Swanco Insurance Company--arizona, Appellant, v. William D. Hager, Commissioner of Insurance of the State Ofiowa, Appellee, 879 F.2d 353 (8th Cir. 1989)

This appeal involves the Product Liability Risk Retention Act of 1981 as amended by the Liability Risk Retention Act of 1986, 15 U.S.C. §§ 3901-3906 (1982 & Supp. V 1987) (the Act), which authorizes persons and businesses with similar or related liability exposure to form "purchasing groups" for the purpose of purchasing liability insurance on a group basis and "risk retention groups" for the purpose of self insurance. 15 U.S.C. § 3901(a) (4), (5). Because some states' laws make purchasing groups and risk retention groups illegal, the Act contains express provisions that preempt such laws. This appeal raises the question of whether, consistent with the Act, the State of Iowa may require an insurance company providing coverage to a purchasing group domiciled in another state but having members in Iowa to be licensed in Iowa.

In 1981, Congress enacted the Product Liability Risk Retention Act, Pub. L. No. 97-45, 95 Stat. 949 (1981) (1981 Act). The 1981 Act was Congress's response to the problems businesses had encountered in obtaining product liability coverage. Premiums had increased dramatically, and some businesses reportedly were unable to obtain coverage at any price. The 1981 Act attempted to redress the crisis by allowing businesses to purchase insurance at more favorable rates either by forming self-insurance pools called risk retention groups or by forming purchasing groups, which purchase group insurance from an existing insurer. Congress intended to reduce the cost and increase the availability of product liability insurance and to preempt certain state laws that prohibited or hindered the formation of these groups.

The 1981 Act was amended by the Liability Risk Retention Act of 1986, Pub. L. No. 99-563, 100 Stat. 3177 (1986), to expand the scope of the preemption to enable risk retention and purchasing groups to provide not only product liability insurance but all types of liability insurance. The 1986 Amendments also include provisions dealing with the permissible scope of state regulation of risk retention and purchasing groups.

This case involves the Ugly Duckling Rent-A-Car System, Inc. Risk Purchasing Group, which is domiciled in Arizona, and has members in Iowa. Appellant Swanco Insurance Company (Swanco) is a corporation chartered and licensed in Arizona as a property casualty insurer, with its principal place of business in Tucson. Swanco, which is not licensed under Iowa law to issue insurance in Iowa, insures the Ugly Duckling Purchasing Group.

On July 22, 1987, appellee William D. Hager, Commissioner of Insurance for the State of Iowa, scheduled a hearing to determine whether Swanco was in violation of the Iowa Unauthorized Insurers Act for providing coverage to a purchasing group with members in Iowa. Swanco moved to dismiss the proceeding on the ground that the Act preempts application of the Iowa statute to Swanco, in that the Act required Swanco to be licensed only in the state where the purchasing group is domiciled. After a hearing examiner denied Swanco's motion, Swanco filed a complaint in the District Court seeking declaratory and injunctive relief.

On cross-motions for summary judgment, the magistrate¹  granted summary judgment in favor of the Commissioner on the ground that the Act does not preempt the Commissioner's authority to require an insurer providing coverage to purchasing group members in Iowa to comply with Iowa's licensing laws.² 

Swanco appeals the magistrate's decision, contending that the plain meaning of the term "located" in section 4(f),³  as well as the legislative history of that section, make it clear that a purchasing group is "located" in only one state, namely the state in which the group is domiciled. Swanco further argues that the Act as so construed preempts Iowa from requiring Swanco to be licensed in Iowa. Although we conclude that Swanco's reading of "located" in section 4(f) is correct, we nevertheless conclude that neither section 4(f) nor any other provision of the Act preempts states from applying licensing requirements that do not directly conflict with the express preemption provisions in section 4(a). Accordingly, we affirm.

We consider first the meaning to be given to the phrase "the State in which the purchasing group is located" in section 4(f) of the Act, the pertinent part of which is set forth in the margin of this opinion at footnote 3.

The Commissioner contends that a purchasing group is "located" wherever the group has members, and therefore section 4(f) requires an insurer providing coverage to a purchasing group to be licensed (or an eligible surplus lines carrier)⁴  in each state where the group has members. Swanco contends that section 4(f) requires the insurer to be licensed only in its state of domicile.

