Captive Insurance

 

BREAKING NEWS

 

• 2021.04.26 ... The IRS Warns Again On Microcaptives And Announces A New Office Of Promoter Investigations
• 2021.03.22 ... The U.S. Tax Court Drives A Stake Into The Heart Of Microcaptives In Caylor Land

 

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INTRODUCTION TO CAPTIVE INSURANCE

 

In its most simple form, a captive insurance company is an insurance company, which is owned by the parent but legally separate from it, that underwrites some or all of the insurance needs of the parent's operating business subsidiaries.

 

To say that captives have fundamentally changed the insurance marketplace would be an understatement. Once upon a time, large business organizations purchased their insurance satisfied all their insurance needs by purchasing insurance in the commercial marketplace, just as an individual would buy auto or homeowner's insurance just on a much larger scale. No more.

 

Today, nearly all large business organizations have their own insurance companies -- and sometimes several -- and use these captives to provide primary coverage for the bulk of their insurance needs. If a risk is too great for their own insurance company to take on, the captive lays off the risk by purchasing reinsurance directly from one of the large reinsurance companies. The effects include the elimination of the "middlemen" insurance companies (and thus the middlemen's advertising costs and agent commission costs, etc.) and much greater efficiencies in the handling or claims, thus dramatically lowering the organization's overall costs of insurance which inures to the benefit of shareholders directly and to the overall health of the economy indirectly.

 

Until 2001, the IRS repeatedly but unsuccessfully challenged captive insurance companies as subterfuges for non-deductible self-insurance within the business. After the IRS lost its $600+ million challenge against a captive owned by United Parcel Service in 2001, the Service resigned itself to the legitimacy of captive insurance companies and soon thereafter abandoned its economic family challenges to captives. The IRS has since issued a great deal of guidance to assist captive owners in their proper structuring, management and reporting.

 

Nearly all major corporations have captives -- indeed, it is hard to identify a major corporation that does not have at least one captive insurance company. Some corporations have multiple captives that serve different risks. For instance, a corporation may have one captive that primarily covers the corporation's general liability, environmental liability, and product liability risks, and then another captive that insures the employee benefit liabilities of the corporation, such as workers compensation and healthcare.

 

Examples of corporate captives: Parent ~ Captive ▪ Exxon-Mobil ~ Ancon Insurance Company ▪ Archer Daniels Midland ~ Agrinational Insurance Company ▪ Verizon ~ Exchange Indemnity Company ▪ A T & T ~ Gateway Rivers Insurance Company ▪ ConocoPhillips ~ Sooner Insurance Company ▪ Starwood Hotels ~ Westel Insurance Company ▪ C B S Corporation ~ Central Fidelity Insurance Company ▪ Boeing ~ Astro Limited ▪ New York Times Company . . . Midtown Insurance Company.

 

Increasingly, non-profit organizations are also forming captive insurance companies to handle their insurance risks in-house. One example above is Veritas Insurance Corporation, a captive insurance company of the University of Michigan. Another is the National Catholic Risk Retention Group, Inc., a form of captive insurance company wholly owned by its member dioceses.

 

More than half of the states have now passed captive insurance enabling statutes, and more than a half-dozen of those states now aggressively cater to the domestic captive market. Captives are now being formed for medium-sized businesses that are able to pay as little as $500,000 per year in premiums to their captive.

 

There are many ways to differentiate captives, but they may be parsed into two primary groups:

 

• Group Captives are captive insurance companies that are formed by a group of companies in the same or similar business sectors to provide particular types of insurance to all the companies in the same group, which insurance may be otherwise difficult or cost-prohibitive to acquire on the commercial insurance markets. Examples of this may be found in captives that were formed in the 1970s and 1980s to provide product liability insurance at a time of a very hard insurance market when such insurance was hard to procure at a reasonable price. In more recent years, such group captives have proven to be very popular for workers compensation insurance and medical malpractice insurance.

 

• Pure Captives are captive insurance companies that are formed to provide insurance only to other operating subsidiaries of the parent organization. Pure captives are very much a creature of tax law: Congress (and like bodies in other countries) could tomorrow negate the need for these captives simply by allowing these business organizations to internally reserve against their risks, which is presently not allowed for a variety of primarily tax-related reasons. Thus, it is of primary importance for many of these insurance companies to qualify for tax purposes as a captive (the premiums paid to captives are tax deductible and the company may accrue reserves against income) as opposed to simply a self-insurance program (the premiums paid are not deductible by the insureds and reserves may not be accrued).

 

Unfortunately, beginning in the late-2000s, certain small captive insurance companies which elect under Internal Revenue Code section 831(b), began to be mass-marketed as tax shelters, thus drawing the ire of Congress and the IRS, and so now greater care must be taken with so-called "831(b) captives" to ensure that they are indeed fully tax-compliant. Because of the media attention focused on these smallish captives, they command a wildly disproportional amount of the discussion about captives although in terms of total premium dollars received they are but a drop in the bucket compared to the larger corporate captives.

