Wadsworth v. Allied Professionals Insurance

13-1163-cv
Wadsworth v. Allied Professionals

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

August Term, 2013

(Argued: February 3, 2014 Decided: April 4, 2014)

Docket No. 13-1163-cv

RENATA WADSWORTH,

Plaintiff - Appellant,

— v. —

ALLIED PROFESSIONALS INSURANCE COMPANY, A RISK RETENTION GROUP, INC.,

Defendant - Appellee.

B e f o r e:

LEVAL, CALABRESI and LYNCH, Circuit Judges.

__________________

Plaintiff-appellant Renata Wadsworth sued defendant-appellee Allied

Professionals Insurance Company (“APIC”), a nondomiciliary risk retention

1
group, under New York’s direct action statute, N.Y. Ins. Law § 3420, to recover

an unsatisfied state court judgment that had been entered against APIC’s

insured. The United States District Court for the Northern District of New York

(Norman A. Mordue, Judge) granted summary judgment to APIC finding that

any construction of New York law that would impose § 3420's direct action

requirement on foreign risk retention groups was preempted by the Liability Risk

Retention Act of 1986 (“LRRA”), 15 U.S.C. § 3901, et seq. We hold that the LRRA

preempts the application § 3420 to foreign risk retention groups.

AFFIRMED.

MICHAEL C. PEREHINEC JR., Holmberg, Galbraith & Miller, LLP, Ithaca,
New York, for Plaintiff-Appellant Renata Wadsworth.

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

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

2
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,

3
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.

1
A risk retention group is a liability insurance company owned and operated by
its members, and those members are its insureds. Risk retention groups offer
commercial liability insurance for the mutual benefit of those owner-insureds,
who must be exposed to similar risks and be members of the same industry. See
15 U.S.C. § 3901(a)(4).

4
 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.

2
The district court had earlier denied both motions with leave to renew,
concluding that on the record then before it, it was “unable to determine with
specificity how section 3420(a)(2) of the New York Insurance Law would affect
the operation of risk retention groups and whether it would have sufficient
impact on their operation to constitute direct or indirect regulation thereof.” J.A.
509. The parties then filed renewed motions with additional supporting
materials.

5
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

3
We have previously discussed the history of the LRRA in two opinions. See
Preferred Physicians Mut. Risk Retention Grp. v. Pataki, 85 F.3d 913, 914 (2d Cir.
1996)[hereinafter “Preferred Physicians”]; Ins. Co. of Pa. v. Corcoran, 850 F.2d 88,
89-90 (2d Cir. 1988).
4
For an exhaustive history of the 1981 Act, see Home Warranty Corp., 777 F.2d at
1456-79.

6
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. See 15 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

7
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. See 15 U.S.C.

8
§§ 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.

5
Underscoring that primary regulatory and enforcement authority rests with the
chartering state, a nondomiciliary state may not initiate an investigation of a risk
retention group unless the chartering state declines to do so. 15 U.S.C.
§ 3902(a)(1)(E)(i)-(ii).

9
II. New York Insurance Law

A. 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

10
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. New York Insurance Law § 3420

Section 3420(a)(2), in its current form, was codified in 1918 and has

remained unchanged ever since. See Richards v. Select Ins. Co., 40 F. Supp. 2d

163, 168 (S.D.N.Y. 1999).6 In derogation of the common law, § 3420 vests a

substantive right in an injured party against a tortfeasor’s insurer. See State

Trading Corp. of India Ltd. v. Assuranceforeningen Skuld, 921 F.2d 409, 416 (2d

Cir. 1990) (noting that a direct action statute is substantive); accord Lang v.

Hanover Ins. Co., 3 N.Y.3d 350, 354 (2004) (noting that § 3420(a)(2) remedied

“inequity” of common law “by creating a limited statutory cause of action on

behalf of injured parties directly against insurers”).

Section 3420 requires that every insurance policy issued in New York

contain, among other required provisions, a provision “that the insolvency or

bankruptcy of the person insured, or the insolvency of the insured’s estate, shall

6
A previous version of the direct action statute permitted the injured party to sue
the insurer before obtaining a judgment against the insured. See Richards, 40 F.
Supp. 2d at 168, citing 1917 N.Y. Laws ch. 524.

11
not release the insurer from the payment of damages for injury sustained or loss

occasioned during the life of and within the coverage of such policy or contract.”

