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Restoration Risk Retention Group, Inc. v. Gutierrez

United States Court of Appeals, Seventh Circuit

January 12, 2018

Restoration Risk Retention Group, Inc., Plaintiff-Appellant,
Laura Gutierrez, Secretary, Wisconsin Department of Safety and Professional Services, et al., Defendants-Appellees.

          Argued September 14, 2017

         Appeal from the United States District Court for the Western District of Wisconsin. No. 3:16-cv-00296-jdp - James D. Peterson, Chief Judge.

          Before Wood, Chief Judge, and Ripple and Hamilton, Circuit Judges.

          Ripple, Circuit Judge.

         Restoration Risk Retention Group, Inc. ("Restoration Risk") brought this action seeking injunctive and declaratory relief against the Secretary of the Wisconsin Department of Safety and Professional Services ("WDSPS"), and the Trades Credentialing Unit ("TCU") of the WDSPS. Restoration Risk claims that TCU's new interpretation of a Wisconsin statute is incorrect or, in the alternative, that the Liability Risk Retention Act ("LRRA"), 15 U.S.C. §§ 3901-3906, preempts the statute as interpreted by TCU.

         The district court denied Restoration Risk's motions for a preliminary injunction and for partial summary judgment. It granted the defendants' motion for partial judgment on the pleadings. In doing so, the district court agreed with TCU's new interpretation of the Wisconsin statute, which effectively barred Restoration Risk from operating in Wisconsin. It also concluded that TCU's interpretation was not preempted by the LRRA.

         After the parties stipulated to a voluntary dismissal without prejudice of all remaining claims, the district court entered a final judgment in favor of the defendants. Restoration Risk timely filed this appeal.

         For the reasons set forth in this opinion, we vacate the district court's judgment and remand the case so that the district court can determine whether intervening amendments to the Wisconsin statute render this litigation moot.




         We begin our analysis with a description of risk retention groups ("RRGs") and of the federal statutory scheme at issue in this case.

         A risk retention group is a form of insurance company; the hallmark of such an entity is that it insures only its owners, sometimes referred to as shareholders or members. See All. of Nonprofits for Ins., Risk Retention Grp. v. Kipper, 712 F.3d 1316, 1319 n.l (9th Cir. 2013).[1] Risk retention groups grew in popularity because, with the increase in product liability litigation, some manufacturers struggled to find affordable product liability insurance. Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062, 1064 (7th Cir. 1998). Indeed, some manufacturers had to choose between "unpalatable" insurance options (such as premiums that amounted to "as much as six percent of gross sales" or rates that rose "twenty-five fold in a single year") or shutting their doors. Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1463 (11th Cir. 1985).

         To address this situation, Congress enacted the Products Liability Risk Retention Act ("PLRRA") to encourage and permit "manufacturers to pool their resources into risk retention groups to provide those members of the group with insurance coverage." Musser, 143 F.3d at 1064. Because insurance regulation traditionally is left to the states, the PLRRA explicitly preempted state laws that inhibited the formation of risk retention groups. Congress later expanded the PLRRA by enacting the Liability Risk Retention Act ("LRRA").

         Under this statutory scheme, Congress sought to protect the establishment of risk retention groups, to subject them primarily to the regulatory requirements of their state of incorporation, and to limit the ability of other states to impose other unnecessarily burdensome regulations upon them. See generally Wadsworth v. Allied Profls Ins. Co., 748 F.3d 100, 103 (2d Cir. 2014). Congress sought to achieve these goals by taking the following steps.

         First, the statute 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). We refer to this clause as the "preemption clause."

         Second, having exempted, in a general way, risk retention groups from state regulation, the statute then restores state regulation in a manner calibrated to ensure the effectiveness of these groups. The statute provides that a risk retention group's domiciliary, or chartering, state is the only state allowed to regulate its formation and operation. Musser, 143 F.3d at 1064. The risk retention group must be "subject to that state's insurance regulatory laws, including adequate rules and regulations allowing for complete financial examination of all books and records, including but not limited to proof of solvency." Id. At that point, the risk retention group may operate in any state. Id.

         Third, the statute recognized that other states had important, but limited, interests in imposing some regulation on risk retention groups operating within their borders. The statute accomplishes this goal by reserving certain regulatory powers for nonchartering states by "saving" them from the general preemption clause and giving nonchartering states concurrent authority with chartering states for certain areas of regulation. See 15 U.S.C. § 3905. Relevant to Restoration Risk's claims, the LRRA saves from preemption nonchartering state laws that require risk retention groups "to ... demonstrate[e] financial responsibility where the State has required a demonstration of financial responsibility as a condition for obtaining a license or permit to undertake specified activities." 15 U.S.C. § 3905(d). We refer to this as the "financial responsibility savings clause."

         To complicate matters, however, the seemingly finely tuned allocation of authority is subject to an antidiscrimination clause that prohibits states from "otherwise[] discriminat[ing] against a risk retention group or any of its members, " but does not exempt risk retention groups from any laws that are generally applicable to individuals or corporations. 15 U.S.C. § 3902(a)(4). We refer to this as the "antidiscrimination clause."


         Restoration Risk is a risk retention group chartered in Vermont. Its shareholder-insureds are businesses that clean and restore buildings after disasters such as floods and fires. In Wisconsin, these businesses are categorized and regulated as "dwelling contractors." At the time this suit was filed, Wisconsin required dwelling contractors to obtain an annual certificate of financial responsibility from TCU, a requirement they can satisfy with proof of a "policy of general liability insurance issued by an insurer authorized to do business in [Wisconsin]." Wis.Stat. Ann. § 101.654(2)(a) (West 2010).[2]Since 2006, dwelling contractors in Wisconsin could meet this state requirement by securing general liability insurance from Restoration Risk, which was registered with the Wisconsin Office of the Commissioner of Insurance ("OCT'). This arrangement worked because ...

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