U.S. CAPTIVE INSURANCE LAW
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They Could Have Used a Captive Insurance Company: Bruce Foods Company

7/31/2016

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We're holding a webinar on Thursday, August 4 titled Commercial Real Estate Companies and Captives; a Natural Fit.  You can sign up here.

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  
Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company
 

The following article is based on the fact of Bruce Foods Corp. v. Tex. Gas Serv.,  (W.D. Tex., 2014)


     From the case:

Plaintiff owns and operates a manufacturing facility in El Paso, Texas … that processes peppers and other vegetables.  Plaintiff requires a steady supply of natural gas to operate the boilers at the Facility. Because harvesting and processing peppers is a time-sensitive operation, any interruption in Plaintiff's natural gas supply can severely harm Plaintiff's business.

Based on this one paragraph, a captive would benefit the company in several ways. 

  1. Regardless of the product they produce, every manufacturer faces two potentially catastrophic risks: product liability and product recall.  A product liability policy will provide funds for legal representation and could, depending on the jurisdiction, reimburse the insured for at least part of the losses from an adverse verdict.  A product recall policy will provide funds for the insured in the event it has to remove a product from the “stream of commerce.”  It also provides funds for brand rehabilitation and legal representation if needed.
  2. Supply chain interruption: there are two supply chains in the case’s fact pattern.  The first is the supply of raw materials while the second is the natural gas powering production.  A supply chain interruption policy could indemnify the insured for losses in the event either supply chain is disrupted.
  3. Contract liability: contracts are the life blood of practically all businesses; it’s the primary way they formally establish their business relationships.  But not everybody lives up to their contractual obligations.  When the counter-party breaches, a contractual liability policy indemnifies the insured to help them cure the breach, or at least make them legally whole.

These are only a few of the policies this manufacturer could purchase from a captive insurance company.  If you’d like to learn more, please call us at 832.330.4101.            
 

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They Could Have Used a Captive: Doctor Bob Herrin

7/25/2016

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The facts for this post are from the following case: Medical Protective Co. v. Bob Herrin, (Tex. App. 2007)

We're holding two upcoming webinars: An Introduction to Captive Insurance on Thursday, July 28th and Commercial Real Estate Companies and Captives; a Natural Fit, on Thursday, August 4th.  You can sign up for each at the following respective links: here and here.

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  
Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company

 

  Dr. Bob Herrin was a practicing physician in Marshall, Texas for approximately 50 years.  For 40 of those years, Medical Protective provided his malpractice insurance.  In 1994, Dr. Herrin settled a $300,000 malpractice case.  Two years later, Medical Protective declined to renew the doctor’s liability policy.  The case’s facts do not offer a reason for the denial.

     How a captive would have helped:

  1. For a medical malpractice captive, it’s standard to write a large deductible, essentially turning the third-party coverage into an excess policy.  Here, the insured could have written a deductible of at least $100,000 and probably more. 
  2. It’s also standard to increase the deductible as the captive accumulates capital.  For example, in years 1-3, the captive underwrites the first $100,000 of risk.  Then, in year 4, that amount increases of $250,000. 

  Let’s look at this situation from several perspectives.  Using the facts stated above, assume that Dr. Herrin formed a captive 1 year before the suit was filed.  The doctor could have taken the first layer of risk with the captive paying $100,000 (or another amount) and the insurance company paying $200,000.  When the doctor renewed his policy, he could have told his third-party insurer that he’d like to continue writing a large deductible, which may have increased the likelihood of a renewal. 
 
  Next, assume the doctor formed the captive 10 years before the lawsuit.  At first, the captive took the first layer of risk – say, $100,000.  Then, after the captive built-up some capital, it increased the deductible to $250,000 or higher – again, a fairly standard captive fact pattern.  In this situation, the captive may have paid the entire claim, which would increase the likelihood that the third-party insurer would renew the policy.

     No matter how you look at this fact pattern, a captive would have helped.  If you’d like to discuss forming a captive, please call us at 832.330.4101.  
 
        

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They Could Have Had A Captive Insurance Company: Two Policies For a Medical Practice

7/17/2016

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We're holding two upcoming webinars: An Introduction to Captive Insurance on Thursday, July 28th and Commercial Real Estate Companies and Captives; a Natural Fit, on Thursday, August 4th.  You can sign up for each at the following respective links: here and here.

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  
Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company


Administrative Actions Coverage

 
 Doctors are governed by their respective state medical boards, who wield a large amount of regulatory power over the medical industry.  In addition, there are other state and federal organizations who have the ability to commence actions against doctors for a large number of potential infractions.    

   To cover this risk, captives commonly issue administrative actions policies, which cover the costs of “… all losses resulting from or caused by an ‘administrative action’ that occurs during the policy period.  The total calculation of losses will include ‘loss of income,’ ‘remedial measures,’ ‘legal representation,’ and ‘public relations expense,’ caused by ‘negative publicity’ if applicable and provided insured can demonstrate loss.”  The policy defines an “administrative action” broadly, usually using the following definition: “an ‘administrative action’ is a formal legal event, proceeding or ‘suit’ commenced by an ‘administrative agency’ (which would include the state bar), seeking to formally or informally adjudicate or enforce an administrative code.”

  Cyber Liability

   Target’s data breach in the winter of 2013 highlighted this risk in the public’s mind.  According to their March 13, 2015 10-K, it eventually cost the company $145 million.  Over the last year, other major companies reporting similar events include JP Morgan, Anthem Health and Home Depot.  The total cost of each breach now totals $3.8 million; the average per record cost has also increased from $144 to $154.[1] 
 
 Confidentiality adds an additional layer of risk for cyber liability.  Suppose a hacker successfully breached a medical practice’s computer system.  A client could sue the practice not only for the breach of data but also for a breach of confidentiality, potentially placing the doctors’ licenses in danger.  While there are no cases on point, it’s only a matter of time before plaintiff’s attorneys start testing this legal theory.   
 
