination of all books and records, including but not limited to proof of solvency. 15 U.S.C. § 3901(a)(4)(C). The "primary responsibility for regulating the formation and operation of [RRGs is placed] on the state in which the [RRG] is chartered." OMIC, 143 F.3d at 1064. For whatever reason, no RRG is chartered in Oregon.

While 15 U.S.C. § 3902 precludes most regulation of RRGs by non-chartering states, the LRRA added a number of provisions that preserve the states' traditional role in regulating insurance and protecting the public in certain areas. At issue here is one of those areas, namely the ability of state laws to require adequate proof of financial responsibility for licensees:²

Subject to the provisions of section 3902(a)(4) of this title relating to discrimination, nothing in this chapter shall be construed to preempt the authority of a State to 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. Such means may include or exclude insurance coverage obtained from an admitted insurance company, an excess lines company, a risk retention group, or any other source regardless of whether coverage is obtained directly from an insurance company or through a broker, agent, purchasing group, or any other person.

15 U.S.C. § 3905(d).

C. Oregon Law Governing RRGs

In 1987, as part of its Insurance Code, Oregon enacted the Alternative Insurance Liability Risk Retention Law, ORS 735.300 through 735.365, governing the operation of RRGs. As mandated by the LRRA, 15 U.S.C. § 3902(a)(2), Oregon expressly prohibits RRGs from joining or financially contributing to an insurance insolvency association, including the OIGA. ORS...