Hitchcock & Cummings LLP

Risk Purchasing Groups

Since the federal Liability Risk Retention Amendments (“LRRA”) were enacted by Congress in 1986, Terry Cummings has been involved in the formation and regulation of risk purchasing groups (“RPGs”) and Risk Retention Groups (“RRGs”). The following article describes the background to the federal statute, and some of the pros and cons of forming a risk purchasing group.

It should be noted initially that, unlike life, and accident & health insurance, property/casualty insurance has historically been prohibited from being written on a group basis. While individuals who work for the same employer, or who are members of the same labor union, have been permitted to obtain life and health insurance under a group policy for decades, property/casualty insurance has historically been limited to policies that were individually issued and underwritten (although there are exceptions in limited circumstances in some states).

The reason for the general prohibition against group property/casualty insurance has been the regulatory concern that group contracts unfairly discriminate against similarly situated non-group members. Several states’ insurance laws contain prohibitions against so-called ‘fictitious groups”, which are associations or other entities formed for the principal purpose of permitting their members to gain access to low cost insurance coverage.

In 1981, in response to a crisis in availability and affordability of products liability insurance, Congress enacted the Products Liability Risk Retention Act. The 1981 law permitted for the first time the formation of risk purchasing groups and risk retention groups to buy and sell, respectively, products liability insurance for their members on a group basis. Insurance carriers were also permitted to sell products liability insurance to the members of purchasing groups on a group basis, without being subject to regulatory sanction.

In the mid-1980s in response to the problems in the availability and affordability of liability insurance across the board, which affected public entities, medical professionals and small business in particular, Congress enacted the federal Liability Risk Retention Amendments of 1986 – the LRRA. The 1986 legislation extended the 1981 legislation to cover all forms of commercial liability insurance, not just products liability. The purpose of the LRRA was to make commercial liability insurance both more available and affordable by allowing similarly situated insureds to achieve economies of scale through the purchase of insurance on a group basis. In furtherance of that objective, Congress imposed minimal regulatory requirements on purchasing groups, while granting them (and their insurers) limited exemptions from state law.

The reaction to the LRRA by the states when it was enacted 25 years ago was generally unfavorable, mostly because it took away some of their regulatory jurisdiction. In the case of purchasing groups, Congress provided in the LRRA that they would have to register with the insurance commissioner in each state in which they do business. The immediate response of the National Association of Insurance Commissioners (“NAIC”) was to adopt a model law, which has been implemented nationwide (The New York statute may be found in Article 59 of the Insurance Law, and in Insurance Department Regulations 134 and 135), and to develop a model registration form, that calls for the disclosure of much more information than Congress intended, and one that serves very little public purpose. As a result, the states impose on purchasing groups a registration process that is an expensive and time consuming barrier to their organization, and their ability to do business. In effect, a simple registration process has been turned into the functional equivalent of a licensing process by several states.


The LRRA authorizes the formation of RPGs to obtain insurance for their members on a group basis, and RRGs to act as a collective self-insurance vehicle. The objective of the statute is to permit groups of insureds with similar exposures to loss from liability claims to achieve the economies of scale that results from buying insurance in bulk. The law relies on a broad preemption of state law prohibitions to achieve its goals. In that regard, it is noteworthy that risk purchasing groups are subject to all state insurance laws and regulations that would otherwise be applicable except those that Congress specifically listed in the statute as being inapplicable, while risk retention groups are generally not subject to the laws of any state other than their state of domicile. In other words, purchasing groups are subject to all state laws except those from which they are specifically exempt, while RRGs are not subject to any state laws except those to which Congress made them specifically subject.

The following is an overview and explanation of the key provisions of the federal law as it affects RPGs. RRGs, are not covered in this outline.

