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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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