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PERMISSIBLE OWNERSHIP INTEREST

IN A

RISK RETENTION GROUP

 

Section 1 of the LRRA makes clear that there are only two permissible ownership structures for RRGs.   See 15 U.S.C. §3901(a)(4)(E).  The first, and by far most common, is to have the RRG owned directly by those persons or entities who comprise its membership and are insured by the group.  The second ownership operation involves a single entity owning the RRG, which in turn has as its members and owners the insured’s of the RRG.   This indirect ownership structure, other than interposing a holding company type entity between the members and the RRG, is conceptually identical to the direct ownership option.  The legislative history of the LRRA makes clear that Congress intended that all insured’s participate in ownership, and that no other person or entity have any ownership interest.

 

The Act imposes an additional ownership limitation – all insured owners of an RRG must be engaged in businesses or activities, which are similar or related with respect to liability exposures.  Thus, a medical professional RRG could insure hospitals, physician groups and individual doctors, but lawyers and doctors could not be insured by the same RRG.

 

RRGs have been organized as stock corporations, mutual corporations, and reciprocals (a form of a mutual company accorded special tax treatment by the Internal Revenue Code).  State corporate laws, under which these various types of business entities are organized, recognize ownership interests in shareholdings (for stock corporations), policyholder interests (for mutual corporations), and subscriber interests (for reciprocals).

 

As a general rule, ownership interests entail participation in the company’s equity, or surplus, entitlement to any distributions, and participation in the company’s governance.  Regardless of entity type, It is the entity’s owners that elect the governing body and who control the governance structure through adoption and amendment of charger documents.  Under state law, any significant change to a corporation’s articles of incorporation or bylaws, for example, may not be implemented without shareholder approval.

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