Wadsworth v. Allied Professionals Ins. Co.

• Decision Date: 04 April 2014
• Docket Number: No. 13–1163–CV.,13–1163–CV.
• Citation: 748 F.3d 100
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Renata WADSWORTH, Plaintiff–Appellant, v. ALLIED PROFESSIONALS INSURANCE COMPANY, A Risk Retention Group, Inc., Defendant–Appellee.

748 F.3d 100

Renata WADSWORTH, Plaintiff–Appellant,

v.ALLIED PROFESSIONALS INSURANCE COMPANY, A Risk Retention Group, Inc., Defendant–Appellee.

No. 13–1163–CV.

United States Court of Appeals,Second Circuit.

Argued: Feb. 3, 2014.

Decided: April 4, 2014.

Preempted

N.Y.McKinney's Insurance Law § 3420(a)(2)Michael C. Perehinec JR., Holmberg, Galbraith & Miller, LLP, Ithaca, NY, for Plaintiff–Appellant Renata Wadsworth.

Rick A. Cigel (Michael B. Kadish, on the brief), The Cigel Law Group, P.C., Los Angeles, CA, for Defendant–Appellee Allied Professionals Insurance Company, a Risk Retention Group, Inc.

Jeffrey B. Randolph, Law Offices of Jeffrey Randolph, Glen Rock, NJ, for Amicus Curiae National Risk Retention Association.

Before: LEVAL, CALABRESI and LYNCH, Circuit Judges.

GERARD E. LYNCH, Circuit Judge:

The federal Liability Risk Retention Act of 1986, 15 U.S.C. § 3901, et seq. (“the LRRA” or “the Act”), contains sweeping preemption language that sharply limits the authority of states to regulate, directly or indirectly, the operation of risk retention groups chartered in another state. Id. § 3902(a). A provision of New York's insurance law requires that any insurance policy issued in that state contain a provision permitting, under certain circumstances, an injured party with an unsatisfied judgment to maintain a direct action against her tortfeasor's insurer for the satisfaction of that judgment. N.Y. Ins. Law § 3420(a)(2). This case requires us to determine whether the LRRA preempts the application of § 3420(a)(2) to a risk retention group that is domiciled in Arizona, but issues insurance policies in New York. We hold that it does.

BACKGROUND

In 2005, plaintiff-appellant Renata Wadsworth sought treatment from Dr. John Ziegler, an Ithaca, New York chiropractor. During her four visits with him, Ziegler repeatedly touched Wadsworth in an inappropriate, sexual manner without her consent. Wadsworth reported Ziegler's conduct to local authorities, who arrested him. Ziegler later pled guilty to third-degree assault for his actions against Wadsworth.

Wadsworth subsequently filed a civil action against Ziegler seeking damages for emotional injury and lost income stemming from the sexual assault. Following a bench trial, the Supreme Court of Tompkins County, New York (M. John Sherman, Judge ), entered a $101,175 judgment in Wadsworth's favor, which Ziegler failed to satisfy. Invoking N.Y. Ins. Law § 3420, and satisfying the conditions precedent of that provision, see infra p. 12, Wadsworth then sued defendant-appellee Allied Professionals Insurance Company (“APIC”), which was Ziegler's insurance carrier at the time of the sexual assault. APIC is registered in New York as a federal risk retention group, ¹ and is recognized as such by the New York Department of Financial Services. Domiciled in Arizona, APIC has over 4,000 insureds in New York, including acupuncturists, chiropractors, and massage therapists.

APIC removed the case to the United States District Court for the Northern District of New York, and the parties cross-moved for summary judgment. In a Memorandum–Decision and Order, the district court (Norman A. Mordue, Judge ) granted APIC's motion and denied Wadsworth's, concluding that any construction of New York law that would impose § 3420's direct action requirement on foreign risk retention groups was preempted by the LRRA.²

Wadsworth timely appealed, and upon de novo review of the district court's grant of summary judgment, Swatch Grp. Mgmt. Servs. Ltd. v. Bloomberg L.P., 742 F.3d 17, 24 (2d Cir.2014), we now affirm.

DISCUSSION

Before turning to the preemption analysis, we briefly outline the history and structure of the various statutory schemes implicated by this case.

I. The Liability Risk Retention Act of 1986³

Under the McCarran–Ferguson Act, 15 U.S.C. § 1011 et seq., the business of insurance is generally regulated by the states rather than the federal government. In the late 1970s, however, Congress perceived a seemingly unprecedented crisis in the insurance markets, during which many businesses were unable to obtain product liability coverage at any cost. And when businesses could obtain coverage, their options were unpalatable. Premiums often amounted to as much as six percent of gross sales, and insurance rates increased manyfold within a single year. See Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1463 (11th Cir.1985).

