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PERMISSIBLE OWNERSHIP INTEREST

IN A

RISK RETENTION GROUP

 

Ownership questions under the LRRA are largely questions of state law, which generally permits different classes of ownership interests.  In a stock corporation, these are reflected through different classes of stock, and the owners of the different classes have different entitlements to distributions and different voting rights.  In mutual corporations and reciprocals, it is also common to see different membership interests with different entitlements.

 

The use of different classes of ownership interests is often useful to reflect different levels of contribution to the company’s surplus, or to vest different degrees of control with different classes.  And in a medical professional liability RRG, for example, different classes of stock might be issued to each of the member hospitals, physician groups, and individual doctors.  However structured, all owners must have at least some participation in distributional or voting rights of the company to satisfy LRRA ownership requirements.

 

The Act makes clear that any ownership interest by non-insured’s is prohibited, whether these ownership interests are direct or indirect.  If there are non-insured’s who claim entitlement to the company’s equity, or who participate directly in governance control, the company would not be a legitimate RRG and would not be entitled to the benefits extended by the LRRA.

 

Protection of third-party contributors therefore poses a problem.  Ultimately, any person or entity providing startup capital to an RRG that is not insured by the group takes on risk.  To reduce that, the entity may in some circumstances – and only with regulatory approval – enter into an agreement with the RRG whereby the RRG agrees to repay contributed amounts over time, provided it has the ability to do so out of retained earnings or surplus contributions from members.  The agreement may also provide for annual interest payments, representation on the board pending repayment, a reinsurance or service relationship, or other provisions acceptable to the group’s members and regulators.

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