Business Insurance Captive Insurance

Why Make a 953(d) Election?

There are a number of reasons why a foreign insurance company would make a so-called 953(d) election.  This article will discuss two of those reasons.

What is a 953(d) Election?

The term “953(d) election” refers to a decision made by a foreign insurance company to be taxed as a United States taxpayer.  For purposes of this discussion, a foreign insurance company is an insurance company incorporated in an off-shore jurisdiction, which is neither licensed, nor engaged in business, in the United States, and can include a captive insurance company.  Typically, a foreign insurance company would not be taxed as a United States taxpayer and would not be required to file a Form 1120-PC with the Internal Revenue Service (IRS).

For the reasons discussed below, a foreign insurance company might prefer to be taxed as a United States taxpayer.  As a result, section 953(d) of the Internal Revenue Code (Code) permits a foreign insurance company to elect to be taxed as a United States taxpayer if certain conditions are met.  Those conditions include the following:

1. The foreign corporation must be a “controlled foreign corporation” (CFC).

2. The foreign corporation would qualify under part I or part II of subchapter L of the Code, if it were a domestic corporation. This simply means that the corporation is an insurance company.

3. The foreign corporation meets the requirements set out by the IRS. The IRS has set out those requirements in Rev. Proc. 2003-47.

4. The foreign corporation makes an election to have section 953(d) apply.

What is a Controlled Foreign Corporation?

As stated above, one of the requirements for making a 953(d) election is that the foreign insurance company is a controlled foreign corporation.  The definition of a CFC is provided in section 957(a) of the Code, as modified by section (b) for insurance companies.  A CFC is any foreign insurance company if more than (i) 25% of the total combined voting power of all classes of stock entitled to vote, or (ii) 25% of the total value of the stock of such corporation, is owned by a United States person on any day during the taxable year of the corporation.

The term “person” includes a United States citizen, a domestic partnership, a domestic corporation, an estate and a trust.  Ownership refers not just to direct ownership, but also includes ownership determined by applying rules of attribution.

How Does a Foreign Insurance Company Make a 953(d) Election?

The requirements for making a 953(d) election are set forth in Rev. Proc. 2003-47, which provides that a foreign insurance company must submit a statement to the IRS of its intention to be taxed as United States taxpayer.  The statement must include a list of all United States shareholders, including the name, address, tax identification number and ownership interest of each shareholder.  The foreign insurance company must agree to update the list on an annual basis.  In addition, the foreign insurance company must agree to pay all taxes as they become due.  An acceptable form of the statement is attached to Rev. Proc. 2003-47 as Appendix A.

In addition, the foreign corporation must meet one of two additional requirements.  The first is called the asset test.  To satisfy the asset test, the foreign insurance company must have (i) a place of business within the United States and (ii) assets equal to 10% of its adjusted gross income for the base year, which are physically located in the United States.  The base year is the taxable year immediately preceding the year in which the election is filed or the year of filing for a new entity.  A foreign insurance company that does not meet the asset test will instead be required to enter into a closing agreement with the IRS and post a letter of credit in an amount equal to 10% its adjusted gross income for the base year, but not less than $75,000 or greater than $10,000,000.

The election is not effective until it has been accepted by the IRS.  However, it will be effective as of the first day of the tax year in which the election was filed.  The election remains in effect until it has been revoked.

The Shareholder of a CFC is Taxed on Subpart F Income

The first reason for a foreign insurance company to make a 953(d) election is that, without the election, certain shareholders of the foreign insurance company will be taxed on the insurance income of the corporation.  So, while a foreign insurance company, which is a CFC, may not be subject to United States income tax, its shareholders are.

Section 951(a)(1) of the Code provides that:

If a foreign corporation is a controlled foreign corporation at any time during any taxable year, every person who is a United States shareholder . . . of such corporation and who owns . . . stock in such corporation on the last day, in such year, on whichcsuch corporation is a controlled foreign corporation shall include in his gross income . . .

(A) his pro rata share . . . of the corporation’s subpart F income for such year . . .

