A.R.S. tit. 20 ch. 14 — Arizona Revised Statutes Title 20 Chapter 14 — Risk Retention Groups

20-2401. Definitions In this chapter, unless the context otherwise requires: 1. "Completed operations liability" means liability arising out of the installation, maintenance or repair of any product at a site which is not owned or controlled by either: (a) A person who performs that work. (b) A person who hires an independent contractor to perform that work. Completed operations liability includes liability for activities which are completed or abandoned before the date of the occurrence giving rise to the liability. 2. "Domicile", for purposes of determining the state in which a purchasing group is domiciled, means: (a) For a corporation, the state in which the purchasing group is incorporated. (b) For an unincorporated entity, the state of its principal place of business. 3. "Hazardous financial condition" means that, based on its present or reasonably anticipated financial condition, a risk retention group, although not yet financially impaired or insolvent, is unlikely to be able to either: (a) Meet obligations to policyholders with respect to known claims and reasonably anticipated claims. (b) Pay other obligations in the normal course of business. 4. "Insurance" means primary insurance, excess insurance, reinsurance, surplus lines insurance and any other arrangement for shifting and distributing risk which is determined to be insurance under the laws of this state. 5. "Liability": (a) Means legal liability for damages, including costs of defense, legal costs and fees and other claims expenses, because of injuries to other persons, damage to their property or other damage or loss to other persons resulting from or arising out of either: (i) A business, whether for profit or nonprofit, trade, product, services, including professional services, premises or operations. (ii) An activity of a state or local government, or an agency or political subdivision of the state. (b) Does not include personal risk liability and an employer's liability with respect to its employees other than legal liability under the federal employers' liability act (45 United States Code section 51). 6. "Personal risk liability" means liability for damages because of injury to a person, damage to property or other loss or damage resulting from any personal, familial or household responsibilities or activities other than those listed in paragraph 5. 7. "Plan of operation or feasibility study" means an analysis which presents the expected activities and results of a risk retention group including at least all of the following: (a) Information sufficient to verify that its members are engaged in businesses or activities similar or related with respect to the liability to which the members are exposed by virtue of any related, similar or common business, trade, product, services, premises or operations. (b) For each state in which the group intends to operate, the coverages, deductibles, coverage limits, rates and rating classification systems for each line of insurance the group intends to offer. (c) Historical and expected loss experience of the proposed members and national experience of similar exposures to the extent that this experience is reasonably available. (d) Pro forma financial statements and projections. (e) Appropriate opinions by a qualified, independent casualty actuary, including a determination of minimum premium or participation levels required to commence operations and to prevent a hazardous financial condition. (f) Identification of management, underwriting and claims procedures, marketing methods, managerial oversight methods and investment policies. (g) Other matters as prescribed by the director for liability insurance companies authorized by the insurance laws of the state in which the risk retention group is chartered. 8. "Product liability" means liability for damages because of any personal injury, death, emotional harm, consequential economic damage or property damage, including damages resulting from the loss of use of property, arising out of the manufacture, design, importation, distribution, packaging, labeling, lease or sale of a product. Product liability does not include the liability of a person for those damages if the product involved was in the possession of the person when the incident giving rise to the claim occurred. 9. "Purchasing group" means a group which meets all of the following criteria: (a) Has as one of its purposes the purchase of liability insurance on a group basis. (b) Purchases the insurance only for its group members and only to cover their similar or related liability exposure, as described in subdivision (c) of this paragraph. (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. (d) Is domiciled in any state. 