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They Could Have Used a Captive Insurance Company: PPG Industries

8/28/2016

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If you're unsure if your company is a viable captive candidate, we'll perform a free evaluation​ It starts with a conversation that lasts between 30-60 minutes and is followed by an analysis of your currently in force insurance policies.

If you'd like to schedule the initial meeting, please call us at 832.330.4101.


We're hosting a webinar titled "An Introduction to Captive Insurance" on Thursday September 29.  You can register at this link.
 
The follow facts are from Joseph v. PPG Industries, 674 S.W.2d 862, (Austin 1984):

On August 19, 1977 Joseph entered into a written contract with John Swope Construction Company (Swope) for Swope to build a commercial building for the maximum price of $250,000. Plans and specifications called for installation of a series of double paned windows. PPG submitted a bid for sale and installation of the glass which was accepted by Swope. PPG and Swope entered into a written contract providing that PPG would sell and install the glass for $10,654.01.

The contract also contained a warranty which provided that if the materials (glass) furnished by PPG had not been manufactured in a workmanlike manner, "PPG's only obligation shall be to provide a replacement unit(s) but no labor."  Joseph paid Swope all but $9,000 of the contract price for the entire building; payment of the contract necessarily included the window glass. Swope, however, failed to pay PPG, abandoned the job sometime in September of 1978, and cannot be found.

The above facts illustrate the need for the following insurance coverage:
  1. Contractual liability: the case is centered on a contract dispute, where one party breached its agreed to promises.  Traditional commercial general liability policies exclude this risk while a captive can provide coverage for a counter-party breach and an “anticipatory repudiation.” 
  2. Sub-contractor default: this is all too common in the construction industry.  For example, a contractor hires a sub-contractor to perform part of a job.  Sometime after completion, fault is found with the sub-contractor’s work, who has disappeared.  The primary contractor, however, is still a going concern who is now liable for the loss.  A sub-contractor default policy would provide coverage for the primary contractor’s exposure.
  3. Warranty: the Uniform Commercial Code places several warranties on goods sold between “merchants.”  In addition, a seller may make certain warranties to non-merchants. "Curing” a defect in the goods costs money.  Captives routinely underwrite this risk.      
  4. Product Liability: anyone who places a product in the “stream of commerce” can be held liable by a plaintiff’s attorney for harm caused by that good.  A product liability policy would provide coverage for this event.
  5. Product recall: like product liability, it’s always possible that someone who makes a good will have to remove it from the shelves due to defect.  A product recall policy indemnifies the insured for this expense.
  6. A legal liability policy provides funds for an attorney in the event the insured is sued.  All the parties in this fact pattern would have benefited from this policy.
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The Liability Insurance Crisis of the 1980s; What's an Accident, Anyway?

8/20/2016

 
We're hosting a webinar on Thursday, September 1 at 11 AM titled An Introduction to Captive Insurance.  You can sign up at this link.

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
  

   As I noted last week, there were several historical trends that led to the insurance crisis of the 1980s.  Perhaps the oddest was the legal debate about the definition of “accident,” which was the triggering event of the first several post-WWII commercial general liability policies.  Insurance companies argued that an “accident” was a short duration event, like an auto accident.  Policy holders argued an “accident” took longer – up to 9 months or a year.  For example, an insured would argue that an employee injured by continuous exposure to a chemical had endured an “accident” within the terms contemplated by the policy. 

   The following excerpt, which explains some of this debate along with its historical context and eventual resolution, is from “The Rise and Fall of Commercial Liability Insurance” by Kenneth S. Abraham, Professor at the University of Virginia:
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831(b) Was About Much More Than Farm Mutuals

8/13/2016

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We're hosting a webinar on Thursday, September 1 at 11 AM titled An Introduction to Captive Insurance.  You can sign up at this link.

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
    

​   For reasons I have yet to discern, whenever people talk about the history of captives, they focus exclusively on farm mutuals, implying 831(b) was nothing more than a political sop to representatives from the nation’s breadbasket.  Nothing could be further from the truth.  By the mid-1980s, U.S. business faced an insurance crisis caused by the following events: a Tsunami of litigation stoked by changes in tort law, aggressive plaintiff’s bars, more liberal insurance policy interpretations that broadened coverage beyond that contemplated by actuaries and, finally, larger jury awards, especially for punitive damages.  The problem was so pervasive that Time Magazine placed the crisis on a 1986 cover: 


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​These events caused losses across the insurance industry, as shown in the following two graphics from the 1986 Department of Justice report titled, “Report of the Tort Policy Working Group on the Causes, Extent and Policy Implications of the Current Crisis in Insurance Availability and Affordability:” 
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The top chart quantifies the insurance industry's losses for the years 1980-1985 while the second chart simply places similar data into graphical format.  Both show a clear pattern of accelerating losses, which led widespread problems.  

     Just remember: Congress passed 831(b) to solve an economy--wide problem.  While this obviously benefited farm mutuals, it also benefited a large swath of American business.   
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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