The term “United States shareholder” is defined in section 951(b) as any person who owns 10% or more of the voting power of all classes of stock of the foreign corporation entitled to vote or 10% or more of the total value of shares of all classes of the foreign corporation.  The term “subpart F income” is defined in section 952(a)(1) as “insurance income” (as defined under section 953), and section 953(a)(1)(A) defines “insurance income” as any income in connection with the issuance of an insurance or annuity contract.  In addition, the tax is owed on subpart F income whether it is actually paid to the shareholder or not.

The shareholders of a foreign insurance company will be taxed on the gross premiums paid to the foreign insurance company, if the foreign insurance company is a controlled foreign corporation, as most captives are.  This tax is not only paid on money actually paid to the shareholders, but also on phantom income – i.e. income that is not distributed to the shareholders.  However, shareholders of a foreign insurance company, which is a CFC, will not be subject to this tax if the foreign insurance company makes a 953(d) election.  In that case, the foreign insurance company will be taxed as a United States taxpayer and not as a CFC.

A Foreign Insurance Company is Subject to the Federal Excise Tax

The second reason for a foreign insurance company to make a 953(d) election is section 4371 of the Code, which imposes an excise tax on foreign insurance companies that issue policies covering United States risks.  The tax is very straightforward.  It is a certain percentage of premiums without deductions or set offs.

For property and casualty insurance, the tax is 4 cents on each dollar, or fraction thereof, of premium paid on the policy.  For life insurance, the tax is 1 cent on each dollar, or fraction thereof, of premium paid on the policy.  The tax is also 1 cent on each dollar, or fraction thereof, of the premium paid on a policy of reinsurance.

A foreign insurance company that makes a 953(d) election is treated as a domestic corporation.  It is not taxed as a foreign corporation.  Therefore, premiums paid by a United States person to a foreign insurance company, which has made a 953(d) election, are not subject to the Federal Excise Tax.  This is a great reason for making a 953(d) election.  It means that 100% of the premiums received by the foreign insurance company, including a captive insurance company, will be available to pay claims asserted against the insurance company.  This will provide policyholders with peace of mind that the foreign insurance company will have the ability to pay claims as they become due.

Captive Insurance Risk Management

New Jersey Supreme Court Provides Relief To Captive Insurance Company

On December 7, 2020, the New Jersey Supreme Court ruled in favor of Johnson & Johnson on its claim for a refund of insurance premium taxes.  The Supreme Court adopted the decision of the Superior Court of New Jersey Appellate Division, which had overruled a decision of the New Jersey Tax Court denying the refund.

Johnson & Johnson Formed a Captive

Johnson & Johnson (J&J) is a well-known, international pharmaceutical company headquartered in New Jersey.  In 1970, J&J formed a captive insurance company called Middlesex Assurance Company Limited (Middlesex) in Bermuda to, as the Appellate Court found, “secure broader coverage and lower the costs and fees associated with its substantial insurance needs”.  The Appellate Court further found that Middlesex was a “pure or single-parent captive”.  By the time of the lawsuit, Middlesex had been re-domiciled to Vermont.  This meant that Middlesex was authorized to do business only in Vermont and was not authorized to do business in New Jersey.  In addition, as a captive insurance company, Middlesex issued insurance coverage only to J&J.

The Different Types of Insurance Markets

There are generally two types of insurance markets.  The first is the “admitted market”, and the second is the “nonadmitted or unauthorized market”.  An admitted insurer is an insurance company licensed and authorized to do business in a particular state.  This means that it can market its products directly to a resident of the state and can deliver its policies in the state.

An unauthorized insurer is an insurance company that is not licensed in a particular state and, as a result, cannot engage in marketing activities in that state.  While an unauthorized insurer may not do business in a particular state, that does not mean that a resident of that state may not buy insurance coverage from the unauthorized insurer.

The United States Supreme Court long ago held that a person has the constitutional right to buy insurance from any company of their choosing.  Therefore, while an unauthorized insurer cannot do business in a particular state, residents of that state may still procure insurance from that unauthorized insurer.