10. "Risk retention group" means a corporation or other limited liability association formed under the laws of any state which meets all of the following criteria: (a) Its primary activity consists of assuming and spreading all or any portion of the liability exposure of its group members. (b) It is organized for the primary purpose of conducting the activity described in subdivision (a) of this paragraph. (c) It is either: (i) Chartered and licensed as a liability insurance company and authorized to engage in the business of insurance under the laws of any state. (ii) It was, before January 1, 1985, chartered or licensed and authorized to engage in the business of insurance under the laws of Bermuda or the Cayman Islands and, before January 1, 1985, had certified to the insurance commissioner of at least one state that it satisfied the capitalization requirements of the state. Any such group is a risk retention group only if it has been engaged in business continuously since January 1, 1985 and only for the purpose of continuing to provide insurance to cover product liability or completed operations liability. (d) It does not exclude any person from membership in the group solely to provide for members of a group a competitive advantage over the person. (e) It either: (i) Has as its owners only persons who comprise the membership of the risk retention group and who are provided insurance by the group. (ii) Has as its sole owner an organization which has as its members only persons who comprise the membership of the risk retention group and has as its owners only persons who comprise the membership of the risk retention group and who are provided insurance by the group. (f) Its members are engaged in businesses or activities similar or related with respect to the liability which the members are exposed to by virtue of any related, similar or common business, trade, product, services, premises or operations. (g) Its activities do not include the provision of insurance other than: (i) Liability insurance for assuming and spreading all or any portion of the liability of its group members. (ii) Reinsurance with respect to the liability of any other risk retention group or any members of any other group which is engaged in businesses or activities that meet the requirement described in subdivision (f) of this paragraph from membership in the risk retention group which provides the reinsurance. (h) The name of the group includes the phrase "risk retention group". 11. "State" means any state of the United States or the District of Columbia. 20-2402. Risk retention groups chartered and licensed in this state; definitions A. A risk retention group, pursuant to this title, shall be chartered and licensed to write only liability insurance pursuant to this chapter and, except as provided in this chapter, must comply with this title with respect to insurers that are chartered and licensed in this state and with section 20-2403. Before it may offer insurance in any state, each risk retention group shall also submit for approval to the director of the department of insurance and financial institutions a plan of operation or a feasibility study and revisions of the plan or study if the group intends to offer any additional lines of liability insurance. The group shall not offer any additional kinds of liability insurance in this state or in any other state until a revision of the plan or study is approved by the director of the department of insurance and financial institutions. B. Immediately on receipt of an application for a charter, this state shall provide summary information concerning the filing to the national association of insurance commissioners, including the name of the risk retention group, the identity of the initial members of the group, the identity of those individuals who organized the group or who will provide administrative services or otherwise influence or control the activities of the group, the amount and nature of initial capitalization, the coverages to be afforded and the states in which the group intends to operate. C. A risk retention group that is licensed in this state shall comply with all of the following: 1. The board of directors of the risk retention group shall have a majority of independent board directors. If the risk retention group is a reciprocal risk retention group, the attorney-in-fact shall be required to adhere to the same standards regarding independence of operation and governance as imposed on the risk retention group's board of directors or subscribers' advisory committee, or both, under these standards, and, to the extent permissible under this state's laws, service providers of a reciprocal risk retention group shall contract with the risk retention group and not the attorney-in-fact. 2. A board director does not qualify as independent unless the board of directors affirmatively determines that the board director has no material relationship with the risk retention group. Each risk retention group shall disclose these determinations to its domestic regulator at least annually. Any person that is a direct or indirect owner of or subscriber in the risk retention group or is an officer, board director or employee, or all three, of an owner and insured, as contemplated by 15 United States Code section 3901(a)(4)(E)(ii), is considered to be independent, unless some other position of that officer, board director or employee constitutes a material relationship. 3. The term of any material service provider contract with the risk retention group may not exceed five years. Any contract or its renewal shall require the approval of the majority of the risk retention group's independent board directors. The risk retention group's board of directors shall have the right to terminate any service provider, audit or actuarial contracts at any time for cause after providing adequate notice as defined in the contract. The service provider contract is deemed material if the amount to be paid for that contract is greater than or equal to five percent of the risk retention group's annual gross written premium or two percent of its surplus, whichever is greater. A service provider contract that is a material relationship may not be entered into unless the risk retention group has notified the director of the department of insurance and financial institutions in writing of its intention to enter into the transaction at least thirty days before and the director of the department of insurance and financial institutions has not disapproved the transaction within that period. 