The Could Have Used a Captive: DG&G, Co.

 
 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 facts for this article are from the following case: Michigan Millers Mutual Insurance Company v, DG&G Co. 569 F.3d 808, (8th Cir. 2009)

    DG&G was a Missouri company that ginned cotton which they delivered to Federal Compass.  In December 2005, Federal noticed that DG&G’s product contained significantly more moisture than industry standards, leading several DG&G’s customers to demand payments for damages.  The company directly paid $5.1 million after their insurer, Michigan Miller’s Mutual Insurance Company, denied the claim.  The situation eventually devolved into litigation involving numerous parties. 

   DG&G had three insurance policies that they thought would pay for their attorneys and damages.  They were wrong.  Their commercial general liability policy excluded damages caused to property under the company’s care or control; the umbrella policy adopted all the CGLs provisions, so it provided no coverage.  And the Agribusiness Policy contained an exemption for “defects, errors, and omissions” in the insured’s machinery.  Unfortunately, the company argued mechanical problems caused the moisture problem as part of their case, preventing coverage under this policy.  Despite having several insurance policies, DG&G had no coverage.

      There are several ways a captive would have helped:

1. Third party insurance is great for insuring against standard risk; a commercial general liability policy provides excellent coverage for a “slip and fall” while a property policy indemnifies the insured when his property catches fire.  But it becomes more likely the third-party policy will exclude a claim when the insured seeks coverage for a stochastic risks (low frequency, higher payout).  In this case, the captive could have written a policy for product liability, avoiding this situation altogether.
2. The larger the claim, the more likely the insurance company will try to deny it due to the negative impact on the insurer’s bottom line.  Here, the potential payout was over a $1 million dollars, which is probably a main reason why the insurer fought the insured over payment.  Compare that situation to a captive, where the insured could have simply documented the claim and wired the payment to his corporate account. 
3. Here, the insurance company completely controlled the drafting process.  While several rules, such as the adhesion contract doctrine or the axiom that courts should interpret policy language to infer coverage, are supposed to counter-balance that benefit, it is best not to rely on the court’s largess.  Had this company formed a captive, they could have written a broadly phrased policy that easily covered the risk.

 
Please call us at 832.330.4101 if you'd like to learn more about how a captive insurance company would benefit your business.