On Wednesday, June 15th, we're hosting a webinar titled "An Introduction to Captive Insurance." It starts at 1PM CST and will last for about half an hour. 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.
The facts used in this post are derived from the following case: Delta and Pine Land Company v. Nationwide Agribusiness Insurance Company, 530 F.3d 398 (5th Cir. 2008).
The Delta Pine and Land Company sold seeds to farmers. They purchased a commercial general liability and umbrella policy from Nationwide Agribusiness. Each policy had a rider that specifically extended coverage to products sold by the insured. In 2002, 56 customers sued Delta, alleging the company’s seed resulted in substantially lower crop yield. Delta filed a declaratory judgement against Nationwide for indemnification and legal fees. Nationwide responded with a request for declaratory judgment and won. Delta appealed.
These facts are unremarkable. A company that sells a specific product purchased insurance to provide coverage for product defect. After being served with notice of a lawsuit, they petitioned the court to determine the legal rights under their policies. Any company that has purchased insurance and then been sued for a claim can relate to these facts.
Why didn’t the insurance company simply grant the insured coverage? While we are not privy to the insurance company’s thinking, it’s possible they determined the costs of litigation against the insured were far lower than a potential payout to 56 litigants. The lower court proved them right.
How would a captive benefit Delta Pines in this fact pattern?
The company petitioned the lower court to rule that the insurer should provide legal representation for the insured. When Delta lost, they had to find an alternate source of payment, which was most likely free cash flow. But most captives provide a legal liability coverage that provides funds to pay for representation in the event of a lawsuit, mediation or arbitration. This would have prevented the drain on their finances caused by the litigation.
Issues related to the seed liability are a bit more complicated. The standard CGL policy excludes risks related to a product sold by the insured. Most umbrella policies have the same terms and conditions as their CGL counterparts to insure continuity of coverage. But here, both policies had a rider that specifically included the insured’s product. It’s well within reason to assume the insured added these riders because they believed they covered product liability.
Then why did the trial court rule against the insured? This is purely speculative, but contract interpretation is not an exact science. It’s very possible the lower court ruled against the insured due to the inherent tension between the “your product” exclusion and riders that were supposed to include seed based products.
A captive would have given the insured two options for product liability coverage. They could have purchased a CGL policy with a large deductible. Then, their captive could sell the parent a deductible reimbursement policy to cover the gap. Or, they could have simply written a product liability policy to cover the first layer of risk and then purchased an excess policy to provide top layer coverage. Either option is viable. And both would have eliminated the initial cost of having to trial and appellate litigation.
Delta found out the hard way contract interpretation isn’t always friendly to insureds. And the larger the claim filed, the higher the possibility that the insurance company will try and find a way to limit their payout. This is why a captive that covers at least some of your risk makes a great deal of sense. Please call as at 832.330.4101 if you’d like to learn more.