N.Y. Ins. Law § 3420(a)(1). It further authorizes “any person who . . . has

obtained a judgment against the insured . . . for damages for injury sustained or

loss or damage occasioned during the life of the policy or contract” to maintain

an action against the insurer “[s]ubject to the limitations and conditions of

paragraph two of subsection (a) of this section.” Id. § 3420(b)(1). Subsection

(a)(2) states: “in case judgment against the insured . . . shall remain unsatisfied at

the expiration of thirty days from the serving of notice of entry of judgment upon

the attorney for the insured, or upon the insured, and upon the insurer, then an

action may . . . be maintained against the insurer.” Id. § 3420(a)(2).

In short, § 3420 grants an injured party a right to sue the tortfeasor’s

insurer, but only under limited circumstances – the injured party must first

obtain a judgment against the tortfeasor, serve the insurance company with a

copy of the judgment, and await payment for 30 days. Compliance with those

requirements is a condition precedent to a direct action against the insurance

company. Lang, 3 N.Y.3d at 355.

12
 Given the foregoing, there is a strong argument that as a matter of New

York law, § 3420 simply does not apply to foreign risk retention groups. Section

5904 lists the specific laws and requirements with which foreign risk retention

groups must comply; that list does not include any portion of § 3420. Section

5904, moreover, largely mirrors 15 U.S.C § 3902(a), which explicitly reserves

specific regulatory authority of the states over nondomiciliary risk retention

groups; those sections themselves do not require the inclusion of a direct action

provision in such insurance contracts or expressly authorize nonchartering states

to do so. Because the declared intention of New York is to regulate risk retention

groups to the extent permitted by federal law, N.Y. Ins. Law § 5901, we are

inclined to believe that New York did not intend § 3420 to apply to risk retention

groups chartered in another state.

We are unaware, however, of any decision of a New York court so holding,

and we refrain from relying unnecessarily on that ground. The question

presented by this appeal, and to which we now turn, is whether the LRRA

preempts application of § 3420(a)(2) to foreign risk retention groups. We hold

that any construction of New York law that would impose § 3420's direct action

requirements on foreign risk retention groups is preempted by § 3902(a)(1) of the

LRRA.

13
III. Preemptive Effect of the LRRA

A. General Preemption Principles

The Supremacy Clause provides that federal law “shall be the supreme

Law of the Land; and the Judges in every State shall be bound thereby, any Thing

in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S.

Const. art. VI, cl. 2. From that constitutional principle, it follows, that when

acting within the scope of its enumerated powers, Congress may preempt state

law. In re MTBE Prods. Liability Litig., 725 F.3d 65, 96 (2d Cir. 2013). Despite its

importance, the preemption power is “sensitive,” id., and when “Congress has

legislated in a field which the States have traditionally occupied, we start with

the assumption that the historic police powers of the States were not to be

superseded by the Federal Act unless that was the clear and manifest purpose of

Congress,” Wyeth v. Levine, 555 U.S. 555, 565 (2009) (internal quotation marks

and alterations omitted). Further, “state laws enacted ‘for the purpose of

regulating the business of insurance’ do not yield to conflicting federal statutes

unless a federal statute specifically requires otherwise.” United States Dep’t of

Treasury v. Fabe, 508 U.S. 491, 507 (1993), quoting 15 U.S.C. § 1012(b).

14
 B. Language and Structure of the LRRA

Even given the general presumption, specifically reinforced by the

McCarran-Ferguson Act,7 that insurance regulation is generally left to the states,

the language and purpose of the LRRA clearly announce Congress’s explicit

intention to preempt state laws regulating risk retention groups. Section 3902 of

the LRRA provides, in relevant part, that

(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 . . . .

15 U.S.C. § 3902(a)(1) (emphasis added).8

7
“Congress hereby declares that the continued regulation and taxation by the
several States of the business of insurance is in the public interest, and that
silence on the part of the Congress shall not be construed to impose any barrier to
the regulation or taxation of [insurance] by the several States.” 15 U.S.C. § 1011.
8
The section goes on additionally to preempt state legislation that would

(2) require or permit a risk retention group to
participate in any insurance insolvency guaranty
association to which an insurer licensed in the State is
required to belong;

(3) require any insurance policy issued to a risk

15
 Section 3902(a)(1) then goes on to provide general authority for “the

jurisdiction in which it is chartered [to] regulate the formation and operation of

such a group.” Id. In stark contrast, the Act authorizes nonchartering states to

require risk retention groups to comply only with certain basic registration,

capitalization, and taxing requirements, as well as various claim settlement and

fraudulent practice laws. See 15 U.S.C. § 3902(a)(1)(A)-(I).