In addition, there are two types of unauthorized insurance markets.  The first is the “surplus-lines insurance market”, and the second is the “self-procured insurance market”.  The “surplus-lines market” refers to the situation where no insurance company licensed in the state is willing to cover a particular risk.

In that case, a “surplus-lines” policy may be procured through a “surplus-lines broker”, who is licensed and regulated by the state.  The “self-procured market” refers to the situation where an insured procures insurance from an unauthorized insurer directly without the help of a surplus-lines broker.

In the J&J case, the Appellate Court held that the surplus-lines market and the self-procured market are separate and distinct.  It also found that J&J procured insurance from Middlesex without the help of a surplus-lines broker.  Therefore, the insurance coverage that J&J obtained from Middlesex was self-procured insurance.

Insurance Premium Taxes

Most states in the country impose a tax on insurance premiums.  The rates vary by state, but there are very few states that do not impose such a tax.  When the premiums are paid to an admitted carrier, the state looks to the insurance company for the payment of the tax.

When insurance is purchased through a surplus-lines broker, the state generally looks to the broker for the payment of the tax.  When the insurance is self-procured, the state generally looks to the insured for the payment of the tax.

Nonadmitted and Reinsurance Reform Act

The Nonadmitted and Reinsurance Reform Act (NRRA) is a federal statute passed as part of the Dodd-Frank legislation.  The NRRA, which became effective in 2011, provides for the reporting, payment and allocation of insurance premium taxes in connection with the purchase of unauthorized insurance.

Prior to the NRRA, the payment of insurance premium taxes was a complicated and unruly system.  Each state had its own regime and generally taxed insurance premiums covering risks located within the state.  This meant that an insured with locations in multiple states could have reporting and payment obligations in all of those states when it bought insurance in the unauthorized market.  This was a reporting and accounting nightmare.

The NRRA adopted what is known as the “home state rule”.  Under the “home state rule”, only the “home state” of an insured could impose an insurance premium tax on insurance premiums paid to an unauthorized insurer.  The NRRA further defined the term “home state” as the place where the insured has its principal place of business, or the state where the greatest percentage of premium is paid, if 100% of the risk is in a state other than where the insured has its principal place of business.  In addition, an insured’s home state could impose a tax on 100% of the premiums paid by the insured, even if the insured was insuring risks in multiple states.

The NRRA Is Not Mandatory

This brings us back to the J&J case.  As the Appellate Court noted, the NRRA does not require a state to impose a premium tax.  A premium tax can only be imposed by a state’s legislature through the enactment of a statute.  More importantly, the NRRA does not require that a state impose a tax on all premiums paid by an insured, even on those premiums for risks located out of state.  It simply authorizes a state to impose its premium tax on all premiums paid by an in-state insured.

After the enactment of the NRRA, New Jersey amended its insurance premium tax statute to conform to the NRRA.  Prior to the amendment, the New Jersey premium tax statute provided that the insurance premium tax was assessed only on risks located in New Jersey.  The amendment purported to change the insurance premium tax regime by assessing the tax on all premiums paid by a resident of New Jersey, even on premiums paid for risks located in other states.

However, the New Jersey legislature, to put it mildly, screwed up.  As stated above, surplus-lines insurance and self-procured insurance are separate and distinct.  In fact, in New Jersey, they are governed by separate sections of the New Jersey statutes.  The problem is that, when the legislature attempted to amend the premium tax statute, it only added the necessary language to the surplus-lines section.  It did not amend the section that governs the self-procured insurance premium tax.

After the amendment, J&J, as a precautionary measure, paid insurance premium tax on all premiums that it paid to Middlesex, even for risks located outside of New Jersey.  J&J then sued for a refund of taxes that it claimed it had overpaid.

The Appellate Court, in an opinion adopted by the New Jersey Supreme Court, said that it was required to apply the precise language of the statute.  It reiterated that self-procured insurance is not surplus-lines insurance.  And, when the legislature amended the stature by adding language to the surplus-lines section, but not the self-procured section, it was probably an oversight.