4. The board of directors of a risk retention group shall adopt a written policy in the plan of operation as approved by the board that requires the board of directors to do all of the following: (a) Ensure that all owners or insureds, or both, of the risk retention group receive evidence of ownership interest. (b) Develop a set of governance standards applicable to the risk retention group. (c) Oversee the evaluation of the risk retention group's management, including the performance of the captive manager, managing general underwriter or other parties responsible for underwriting, determination of rates, collection of premium, adjusting or settling claims or the preparation of financial statements. (d) Review and approve the amount to be paid for all material service providers. (e) Review and approve, at least annually, all of the following: (i) The risk retention group's goals and objectives relevant to the compensation of officers and service providers. (ii) The officers' and service providers' performance in light of those goals and objectives. (iii) The continued engagement of the officers and material service providers. 5. Each risk retention group shall have an audit committee composed of at least three independent board members. A nonindependent board member may participate in the activities of the audit committee, if invited by the members, but cannot be a member of that committee. The audit committee shall have a written charter that defines the committee's purpose, which, at a minimum, shall be to do all of the following: (a) Assist in board oversight of the integrity of the financial statements, the compliance with legal and regulatory requirements and the qualifications, independence and performance of the independent auditor and actuary. (b) Discuss the annual audited financial statements and quarterly financial statements with management. (c) Discuss the annual audited financial statements with its independent auditor and, if advisable, discuss its quarterly financial statements with its independent auditor. (d) Discuss policies with respect to risk assessment and risk management. (e) Meet separately and periodically, either directly or through a designated representative of the committee, with management and independent auditors. (f) Review with the independent auditor any audit problems or difficulties and management's response. (g) Set clear hiring policies of the risk retention group as to the hiring of employees or former employees of the independent auditor. (h) Require the external auditor to rotate the lead or coordinating audit partner having primary responsibility for the risk retention group's audit as well as the audit partner responsible for reviewing that audit, so that neither individual performs audit services for more than five consecutive fiscal years. (i) Report regularly to the board of directors. 6. The director of the department of insurance and financial institutions may waive the requirement to establish an audit committee pursuant to paragraph 5 of this subsection if the risk retention group demonstrates to the director that doing so is impracticable and the risk retention group's board of directors is otherwise able to fulfill the requirements of the audit committee as set forth in this section. 7. The board of directors shall adopt and disclose governance standards by making the information available through electronic means, such as posting the information on the risk retention group's website, or other means, and providing that information to members and insureds on request. The information shall include all of the following: (a) A process by which the board directors are elected by the owners or insureds, or both. (b) Board director qualification standards. (c) Board director responsibilities. (d) Board director access to management and, as necessary and appropriate, independent advisers. (e) Board director compensation. (f) Board director orientation and continuing education. (g) The policies and procedures that are followed for management succession. (h) The policies and procedures that are followed for the annual performance evaluation of the board. 8. The board of directors shall adopt and disclose a code of business conduct and ethics for board directors, officers and employees and promptly disclose to the board of directors any waivers of the code for board directors or executive officers, including all of the following topics: (a) Conflicts of interest. (b) Matters covered under the corporate opportunity doctrine under the state of domicile. (c) Confidentiality. (d) Fair dealing. (e) Protection and proper use of risk retention group assets. (f) Compliance with all applicable laws, rules and regulations. (g) Requiring the reporting of any illegal or unethical behavior that affects the operation of the risk retention group. 9. The captive manager, president or chief executive officer of the risk retention group shall promptly notify the domestic regulator, in writing, if either becomes aware of any material noncompliance with any of the risk retention group's governance standards. D. For the purposes of this section: 1. "Board director" means a natural person designated in the articles of the risk retention group, or designated, elected or appointed by any other manner, name or title to act as a board director. 