It is undisputed that APIC is a risk retention group formed and functioning

under the LRRA and that it is domiciled in Arizona. Therefore, § 3902(a)(1),

insofar as it relates to the powers of nondomiciliary states, governs the authority

of New York to impose regulations on APIC’s operations in New York. Further,

Wadsworth does not argue that New York’s direct action provision falls within

the ambit of the specific exceptions from preemption set forth in subsections

retention group or any member of the group to be
countersigned by an insurance agent or broker residing
in that State; or

(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)(2)-(4).

16
3902(a)(1)(A)-(I).9 Instead, she argues for a narrow construction of the

preemption provision itself. Reasoning that Congress was concerned with

“discrimination by the states against alternative insurance providers,”

Wadsworth contends that Congress’s main purpose in passing the Act “was to

ensure further state discrimination would not occur.” Appellant Br. 15. On this

reading of the LRRA, N.Y. Ins. Law § 3420 would be a generally applicable,

nondiscriminatory statute that does not conflict with or frustrate 15 U.S.C.

§ 3902(a)(1), and is therefore not preempted.

The LRRA’s language and structure, however, as well as our prior

decisions, render Wadsworth’s reading of the statute untenable. Plainly,

§§ 3902(a)(2) and (3) are not directed toward placing risk retention groups “on

equal footing” with traditional insurers. To the contrary, both of those provisions

excuse risk retention groups from certain requirements that states may and

typically do impose upon insurers licensed within that state. Moreover,

9
Such an argument would be implausible. The highly specific and limited
exceptions to preemption under that provision support the conclusion that if
Congress had intended to exempt direct action statutes from preemption, it
would have said so. See United States v. Smith, 499 U.S. 160, 167 (1991) (“Where
Congress explicitly enumerates certain exceptions to a general prohibition,
additional exceptions are not to be implied, in the absence of evidence of a
contrary legislative intent.”) (internal quotation marks omitted).

17
§ 3902(a)(4) expressly prohibits discrimination against risk retention groups. If

the entire purpose of the preemption provision was solely to invalidate

discriminatory state laws, Congress could have enacted a far less complex statute

that simply adopted the language of subsection (a)(4) without more, and thus

prohibited all state laws, and only those, that discriminate against risk retention

groups. Instead, however, Congress specifically preempted “any” law, rule, or

regulation by a nondomiciliary state that would “regulate, directly or indirectly,

the operation of a risk retention group.” 15 U.S.C. § 3902(a)(1) (emphasis added).

A clearer prohibition would be hard to devise. The express preemption of any

regulation simply cannot be read as preemption only of discriminatory

regulation.10

For these reasons, we have read the LRRA’s preemption language broadly.

In enacting the LRRA, we have held, Congress desired “to decrease insurance

10
Wadsworth argues that inclusion of the word “otherwise” in § 3902(a)(4)
implies that the provisions that precede it must also be limited to regulation that
discriminates. But such a reading fails. Wadsworth does not explain, for
example, how § 3902(a)(2), which would also be affected by her reading, could
coherently be limited only to discriminatory laws; that provision expressly
prohibits subjecting risk retention groups to a requirement identical to that
imposed on other insurers. The weak implication from the word “otherwise,” in
any event, cannot trump the broad express language of § 3902(a)(2)’s prohibition
of any regulation of risk retention groups by nondomiciliary states.

18
rates and increase the availability of coverage by promoting greater competition

within the insurance industry.” Preferred Physicians, 85 F.3d at 914, citing H.R.

Rep. No. 99-865, 1986 U.S.C.C.A.N. 5303, 5304-06.11 “[T]he legislative history of

the Act makes clear that Congress intended to exempt [risk retention groups]

broadly from state law ‘requirements that make it difficult for risk retention

groups to form or to operate on a multi-state basis.’” Id. at 915-16, citing 1986

U.S.C.C.A.N. 5303, 5305.12 An expansive reading of the preemption language

furthers the Act’s purpose. Id. at 915.

