Federal Risk Retention Act Preempts State Anti-arbitration Law

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During an earlier insurance availability crisis, the federal government enacted the Liability Risk Retention Act (“LRRA”).  Under the LRRA, a risk retention group (“RRG”) can be formed in one state and can do an insurance business in other states.  As discussed in a recent blog post, some states have passed anti-arbitration laws that preclude insurance policies in those states from containing arbitration provisions.  What happens when an out-of-state RRG demands arbitration of a coverage dispute against an insured in a state with anti-arbitration laws?

In Allied Professionals Insurance Co. v. Anglesey, No. 18-56513 (9th Cir. Mar. 12, 2020), an Arizona RRG doing business in Washington state sought to compel arbitration in Washington of all claims against it by a claimant and an insured who were entering into a settlement and consent judgment.  The RRG had denied coverage and sought to rescind the insured’s policies for failing to provide notice in the renewal process of this potential claim.

After initially denying standing to the RRG–which was reversed by the 9th Circuit, see Allied Prof’ls Ins. Co. v. Anglesey, 680 Fed. Appx. 586 (9th Cir. 2017)–the district court granted the RRG’s motion to compel arbitration and certified an interlocutory appeal.  The question certified was “whether the Liability Risk Retention Act preempts Wash. Rev. Code § 48.18.200(1)(b) as applied to risk retention groups.”

In affirming the order compelling arbitration, the court held that the state anti-arbitration statute was preempted by the LRRA and the LRRA was not reverse preempted by the McCarran-Ferguson Act.  The court described in detail the regulatory structure of the LRRA, which expanded the benefits of the Product Liability Risk Retention Act to all commercial liability insurance.  The court found that the LRRA was an exception to McCarran-Ferguson’s preference for state insurance regulation and, therefore, McCarran-Ferguson’s reverse preemption in favor of state insurance laws did not apply to the LRRA.

The court, consistent with cited precedent, held that the LRRA was broad in scope when it preempted state insurance laws in favor of allowing the use of RRGs and the like. The court found that the anti-arbitration law offended the broad preemption language of the LRRA and was not saved by the exceptions within the LRRA.  The court affirmed the order compelling arbitration.

So if a company is an out-of-state RRG and has an arbitration clause, it can be enforced in a state with an anti-arbitration statute, but if you are an insurer without the protection of the LRRA, the arbitration clause will not be enforceable in a state with an anti-arbitration statute.  Perhaps it is time for these antiquated anti-arbitration statutes to be repealed or revised.



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