  At a minimum, a medical practice’s captive program should underwrite a cyber-liability policy that provides coverage for:
 
         1.  A security breach where hackers obtain confidential client information such as physical and email addresses, social security (or similar) numbers, medical history   and other privileged information.
 
        2. Public relations expenses expended by the company to overcome negative publicity related to the event.
 
         3. Loss of income directly related to the event.
 
        4.  Extortion threats, where hackers obtain confidential information and then demand payment to not distribute it.


[1] Cory Bennett, Study: Data Breaches Average $3.8 Million, The Hill May 27, 2015.

 
   
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They Could Have Used a Captive Insurance Company: Harvey and Nina Koloms 

7/10/2016

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The facts for this article are taken from the following case: American States Insurance Co. v. Koloms 177 Ill.2d 473 (Ill. 1997)

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company
 
     The Koloms owned a 2-story commercial building.  In September 1990, the building’s furnace broke, emitting carbon dioxide that caused several tenants to become sick.  The tenants sued for damages.  The Koloms were covered by a commercial general liability policy (CGL) that had a total pollution exclusion (TPE).  When they submitted their claim, the carrier determined the “total pollution exclusion” (TPE) applied, preventing the insurer from providing coverage.  Several lower courts disagreed with the insurer’s analysis of the policy and ruled for the Koloms, forcing the insurer, American State Insurance Company, to appeal to the Illinois Supreme Court.

     The case centered around the TPE’s specific language and history.  American State argued the language clearly applied to the case’s facts while the insured responded that the TPE historically only applied to larger scale environmental disasters, not to routine commercial hazards.  The court researched how other states ruled on the issue and noted there was a split among the jurisdictions.  The court ruled for the insureds, arguing that, taken to its logical conclusion, the insurer’s argument would lead to an interpretation so broad that the TPE would apply to literally any discharge.

     How a Captive Would Have Helped

  1. There are several historical trends that led Congress to pass 831(b) in 1986, one of which is the large amount of claims insurers paid related to environmental litigation.  In the early 1970s, the TPE was added to the CGL to prevent that policy’s application to environment claims.  Since then, insurers have been very aggressive in their use of the TPE to deny coverage.  Using a captive to underwrite environmental claims – or at least the first layer of environmental risk through a deductible reimbursement policy – is a good idea.
  2. The Koloms could have underwritten all the risk related to their buildings HVAC system through the captive, which would have completely eliminated this litigation.
  3. This case went from the trial court, to the appellate court and finally to the state supreme court – three layers of very expensive litigation.  It’s standard for a captive to underwrite a legal liability policy, which would have provided the insured with funds to defend this litigation.
      
If you'd like to discuss the benefits of captive insurance and how a captive could help your company, please call us at 832.330.4101

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They Could Have Used a Captive Insurance Company: Raymond Corporation

7/3/2016

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The facts for this post are from the following case: Raymond Co. v. National Union Fire Insurance of Pittsburgh, 833 N.E.2d 232 (2005)

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company
   
​Raymond Corporation made side-loader forklifts; Arbor Handling Services sold Raymond’s products.  In 1994, Arbor sold 2 new units to Ryerson.  Due to a delay in the new unit’s delivery, Ryerson asked Arbor for 2 rentals.  Arbor employees negligently installed the units, causing serious injury to a Ryerson employee, who sued for damages. 
  
     All parties settled for $6 million; Arbor’s insurer paid $3 million.  Raymond, Arbor and National Union (Raymond’s insurer) disputed payment of an additional $2.5 million.  This dispute became the subject of a lawsuit, which eventually went to the New York Court of Appeals, who ruled for National Union, the insurer.   Their decision concluded that Raymond’s vendor endorsement did not apply to the Vendor’s negligence.  From the decision:

The vendor's endorsement has its genesis in products liability law. Accordingly, "[s]uch an endorsement covers the vendors' liability arising out of their role in passing the manufacturer's product on to customers, but does not cover vendors for their own negligence. Coverage under the vendor's endorsement is limited to injuries arising out of a defect in the manufacturer's product"      
…..
In sum, the vendor's endorsement in this case covers Arbor for defective-product suits arising out of its distribution, sale, repair, servicing, demonstration or rental of Raymond's products. Nothing in the wording of the endorsement (or the exclusions, for that matter) suggests that bodily injuries "arising out of" Raymond's products encompasses the vendor's independent acts of negligence. Our interpretation of the endorsement follows its language and comports with the traditional majority view, the origins of the vendor's endorsement as an outgrowth of products liability law, and common and economic sense.

How a captive would have helped:
  1. A legal liability policy, which pays legal fees associated with litigation, arbitration or mediation and which is a standard policy issued by a captive insurer, would have paid for the insured’s legal expenses.   These were probably considerable as the case went through three levels of legal proceedings.
  2. Standard captive underwriting involves a thorough analysis of the insured’s then in place insurance policies.  Had that occurred in this case, the lack of coverage for the vendor’s negligence should have come out and subsequently been underwritten by the captive.

If you think a captive would benefit your company, please call us at 832.330.4101.
 
 
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  • Welcome
  • Basic Information
    • Who Should Form a Captive?
    • Convert To A Pure Captive
    • How We Work
  • Following the Rules
    • Introduction to Anti-Avoidance Law
    • Substance Over Form
    • Sham Transaction
    • Step Transaction Doctrine
    • The Economic Substance Doctrine
  • Articles
  • Blog
  • About US