11
See also Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062, 1067 (7th Cir. 1998)
(“Congress enacted the PLRRA (and, later, the LRRA) because it felt that the
tangle of myriad state regulations choked off RRGs . . . .”); Mears Transp. Grp. v.
State of Fla., 34 F.3d 1013, 1017 (11th Cir. 1994) (noting that purpose of
preemption provisions was to facilitate “the efficient operation of risk retention
groups by eliminating the need for compliance with numerous non-chartering
state statutes that, in the aggregate, would thwart the interstate operation [of]
product liability risk retention groups”), quoting H.R. Rep. No. 190, 97th Cong.
1st Sess. 12 (1981), reprinted in 1981 U.S.C.C.A.N. 1432, 1441.
12
Our sister circuits have similarly recognized the breadth of the LRRA’s
preemption provisions. See, e.g., Nat’l Warranty Ins. Co. RRG v. Greenfield, 214
F.3d 1073, 1077 (9th Cir. 2000) (“[Section] 3902(a) plainly preempts most
regulation of RRGs by non-chartering states.”); Ophthalmic Mut., 143 F.3d at
1067 (finding preemptive language of § 3902(a) “explicit”); Nat’l Amusement
Purchasing Grp., Inc., 905 F.2d at 363 (noting that Act’s “sweeping preemption
language,” largely preempts “the authority of non-domiciliary states to license
and regulate risk retention groups”).

19
 C. Effects of Applying § 3420(a)(2) to Foreign Risk Retention Groups

The effects that application of N.Y. Ins. Law § 3420(a)(2) would have on

nondomiciliary risk retention groups further buttress our conclusion. That

section, which is in derogation of the common law, allows an injured party with

an unsatisfied judgment against an insured party to sue the insurer for

satisfaction of the judgment in some circumstances. Cont’l Ins. Co v. Atl. Cas.

Ins. Co., 603 F.3d 169, 174 (2d Cir. 2010); Lang v. Hanover Ins. Co., 3 N.Y.3d 350,

353-54 (2004).13 “The effect of the statute is to give to the injured claimant a cause

13
Section 3420(a) requires all New Your insurance contracts to “contain[] in
substance the following provision or provisions that are equally or more
favorable to the insured and to judgment creditors so far as such provisions
relate to judgment creditors . . .
(2) A provision that in case judgment against the
insured . . . in an action brought to recover damages for
injury sustained or loss or damage occasioned during
the life of the policy or contract shall remain unsatisfied
at the expiration of thirty days from the serving of
notice of entry of judgment upon the attorney for the
insured, or upon the insured, and upon the insurer,
then an action may . . . be maintained against the insurer
under the terms of the policy or contract for the amount
of such judgment not exceeding the amount of the
applicable limit of coverage under such policy or
contract.
N.Y. Ins. Law § 3420(a). Section 3420 also contains provisions regarding notice,
insolvency or bankruptcy of the insured, and the insurer’s right or obligation to
bring a declaratory judgment action.

20
of action against an insurer for the same relief that would be due to a solvent

principal seeking indemnity and reimbursement after the judgment had been

satisfied.” Lang, 3 N.Y.3d at 354-55 (internal quotation marks and alteration

omitted). Although the statute does not increase the amount of the insurer’s

liabilities, the rights of the injured party are independent of the rights of the

insured, and in some circumstances, more favorable. See Cont’l Ins., 603 F.3d at

176 (“Th[e] separate standard, used to determine the reasonableness of the

injured party’s notice, is more lenient than the standard for the insured party’s

notice.”).

Application of those provisions to APIC or to any other foreign risk

retention group would undoubtedly “regulate, directly or indirectly,” those

groups by subjecting them to lawsuits filed in New York by claimants who are

not parties to APIC’s contracts with insureds. 15 U.S.C. § 3902(a)(1). The cost of

litigation might well result in higher attorneys’ fees, costs, and potential

recoveries. Moreover, § 3420(a)(2) is not simply a rule of civil procedure. It

specifically governs the content of insurance policies, requiring insurers to place

in their New York contracts a provision that is not contemplated by the LRRA,

and that is not required by all other states. Application of the statute would

21
therefore make it difficult for a foreign risk retention group to maintain uniform

underwriting, administration, claims handling, and dispute resolution processes.