However, as a matter of statutory construction, a court cannot give effect to the intent of the legislature, when the language of a statute is clear and unambiguous.  Here, the self-procured section of the statute was left unchanged by the amendment, and it was clear and unambiguous.  It still provided that the insurance premium tax could only be assessed against risks located in New Jersey.

As a result, the Court had no choice but to rule that J&J had overpaid its insurance premium tax and was entitled to a refund.

The moral of the story is read a statute carefully.  Whether you are a legislator writing the law or a person subject to the law, make sure you understand what it says.  And, if you do not understand what a law provides, talk to somebody who does.

Captive Insurance

Captive Insurance for the Mortgage Industry

The mortgage industry is flourishing.  Low interest rates and migration out of population centers mean more people are looking for homes, which means more people are looking for mortgage loans. However, with increased business comes increased exposure. While record lending may fuel growth, it also adds risk.

Growing Risks and Exposures

The mortgage industry faces many different types of risks.  Whether a business is a lender or a loan originator, there is exposure. The pandemic has caused shutdowns, forcing many businesses to close; some permanently.  This has resulted in layoffs and job losses. The employment rate, which was recently at an all-time low, is now more than double what it was before the pandemic.

When borrowers lose their jobs there is an increased chance of a loan default. Unemployment, underemployment, and a struggling economy can be tell-tale signs that the housing market is going to suffer, if not now soon. And, as a rule of thumb when the housing market struggles, the mortgage industry suffers as well.

In some cases, a loan originator that sold the loan may be required to buy the loan back or refund commissions.  These losses go directly to the business’ bottom line and are in addition to more traditional risks, such as E&O, legal liability, employee-related claims, and reputational risk that any business may face.

A business may be able to insure against some of these risks.  However, not every risk can be covered commercially, and some insurance coverages may be prohibitively expensive.  Fortunately, there is a solution when the commercial market will not do.  And that is a captive insurance company.

A captive is an insurance company formed by a business to cover the risks and exposures of the business.  It enables a business to buy insurance that is tailored to the specific needs of the business.

Coverage Possibilities

RMC has worked with the mortgage industry for many years. We have helped mortgage companies form and manage very successful captive insurance companies.  Some of the risks that a captive can cover are:

  • Administrative Actions – fines and penalties by governing bodies
  • Collections Risk / Clawbacks – based on EPO’s and EPD’s
  • Directors & Officers – exposures for the officers of the company
  • Deductible Reimbursement – reimburse deducible layers of commercial insurance risk
  • Cyber – broad coverage
  • Loss of Key Contract – losses of revenue because of a lost contract (think Fannie/Freddie Mac)
  • Medical Buydown – layer of employee medical insurance should the company meet the requirements
  • Regulatory Change – operational or revenue losses based on regulatory changes
  • Reputational Risk – covers revenue lost due to a reputational exposure

Mixing Commercial Risk into a Captive

A captive insurance company can cover many types of standard commercial risks.  Some risks can be fully covered by the captive, instead of through the traditional commercial market.  Other risks may be better handled by a combination of a captive and a commercial insurer.

E&O, Fidelity Bonds, Professional Liability, Workers Compensation, General Liability, and Property can all be written by the captive or by a combination of a captive and commercial insurer. In some cases, it may make sense to use a fronting carrier where an admitted company is required. In other cases where an admitted carrier is required, a business can reduce premiums by increasing its deductible, and the captive can write a deductible reimbursement policy.

Taking on the Risk of Your Health Insurance

A mortgage company, like any business, has employees.  And, like any business, health care is a major expense.  Most businesses are unaware that a captive can help them reduce their healthcare costs.  By using its captive to assume some of its healthcare risks, a business can significantly reduce its overall spending while still providing its employees with first-class healthcare.

To discuss your options and to see if a captive insurance company is right for your business, contact RMC today at [email protected] or 239-298-8210.

Business Insurance Captive Insurance

How to Go from Salesperson to Advisor with Alternative Risk Strategies

How can you become a trusted advisor to your clients providing them more value than you currently are? The answer is offering them alternative risk management strategies.