Based upon our reading of the Act, we conclude that Swanco's position is correct. We think it is significant that section 4(f) uses the term "the State" in the singular. It does not refer to "the States" or to "every State" in which the purchasing group is located, nor does it refer to "a State," a form which could be construed to mean multiple states. Furthermore, section 4(f) refers only to the location of "the purchasing group," and not the location of its "members." Other sections of the Act refer separately to "the purchasing group," "members of the group," and "its members," see 15 U.S.C. § 3903(a), (b), demonstrating a clearly drawn distinction between the purchasing group and its members. We therefore conclude that "the purchasing group" language of section 4(f) is not to be read as encompassing members of the group.

This conclusion--that section 4(f) refers to a single state--requires us to identify that state or, more precisely, to determine the statutory test for identifying the "state in which the purchasing group is located." Basing the state of location on the group's highest premium volume, or where the most members reside, or the state which has the greatest interest in the purchasing group's activities, would be problematic because these factors may not be easily ascertainable and may change over time. That is not to say that Congress could not have decided to base "location" on one of these factors. We do not believe, however, that Congress intended to do so, for it chose to gear other sections of the Act to the purchasing group's domicile. See 15 U.S.C. § 3901(a) (5) (D) (requiring that a purchasing group be domiciled in a state); 15 U.S.C. § 3903(d) (1) (A) (requiring a purchasing group to give notice of the group's state of domicile to a state in which it plans to do business). Further, the Act allows risk retention groups to declare the state in which the group will be chartered. See 15 U.S.C. § 3901(a) (4) (C) (i). Though the statute is not a model of clarity, we conclude that the state of location referred to in section 4(f) is the state in which the purchasing group is domiciled. Since in the present case the purchasing group is domiciled in Arizona, section 4(f) requires the insurer (Swanco) to be admitted only in Arizona, not in all the various states, including Iowa, in which the purchasing group has members. Accordingly, we reject the Commissioner's argument that section 4(f) requires insurers to be licensed in every state in which a group has members.

Our conclusion that section 4(f) requires the insurer to be licensed (or an eligible surplus lines carrier) in only the purchasing group's state of domicile does not end our analysis. The question remains whether Congress intended to exempt insurers of purchasing groups from the licensing and regulatory laws of nondomiciliary states. The Commissioner contends that under the reading of the Act that we have adopted in Part II of this opinion, section 4(f) should be viewed as a minimum federal requirement leaving nondomiciliary states free to enforce their licensing laws and regulations to the extent they are not inconsistent with the Act. Swanco counters that Congress, by enacting section 4(f), has preempted nondomiciliary states from regulating insurers of purchasing groups.

Preemption occurs when Congress, in enacting a statute, expresses a clear and manifest intent to preempt state law, Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S. Ct. 1305, 1309, 51 L. Ed. 2d 604 (1977); when there is an outright conflict between the federal law and state law, Free v. Bland, 369 U.S. 663, 666, 82 S. Ct. 1089, 1092, 8 L. Ed. 2d 180 (1962); where Congress has legislated comprehensively, thus occupying the field so as to leave no room for the states to supplement federal law, Rice v. Sante Fe Elevator Corp., 331 U.S. 218, 230, 67 S. Ct. 1146, 1152, 91 L. Ed. 1447 (1947); or where state law stands as an obstacle to the execution of the federal law passed by Congress, Chicago & North Western Transportation Co. v. Kalo Brick & Tile Co., 450 U.S. 311, 317, 101 S. Ct. 1124, 1130, 67 L. Ed. 2d 258 (1981). We begin our analysis with the well-established presumption against imputing to Congress an intention to preempt an area that traditionally has been left to state regulation. See Wisconsin Educ. Ass'n Ins. Trust v. Iowa State Bd. of Pub. Instruction, 804 F.2d 1059, 1064 (8th Cir. 1986) (citing Jones v. Rath Packing Co., 430 U.S. at 525, 97 S. Ct. at 1309).⁵ 

It is undisputed that insurance is an area that traditionally has been left to state regulation. It also is undisputed that Congress intended the Act to preempt certain state laws that prohibited or hindered the formation of purchasing groups. The question then is whether the Iowa law requiring Swanco to be licensed in Iowa is preempted by section 4(f). In other words, does the Act overcome the presumption against preemption? Our task is to determine whether Congress plainly has demonstrated its intent that section 4(f) should have preemptive effect. To make this determination, we must look to the language and structure of the Act.