After several years of study, Congress enacted the Product Liability Risk Retention Act of 1981 (“the 1981 Act”),⁴ which was meant to be a national response to the crisis. As relevant here, the 1981 Act authorized persons or businesses with similar or related liability exposure to form “risk retention groups” for the purpose of self-insuring. 15 U.S.C. § 3901(a)(4). The 1981 Act only applied to product liability and completed operations insurance, but following additional disturbances in the interstate insurance markets, in 1986, Congress enacted the LRRA, and extended the 1981 Act to all commercial liability insurance. See15 U.S.C. §§ 3901– 3906 (1982 & Supp. IV 1986); Preferred Physicians, 85 F.3d at 914. At the time of the LRRA's passage, however, most states, exercising their traditional power over the business of insurance, did not permit such risk retention groups. Preferred Physicians, 85 F.3d at 914.

Rather than enacting comprehensive federal regulation of risk retention groups, see Corcoran, 850 F.2d at 91, Congress enacted a reticulated structure under which risk retention groups are subject to a tripartite scheme of concurrent federal and state regulation. First, at the federal level, the 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), language that we have previously described as “expansive,” Preferred Physicians, 85 F.3d at 915, and “sweeping,” Corcoran, 850 F.2d at 91.

That preemption is not universal. The second part of the scheme secures the authority of the domiciliary, or chartering, state to “regulate the formation and operation” of risk retention groups. 15 U.S.C. § 3902(a)(1). Federal preemption, therefore, functions not in aid of a comprehensive federal regulatory scheme, but rather to allow a risk retention group to be regulated by the state in which it is chartered, and to preempt most ordinary forms of regulation by the other states in which it operates. Thus, the Act “provides for broad preemption of a non-domiciliary state's licensing and regulatory laws.” Fla., Dep't of Ins. v. Nat'l Amusement Purchasing Grp., Inc., 905 F.2d 361, 363–64 (11th Cir.1990). Similarly, the Act prohibits states from enacting regulations of any kind that discriminate against risk retention groups or their members, but does not exempt risk retention groups from laws that are generally applicable to persons or corporations. 15 U.S.C. § 3902(a)(4).

While the Act assigns the primary regulatory supervision of risk retention groups to the single state of domicile, the third part of its regulatory structure “explicitly preserves for [nondomiciliary] states several very important powers.” Fla., Dep't of Ins., 905 F.2d at 364. The Act specifically enumerates those reserved powers in subsequent subsections, with many powers of the nondomiciliary state being concurrent with those of the chartering state. See15 U.S.C. §§ 3902(a)(1)(A)-(I), 3905(d). In particular, subject to the Act's anti-discrimination provisions, nondomiciliary states have the authority to specify acceptable means for risk retention groups to demonstrate “financial responsibility” as a condition for granting a risk retention group a license or permit to undertake specified activities within the state's borders. 15 U.S.C. § 3905(d). Additionally, any state may, after an investigation of the group's financial condition, commence a delinquency proceeding. 15 U.S.C. § 3902(a)(1)(F)(i).⁵ Any state may also require a risk retention group to comply with any order resulting from such an investigation, or from a voluntary dissolution proceeding. 15 U.S.C. § 3902(a)(1)(F)(i)-(ii). In short, as compared to the near plenary authority it reserves to the chartering state, the Act sharply limits the secondary regulatory authority of nondomiciliary states over risk retention groups to specified, if significant, spheres.

II. New York Insurance LawA. General Provisions

New York Insurance Law, as it pertains to risk retention groups, largely mirrors the structure of federal law. Article 59 of the New York Insurance Law expressly recognizes the limits imposed by the LRRA, noting that its purpose is “to regulate the formation and/or operation ... of risk retention groups ... formed pursuant to the provisions of the federal Liability Risk Retention Act of 1986, to the extent permitted by such law.” N.Y. Ins. Law § 5901 (internal citation omitted). In keeping with those limits, New York cleanly distinguishes between the broad regulatory authority it exercises over those risk retention groups that seek to be chartered in New York, and the more limited regulations it is permitted to adopt with respect to nondomiciliary risk retention groups. Section 5903, entitled “Domestic risk retention groups,” commands that such groups “shall comply with all of the laws, regulations and orders applicable to property/casualty insurers organized and licensed in this state,” id. § 5903(a) (emphasis added). In contrast, § 5904, applicable to “[r]isk retention groups not chartered in [New York],” requires that such groups “comply with the laws of [New York]” set out in ten subsequent subsections, largely tracking the powers reserved to nondomiciliary states by 15 U.S.C. § 3902(a)(1)(A)-(I). Those ten subsections do not include the provisions of New York law that are at issue in this case, N.Y. Ins. Law §§ 3420(a)(2) & (b)(1), or indeed any part of § 3420.

B....