A substantial portion of state insurance regulation consists of such standardized

requirements for the content of insurance policies, which vary from state to state.

A major benefit extended to risk retention groups by the LRRA is the ability to

operate on a nationwide basis according to the requirements of the law of a single

state, without being compelled to tailor their policies to the specific requirements

of every state in which they do business. Requiring compliance with various

state regulations governing the content of insurance policies would, in the

aggregate, thwart the efficient interstate operation of risk retention groups. See

Mears Transp. Grp., 34 F.3d at 1017.

Wadsworth relies on two decisions, National Home Insurance Co. v. King,

291 F. Supp. 2d 518 (E.D. Ky. 2003), and Sturgeon v. Allied Professionals

Insurance Co., 344 S.W.3d 205 (Mo. Ct. App. 2011), neither binding on us, to

support her argument that application of § 3420(a)(2) would not affect the

interstate operation of risk retention groups.14 In both of those cases, the state

14
Wadsworth also cites an opinion of the New York General Counsel that
determined that nondomiciliary risk retention groups offering medical
malpractice policies have claim reporting obligations under N.Y. Ins. Law

22
statutes at issue proscribed mandatory arbitration of disputes arising from

insurance contracts. See Nat’l Home, 291 F. Supp. 2d at 524, quoting Ky. Rev.

Stat. Ann. § 417.050; Sturgeon, 344 S.W.3d at 210, quoting Mo. Rev. Stat.

§ 435.350. In both cases, the courts found that as a general matter, the Federal

Arbitration Act, 9 U.S.C. § 2, preempted state anti-arbitration laws. Both courts

also found, however, that the McCarran-Ferguson Act “reverse preempted” the

anti-arbitration provisions. Nat’l Home, 291 F. Supp. 2d at 528; Sturgeon, 344

S.W. 3d at 212.

The McCarran-Ferguson Act precludes the application of a federal statute

in the face of state law “enacted . . . for the purpose of regulating the business of

insurance,” if the federal measure does not “specifically relat[e] to the business of

§ 315(b)(1). See N.Y. Gen. Counsel Op. 7-26-2007, No. 2. That statutory
provision, which requires each insurance company engaged in issuing
professional medical malpractice insurance to file quarterly reports on all claims
for medical malpractice made against any of its insureds, is quite different from
§ 3420(a)(2). The General Counsel’s opinion did not consider the application of
§ 3420(a)(2) to nondomiciliary risk retention groups. We express no views on the
merits of that opinion which, in any event, does not bind this Court. We note,
however, that in light of the retained authority of nondomiciliary states to
monitor the financial condition of nondomiciliary risk retention groups and to
require those groups to comply with state regulation regarding unfair claim
settlement practices, 15 U.S.C. §§ 3902(a)(1)(A), (G), it is doubtful that such
quarterly reporting requirements are preempted as “regulating, directly or
indirectly, the operation of a risk retention group,” id. § 3902(a)(1).

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insurance,” and would “invalidate, impair, or supersede” the state’s law. See

Fabe, 508 U.S. at 500-01. The courts Wadsworth relies upon found all three of

those considerations satisfied because the FAA is not a statute that specifically

relates to the business of insurance, and therefore did not preempt statute anti-

arbitration laws to the extent that such provisions were enacted to regulate the

business of insurance.

To that extent, the National Home and Sturgeon decisions are inapposite.

Both opinions further ruled, however, that the LRRA did not preempt the state

law rules in question. Insofar as those decisions relied on an interpretation of the

LRRA that differs from ours, we disagree. The LRRA is, without question, a

federal statute that specifically relates to the business of insurance. Section

3420(a)(2), which, to reiterate, requires any insurance policy issued in the state of

New York to contain a provision permitting a direct action against a tortfeasor’s

insurer, was undoubtedly enacted to regulate the business of insurance. In

sweeping preemption language, subject to certain limited exceptions, Congress

chose to limit the power of nondomiciliary states to regulate risk retention

groups. The McCarran-Ferguson Act does not save § 3420(a)(2) from the LRRA’s

preemptive sweep.

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 CONCLUSION

We conclude that any construction of N.Y. Ins. Law § 3420(a)(2) that

permits its application to risk retention groups chartered in another state is

preempted by the LRRA. The judgment of the district court is AFFIRMED.

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