A risk purchasing group is “any group” which:

(A) has as one of its purposes the purchase of liability insurance on a group basis;

(B) purchases such insurance only for its group members and only to cover their similar or related liability exposure, as described in subparagraph (C);

(C) is composed of members whose businesses or activities are similar or related with respect to the liability to which members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations; and

(D) is domiciled in any State

15 U.S.C. §3901 (a)(5).


The statute does not define the legal form that the RPG must take. It can be a corporation, a partnership, or merely a group of individuals or businesses who share a similar exposure to loss and who get together to buy their insurance. However, because limited liability is a goal of corporate membership, the formations of RPGs as not-for-profit corporations is advisable. (It is questionable whether a for-profit corporation whose shareholders included non-insured members of the group (e.g. a producer or broker) would be viewed as a purchasing group entity within the meaning of the federal statute, hence, the not-for-profit membership corporation is preferred.)


Purchasing commercial liability insurance on a group basis needs to be one of the purposes of the group. The statue does not state that a purchasing group may not have any other purposes, so long as the liability insurance purchased is limited to members of the group and only covers claims arising from their similar or related exposure. In other words, one of the purposes of the group may be to purchase property insurance without being in violation of the statute, which suggests that individually issued and underwritten (i.e. non-group) property or workers’ compensation policies may be purchased by the members of a purchasing group, as long as they are not underwritten and issued on a group basis through the RPG. (This view is not uniformly shared by state regulators, many of whom are of the view that a RPG is limited to purchasing liability insurance only, and cannot offer non-group insurance.)


The definition of homogeneity in the LRRA is quite broad - - RPGs must be composed of members whose businesses or activities are similar or related with respect to the liability to which members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations. For example, a manufacturer of a product may be insured under the same RPG policy as a wholesaler and a retailer of the same product, even though manufacturers, wholesale distributers, and main street retailers do different things.

There are some gray areas, however; for example, it is not clear that a RPG whose members are all members of the medical profession must be limited to a particular medical specialty, e.g. orthopedists, or whether any doctor, regardless of medical specialty, could join the same RPG. The legislative history to the LRRA supports the view that homogeneity requirements are to be read liberally. By analogy, since it would almost certainly be lawful to combine attorneys in a RPG without regard to their specialty area of practice (e.g. litigation lawyers could be insured under the same policy as trusts & estates lawyers), there appears to be no reason why different medical specialties could not be combined in the same RPG.

A purchasing group will meet the homogeneity requirements by having common premises, not just a common trade or business or product. It would be permissible for all of the commercial tenants in an office building, for example, to form a purchasing group for their business liability coverage(i.e. BOP policy) needs, even if the tenants were all engaged in difference occupations.


The statue does not define what constitutes group insurance. As a result we are frequently asked whether a RPG must obtain a group master policy with individual certificates issued to each member, or whether the members may be issued individual polices. The better view, in our opinion, is that the form of the coverage, group versus individual policy, is irrelevant for purposes of complying with the statue. The issue is whether the underwriter viewed the risk as a collective one, applied the group’s own loss experience in coming up with a rate, and built in economies of scale in the rate determination.


A risk purchasing group is exempt from all state laws, rules, regulations or order that would:

• Prohibit the establishment of a purchasing group
• Make it unlawful for an insurer to provide, or a purchasing group or its members from purchasing, insurance (as defined) on a basis providing to a purchasing group or its members advantages, based on their loss and expense experience, not afforded to other persons with respect to rates, policy forms, coverage, or other matters.
• Require a purchasing group to have been in existence for a minimum period of time or which would require it to have a maximum number of members
• Require a certain percentage of the group to obtain insurance on a group basis
• Require a local agent to countersign a policy issued so a purchasing group or its members (a particularly attractive feature to brokers and producers)
• Otherwise discriminate against purchasing groups or their members

15 U.S.C. §3903(a). The anti-discriminatory provision is obviously a useful provision. For example, New York Regulation 135 prohibits purchasing group policies being issued as Special Risks Insurance in the Free Trade Zone (N.Y. Ins. Law Art. 63). It is our view that excluding purchasing groups and their members from obtaining coverage in the Free Trade Zone is discriminatory and falls afoul of the federal LRRA statute.