2. "Board of directors" or "board" means the governing body of the risk retention group elected by the shareholders or members to establish policy, elect or appoint officers and committees and make other governing decisions. 3. "Material relationship" means a person's relationship with the risk retention group, including any of the following: (a) The receipt in any one twelve-month period of compensation or payment of any other item of value by that person, a member of that person's immediate family or any business with which that person is affiliated from the risk retention group or a consultant or service provider to the risk retention group that is greater than or equal to five percent of the risk retention group's gross written premium for that twelve-month period or two percent of its surplus, whichever is greater, as measured at the end of any fiscal quarter falling in a twelve-month period. The person or immediate family member of that person is not independent until one year after the person's compensation from the risk retention group falls below the threshold. (b) A relationship with an auditor in which a board director or an immediate family member of a board director who is affiliated with, or employed in, a professional capacity by a present or former internal or external auditor of the risk retention group is not independent until one year after the end of the affiliation, employment or auditing relationship. (c) A relationship with a related entity in which a board director or immediate family member of a board director who is employed as an executive officer of another company where any of the risk retention group's present executives serve on that other company's board of directors is not independent until one year after the end of that service or the employment relationship. 4. "Service providers" includes captive managers, auditors, accountants, actuaries, investment advisers, attorneys and managing general underwriters or any other party responsible for underwriting, determination of rates, collection of premium, adjusting and settling claims or the preparation of financial statements. For the purposes of this paragraph, attorney does not include defense counsel retained by the risk retention group to defend claims, unless the amount of fees paid to those attorneys creates a material relationship. 20-2403. Risk retention groups not chartered and licensed in this state A. Before offering insurance in this state, a risk retention group shall submit to the director all of the following: 1. Evidence that the group meets the criteria of a risk retention group. 2. A statement identifying the state or states in which the risk retention group is chartered and licensed as a liability insurance company, the date of chartering and its principal place of business. 3. A copy of its plan of operations or a feasibility study and revisions of the plan or study submitted to its state of domicile. 4. A statement of registration which designates the director as its agent for the purpose of receiving service of legal documents or process. The director shall determine the filing fee for the statement of registration. B. A risk retention group doing business in this state shall submit to the director all of the following: 1. A copy of the group's financial statement submitted to the state in which the risk retention group is chartered and licensed, which is certified by an independent public accountant and contains a statement of opinion on loss and loss adjustment expense reserves made by a member of the American academy of actuaries or a qualified loss reserve specialist under criteria established by the director. 2. A copy of each examination of the risk retention group as certified by the director or public official conducting the examination. 3. On request by the director, a copy of any audit performed with respect to the risk retention group. 4. Information required to verify it continues to meet the criteria as a risk retention group under section 20-2401, paragraph 10. C. Each risk retention group is liable for the payment of premium taxes and taxes on premiums of direct business for risks resident or located in this state and shall report to the director the net premiums written for risks resident or located in this state. The risk retention group is subject to taxation and any applicable fines and penalties related to the taxation on the same basis as a foreign admitted insurer. To the extent licensed insurance producers are used pursuant to this chapter, they shall report to the director the premiums for direct business for risks resident or located in this state which the licensees have placed with or on behalf of a risk retention group which is not chartered and licensed in this state. To the extent that insurance producers are used pursuant to this chapter, the insurance producer shall keep a complete and separate record of all policies procured from each risk retention group. The record shall be open to examination by the director. These records, for each policy and each kind of insurance provided under each policy, shall include all of the following: 1. The limit of liability. 2. The time period covered. 3. The effective date. 4. The name of the risk retention group which issued the policy. 5. The gross premium charged. 