 

 

 

2021.07.23 ... Delaware Department Of Insurance Loses IRS Summons Fight For Artex And Tribeca Captives But Can Appeal

2021.05.20 ... U.S. Supreme Court Rules On Anti-Injunction Act In Microcaptive Context

2021.04.26 ... The IRS Warns Again On Microcaptives And Announces A New Office Of Promoter Investigations

2021.03.22 ... The U.S. Tax Court Drives A Stake Into The Heart Of Microcaptives In Caylor Land

2020.12.31 ... U.S. District Judge Denies Blanket Assertion Of Attorney-Client Privilege In Moore Ingram Microcaptive Promoter Audit Case

2020.10.22 ... IRS Announces A Second Settlement Initiative For Abusive Microcaptive Tax Shelters But With Much Stricter Compliance Requirements Requiring Independent Counsel

2020.10.02 ... IRS Warns Microcaptive Shelter Penalties To Get Much Worse, Taking On The Puerto Rico Deal And Other Next-Generative Captive Shelters

2020.09.23 ... U.S. Tax Court Affirms Most Penalties In Patel Microcaptive Shelter Case But Kicks Out Some For IRS Procedural Errors

2020.09.12 ... Microcaptive Manager Artex And Related Professionals Dodge The Class Action Bullet In Shivkov

2020.09.10 ... GAO Report To Grassley At Senate Finance Slams Offshore Microcaptive And Variable Life Insurance Transactions

2020.08.24 ... Buyers Of Jade Risk Get Taken To Woodshed In Litigation Arising From Merger Of Captive Insurance Managers

2020.08.08 ... IRS Sends Second Wave Of Soft Letter Warnings To Certain Captive Owners For A busive Microcaptive Transactions

2020.07.27 ... Microcaptive Tax Shelter Promoter Investigation Of Moore Ingram Law Firm Leads To Attorney-Client Privilege Issues With Client Documents

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More articles

 

General Resources

• Articles On Captives ... An archive of articles by Jay Adkisson on captive insurance companies
• Captive Insurance Litigation Issues ... Procedural and similar court issues involving captive insurance company arrangements that are in litigation.

 

State Regulation

• State Regulation Of Captives ... Issues related to the regulation and taxation of captives by the states

 

U.S. Tax Considerations For Captive Arrangements

• Captive Taxation Generally ... An overview of captive taxation, including the IRS's abandonment of its "Economic Family Theory"
• Protected Cell and Series Captives ... Considers the unique tax issues that involve protected cell companies (PCCs) and series business units (SBUs)
• Tax: Risk Distribution: Multiple Insureds ... Considers the IRS safe harbor for multiple insureds and risk distribution through many "points of insurance" generally
• Tax: Risk Distribution: Unrelated Insurance ... Describes the IRS "50% unrelated third-party insurance" safe harbor and related issues
• Tax: Risk Distribution: Risk Pools ... Introduces the concept of risk pools which are sometimes used by captive managers to assist their clients in obtaining 50% third-party insurance, and which are currently under heavy scrutiny by the IRS
• Tax: Risk Shifting ... Considers the tax law requirement that an insurance arrangement have a true shifting of risk between the insured and the insurer

 

§ 831(b) Captives

• 831(b) Captives Generally ... Discusses the unique characteristics and problems of captive insurance companies that qualify for the IRC section 831(b) election

• Class action lawsuits related to 831(b) risk-pooled captive tax shelters

 

Expert ... Expert witness and available for consultation as an expert regarding captive insurance company matters

 

Evaluation & Formation ... Jay has been involved with the formation of well over 100 captive insurance companies since 1998, and now assist prospective captive owners in evaluating their suitability for a captive, and in forming the captive and obtaining its insurance license

 

Litigation ... Frequently serves as counsel in disputes involving insurance companies

 

Remediation & Closing ... Remediation and termination of defective captive arrangements, and consulting and second-opinion reviews of existing captives

 

 

• Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances.

 

• Asset Protection - The all-time best-selling book on asset protection planning by Jay Adkisson and Chris Riser.

 

• Creditor-Debtor Law - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies.

 

• Voidable Transactions - Discussion of the Uniform Voidable Transactions Act (a/k/a 2014 Revision of the Uniform Fraudulent Transfers Act) and fraudulent transfer law in general.

 

• Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused.

 

• Charging Orders - The confusing remedy against a debtor's interest in an LLC or partnership is explained in reference to the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Limited Liability Company Act.

 

• Protected Series LLCs - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017.

 

• California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues.

 

• Anti-SLAPP Laws - A collection of and commentary about Anti-SLAPP laws and significant court decisions on the subject within the United States, and special section on California Anti-SLAPP laws.

 

© 2021 Jay D. Adkisson. All Rights Reserved. No claim to original government works. The information contained in this website is for general educational purposes only, does not constitute any legal advice or opinion, and should not be relied upon in relation to particular cases. Use this information at your own peril; it is no substitute for the legal advice or opinion of an attorney licensed to practice law in the appropriate jurisdiction. This site is https://captiveinsurancecompanies.com