It is noteworthy that the preemption provisions also apply to the provision of insurance related or management services to a RPG or a member of the group. This particular provision has been instrumental in the formation of RPG management companies and the provision of fee-based services to RPGs.


Prior to doing business in any state, the LRRA requires a RPG to file a notice of intent to do so with the insurance commissioner of that state. The notice must contain four pieces of information: the state in which the group is domiciled: the type of liability insurance to be purchased: the insurance carriers and their state(s) of domicile; and the purchasing group’s principal place of business. 15 U.S.C. §3903(d)(1).

The group must also register with and designate the local insurance commissioner as its agent for service of process in any state in which it actually does business. ((e) Designation of agent for service of documents and process (See 15 U.S.C. §3903(e), “A purchasing group shall register with and designate the State insurance commissioner of each State in which it does business as its agent solely for the purpose of receiving service of legal documents or process … .” (emphasis added)) Despite the fact that the context of this particular LRRA provision seems to be limited to merely signing a register of RPGs and designating the insurance commissioner as agent for service of process, the term “register with” was seized on by the NAIC and the states to impose requirements much more rigorous than the four items described in 15 U.S.C. §3903(d)(1), above.

For example, the State of Florida requires a full background check and fingerprint cards to be submitted by a RPG’s officers and directors as condition of registration. The State of Texas requires written confirmation from a RPG’s state of domicile that it has registered with its domiciliary state insurance commissioner, and written confirmation that it has registered with the state where it has its largest premium volume. All states require the laborious NAIC RPG registration form, or more onerous forms, to be submitted as a pre-condition of registration. Adding insult to injury, many states impose a RPG filing fee to offset the cost of processing the registration forms. Whether the registration forms serve any purpose other than taking up file space in the local insurance commissioner’s office remains to be seen.


Q: If a carrier issues a policy on a master basis to a risk purchasing group, may it be subject to a shared aggregate?

A: Definitely not in New York. Unclear in other states, generally shared aggregates and shared deductibles among RPG members should be avoided.

Q: Are purchasing group policies subject to multi-state rate and filing requirements by admitted carriers?

A: For the most part, the answer is yes. A few states exempt non-domiciliary purchasing groups from these requirements. Some carriers file their rates and forms only in the RPG’s state of domicile. In our opinion, an admitted carrier has to file its rates and forms in every state where the RPG is to have members.

Q: An insurer wishes to write a risk purchasing group with members in all 50 states on admitted paper. If it has state-specific endorsements for terrorism, cancellations, extended reporting periods, may it issue a group policy or must is issue separate policies for each state with state specific requirements? If it wishes to cancel or non-renew, to whom must notice be sent?

A: There is no legal requirement that group policies be issued versus individual policies, only that the members achieve economies of scale. Whether written on a group or individual policy basis, rate and form filing requirements must be followed, although no state can decline to approve a benefit based on a group’s unique loss and expense experience. As a practical matter, state-specific endorsements would be required irrespective of whether group or individual policies are issued. Cancellation/non-renewal requirements vary state to state, but typically, notices need to be sent to the individual member in accordance with the law of their state of residence. A notice to the group applicable to all members likely would not satisfy the requirements of the statute.

Q: If coverage is issued on a surplus lines basis, where do surplus lines taxes get paid.

A: In general, the same rules apply as for individual policies. Premiums must be allocated by state and each state is entitled to its share of the surplus lines tax, paid by a licensed surplus lines broker. On the bright side, in most cases declinations may be obtained for the RPG as a whole, rather than on an individual member by member basis.

Disclaimer. The above is for informational purposes only and should not be construed or relied on as legal advice. In each case counsel’s advice should be obtained with regard to the specific facts and circumstances and with regard to the applicable law of the jurisdiction in question. The foregoing is not intended for the purpose of giving legal advice or responding to any specific legal inquiry.