6. The amount of return premium, if any. D. A risk retention group and its agents and representatives shall comply with section 20-461 pertaining to unfair claims settlement practices. E. A risk retention group shall comply with chapter 2, article 6 of this title. However, if the director seeks an injunction regarding such conduct, the injunction shall be obtained from a court of competent jurisdiction. F. A risk retention group shall submit to an examination by the director to determine its financial condition if the director of the jurisdiction in which the group is chartered and licensed has not initiated an examination or does not initiate an examination within sixty days after a request by the director of this state. Any examination shall be coordinated to avoid unjustified repetition and conducted in an expeditious manner and in accordance with rules established by the director. G. A policy issued by a risk retention group shall contain in ten point type on the front page and the declaration page the following notice: Notice This policy is issued by your risk retention group. Your risk retention group may not be subject to all of the insurance laws and regulations of your state. State insurance insolvency guaranty funds are not available for your risk retention group. H. The following acts by a risk retention group are prohibited: 1. The solicitation or sale of insurance by a risk retention group to a person who is not eligible for membership in the group. 2. The solicitation or sale of insurance by, or operation of, a risk retention group that is in a hazardous financial condition or is financially impaired. I. No risk retention group may do business in this state if an insurance company is directly or indirectly a member or owner of the risk retention group, other than a risk retention group whose members are insurance companies. J. A risk retention group which is not chartered and licensed in this state and is doing business in this state must comply with a lawful order issued in a voluntary dissolution proceeding or in a delinquency proceeding commenced by a state insurance director if there has been a finding of financial impairment after an examination under subsection F of this section. K. The director, in establishing criteria for loss and loss adjustment reserves under subsection B, paragraph 1 of this section and in conducting examinations under subsection F of this section, for purposes of uniformity, shall consider any nationally adopted criteria or procedure. L. In addition to complying with the requirements of this section applicable to risk retention groups doing business in this state, any risk retention group operating in this state before August 18, 1987 shall comply with subsection A of this section within thirty days after August 18, 1987. M. A risk retention group which violates any provision of this chapter is subject to fines and penalties applicable to licensed insurers generally, including revocation of its license or the right to do business in this state. 20-2404. Compulsory associations A. No risk retention group is required or permitted to join or contribute financially to any insurance insolvency guaranty fund, or similar mechanism, in this state, and no risk retention group, or its insureds or claimants against its insureds, may receive any benefit from any fund for claims arising under the insurance policies issued by the risk retention group. B. If a purchasing group obtains insurance covering its members' risks from an insurer that is not authorized in this state or a risk retention group, no risks wherever resident or located may be covered by any insurance guaranty fund or similar mechanism in this state. C. If a purchasing group obtains insurance covering its members' risks from an authorized insurer, only risks resident or located in this state may be covered by the state guaranty fund. D. A risk retention group shall participate in this state's joint underwriting associations and mandatory liability pools as provided by this title. 20-2406. Purchasing groups; exemption from certain laws relating to the group purchase of insurance A. A purchasing group which meets the criteria established under the federal liability risk retention act of 1986 is exempt from any law of this state relating to the creation of groups for the purchase of insurance, prohibition of group purchasing or any law that would discriminate against a purchasing group or its members. B. This state shall not enact any law or the director shall not adopt a rule which imposes prohibitions or requirements on purchasing groups in violation of section 3(a) of the liability risk retention act of 1986, Public Law 99-563. A purchasing group is subject to all applicable laws of this state. 20-2407. Notice and registration requirements of purchasing groups A. A purchasing group which intends to do business in this state, before doing business, shall furnish notice to the director which: 1. Identifies the state in which the group is domiciled. 2. Specifies the lines and classifications of liability insurance which the purchasing group intends to purchase. 3. Specify the method by which, and the person or persons, if any, through whom, insurance will be offered to its members whose risks are resident or located in this state. 4. Identifies the principal place of business of the group. 5. Provides other information as may be required by the director to verify that the purchasing group meets the criteria under section 20-2401, paragraph 9. B. The purchasing group shall register with and designate the director as its agent solely for the purpose of receiving service of legal documents of process. The director shall determine the filing fee. This requirement does not apply in the case of a purchasing group: 1. Which in any state both: (a) Was domiciled before April 1, 1986. (b) Is domiciled on October 27, 1986 in any state. 