The Act creates two distinct alternatives, self-insurance by risk retention groups and group purchase of insurance by purchasing groups. Congress considered but rejected the creation of a comprehensive federal regulatory scheme for purchasing and risk retention groups. See H.R.Rep. No. 190, 97th Cong., 1st Sess. 6-7, reprinted in 1981 U.S.Code Cong. & Admin.News 1432, 1435; see also Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1471-72 (11th Cir. 1985), cert. denied, 479 U.S. 852, 107 S. Ct. 183, 93 L. Ed. 2d 118 (1986). Instead, Congress created separate and distinct preemption schemes for the two groups. "These carefully drafted provisions were designed to provide a 'workable legal framework' balancing the traditional authority of the states and the need for purchasing groups to ameliorate the liability insurance crisis." Insurance Co. of State of Pennsylvania v. Corcoran, 850 F.2d 88, 91 (2d Cir. 1988) (citing H.R.Rep. No. 865, 99th Cong., 2nd Sess. at 21, 1986 U.S.Code Cong. & Admin.News 5303, 5318).

Section 3 of the Act allows groups with similar types of risk to form and own their own insurance company to insure against their liability exposures. The risk retention group is chartered in the group's state of domicile and this state is primarily responsible for the group's regulation. See 15 U.S.C. § 3902(a) (1). The authority of nondomiciliary states is largely preempted. Section 3(a) (1) 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." (emphasis added). The Act specifically enumerates the exceptions to this broad preemption. See 15 U.S.C. § 3902(a) (l) (A)-(I) (among the powers reserved to nondomiciliary states are the authority to tax business written in the nondomiciliary state, to require compliance with the nondomiciliary state's unfair claims and deceptive trade practices laws, and to require policies issued by risk retention groups to give notice that the nondomiciliary state's insurance laws and state guarantee funds might not apply). Thus, aside from the specific powers reserved to nonchartering states, the Act prohibits those states from regulating risk retention groups.⁶ 

The Act's approach to purchasing groups is quite different. Unlike section 3, which broadly preempts state law while enumerating specific laws that the state may enforce, section 4 expressly preempts only a limited number of specific state laws.⁷  Nothing in the 1986 Amendments, which expanded the applicability of the 1981 Act to all forms of liability insurance, undermines the preemption structure developed by the 1981 Act.⁸  The statutory meaning is clearly manifested in section 4(g), which states: " [n]othing in this chapter shall be construed to affect the authority of any State to make use of any of its powers to enforce the laws of such State with respect to which a purchasing group is not exempt under this chapter." 15 U.S.C. § 3903(g).

The language and structure of the Act thus strongly support the Commissioner's position that section 4(f) does not preempt a nondomiciliary state from imposing its licensing requirements upon insurers who wish to sell to purchasing group members in that state.

Swanco maintains that Congress intended to free purchasing groups and their insurers from multiple and inconsistent state regulations, and that allowing states to enforce their licensing laws defeats the purpose of the Act.⁹  Although Swanco may be correct in stating that total preemption of nondomiciliary state regulation would enhance the ability of purchasing groups to operate, our reading of the statute does not permit us to accept Swanco's conclusion that the Act must be given a broad preemptive effect. Section 4(a) specifically preempts certain state laws. Except for those explicitly preempted laws, the Act leaves the states free to apply their laws in a nondiscriminatory manner.¹⁰  Instead of total preemption, Congress "selected particularized means to [an] end in conscious recognition that a considerable area of state regulation would remain intact." Corcoran, 850 F.2d at 93 (rejecting insurer's argument that Congress intended wholesale preemption for purchasing groups). Swanco's position is at odds with the statutory scheme and thus cannot prevail.¹¹ 

In conclusion, we affirm the magistrate's grant of summary judgment in favor of the Commissioner on the ground that Iowa is not preempted under the Act from requiring Swanco to comply with Iowa's licensing requirements.