2. Which both: (a) Before October 27, 1986 purchased insurance from an insurance carrier licensed in any state. (b) Since October 27, 1986 purchased its insurance from an insurance carrier licensed in any state. 3. Which was a purchasing group under the requirements of the product liability risk retention act of 1981 (15 United States Code section 3901) before October 27, 1986. 4. Which does not purchase insurance that was not authorized for purposes of an exemption under the product liability risk retention act of 1981 (15 United States Code section 3901), in effect before October 27, 1986. C. Any purchasing group which was doing business in this state before the effective date of this chapter, within thirty days after the effective date of this chapter, shall furnish notice to the director pursuant to subsection A and furnish information required pursuant to subsection B. 20-2408. Restrictions on insurance purchased by purchasing groups A. A purchasing group may not purchase insurance from a risk retention group that is not chartered in a state or from an insurer which is not admitted in the state in which the purchasing group is located, unless the purchase is effected through a licensed insurance producer. B. No purchasing group may offer insurance policy coverage prohibited by this title or declared unlawful by the supreme court of this state. C. A purchasing group which obtains liability insurance from an insurer that is not admitted in this state or a risk retention group shall inform each of the members of the group which have a risk resident or located in this state that the risk is not protected by an insurance insolvency guaranty fund in this state and that the risk retention group or the insurer may not be subject to all insurance laws and rules of this state. 20-2409. Administrative and procedural authority regarding risk retention groups and purchasing groups The director may make use of any of the powers established under this title to enforce the laws of this state so long as those powers are not specifically preempted by the product liability risk retention act of 1981, as amended by the risk retention amendments of 1986. This includes the director's administrative authority to investigate, issue subpoenas, conduct depositions and hearings, issue orders and impose penalties. With regard to any investigation, administrative proceedings or litigation, the director may rely on the procedural law and rules of this state. The injunctive authority of the director in regard to risk retention groups is restricted by the requirement that any injunction be issued by a court of competent jurisdiction. 20-2410. Penalties A risk retention group which violates any provision of this chapter is subject to civil penalties set forth in section 20-220 and section 20-456 and to revocation or suspension of its license and the right to do business in this state. 20-2411. Duty of insurance producer to obtain license A. No person, firm, association or corporation may act or aid in any manner in soliciting, negotiating or procuring liability insurance in this state from a risk retention group unless the person, firm, association or corporation is licensed as an insurance producer in accordance with this title. B. No person, firm, association or corporation may act or aid in any manner in soliciting, negotiating or procuring liability insurance in this state for a purchasing group or any of its members from an authorized insurer or a risk retention group chartered in a state unless the person, firm, association or corporation is licensed as an insurance producer in accordance with this title. C. No person, firm, association or corporation may act or aid in any manner in soliciting, negotiating or procuring liability insurance from an insurer that is not authorized to do business in this state on behalf of a purchasing group which is located in this state unless the person, firm, association or corporation is licensed as a surplus lines broker or excess line broker in accordance with this title. D. For purposes of acting as an insurance producer or surplus lines broker for a risk retention group or purchasing group pursuant to subsections A, B and C of this section, the requirement of residence in this state does not apply. E. Every person, firm, association or corporation that is licensed pursuant to this title, on business placed with risk retention groups or written through a purchasing group, shall inform each prospective insured of the provisions of the notice required by section 20-2403, subsection G in the case of a risk retention group and section 20-2408, subsection C in the case of a purchasing group. 20-2412. Binding effect of orders issued in United States district court An order issued by any district court of the United States enjoining a risk retention group from soliciting or selling insurance or operating in any state on a finding that such a group is in a hazardous financial condition is enforceable in the courts of this state. 20-2413. Rules The director may adopt rules relating to risk retention groups as may be necessary or desirable to carry out the provisions of this chapter. 20-2414. Annual report A. The director shall annually report the following information to the president of the senate and the speaker of the house of representatives: 1. The number of risk retention groups licensed in this state since August 6, 2016. 2. Any regulatory action taken by the director against a risk retention group licensed in this state for noncompliance with section 20-2402. B. The director may provide the report required by subsection A of this section in an electronic format.