Won’t offering alternative strategies reduce my commissions? Maybe, but you could go from being a commodity salesperson who could be replaced by anyone with a lower renewal offer to a consultant who receives both commissions and consulting fees.

Hear me out…

Say you write both the Property and Casualty Insurance as well as the Employee Benefits for a manufacturer with 200 employees and $45 million in annual revenue.

Sounds like a solid account!

But in 2020, you had to explain that there’s no payout for the $3 million in business income they lost when their plant was shut down due to Covid-19 because they didn’t have direct damage to the plant.

And then in 2021, their overall renewal is going to cost 25% more due to rate increases.

Suddenly, being the agent on their insurance account doesn’t make you feel quite as secure. Particularly when you find out that their investment advisor has been talking to them about captive insurance companies for a while.

What if you had been the one to bring the captive insurance company option to them?

When the denied claim happened, what if you had taken the opportunity to explain that a captive insurance company could write contingent business income? And would pay out if there wasn’t direct physical damage.

A captive insurance company can even cover extra expenses for a manufacturing business like replacement suppliers. So, when their manufacturer in China couldn’t get parts out due to the pandemic, they would have had coverage.

As the advisor, you should always give options to your client. It will show the client that you are more than just an average advisor. It will prove to them that you are a vital team member and that you have their best interest at heart.

Before your next call, what if you came to your client with a plan to increase deductibles on their commercial insurance policies, then covered those gaps through a captive insurance company? Or with a plan to help them insure a layer of their employee benefits themselves and protect against catastrophe with stop-loss which would allow for no increase at renewal?

Then with these new plans and a newly formed a captive insurance company, you can help them understand the new data available that results from the captive. This will create better loss control and coordinating renewals each year to maximize the benefits of a blended strategy as their risk consultant. Suddenly you’ve become a hero and vital team member instead of just another salesperson.

Become the trusted advisor by partnering with RMC Group to find the best solutions for your client. To schedule a call with a RMC professional, click here.

Captive Insurance

Why Your Insurance Keeps Getting More Expensive…

And What You Can Do About It

Why are the policies that you purchased last year to protect your business more expensive this year? Because the insurance market is hardening.

Okay, hardening seems an appropriate word because it is certainly harder for your business to get the insurance that it needs at an affordable cost.  But what does that nice bit of industry jargon actually mean?

It means that insurance companies are becoming more selective about what risks they will take and charging more to insure those risks.

Why is the Market Hardening?

Some reasons why are obvious. Insurance companies have had to pay out significant claims for an above-average number of wildfires, hurricanes, and now Covid-19. (Even though many of these claims were denied, it still costs the insurance company to legally defend their position.)

Other reasons are more subtle. Lower interest rates and a fluctuating stock market have impacted insurance companies’ return on investments and lowered their profitability.  Working from home has increased cyber risks and civil movements have led to claims being filed against companies for their diversity initiatives or lack thereof.

Take on Your Own Risk

However, insurance is still a lucrative industry, as the ubiquitous TV commercials, sports stadium sponsorships and high-rise buildings all attest. Especially if the risk can be well-understood and managed.

So perhaps instead of transferring all your business risk to an insurance company that is not particularly keen to take it, you should retain some of the risk yourself.

If you’re willing to increase the deductibles on your policies or self-insure a layer of your employee medical costs, the premiums an insurance company charges you are likely to go down.

You then have two options: 1) simply hold aside money for these risks or 2) create your own insurance company and formalize your role as an insurer. This is known as a captive insurance company.

Captive Insurance Benefits

Creating a captive insurance company can provide better risk management for the parent company because of increased attention, trackable data, and loss control measures. In addition, your own insurance company could invest the premiums, where normally you would lose those premiums to an insurance company, which invests them and retains the investment gains.

RMC Group can help you establish a captive insurance company.  We will do a complimentary risk review of your business and the insurance policies you currently have. This will help you decide if these options are viable for you. To schedule a call with an insurance professional, click here.

Business Insurance Captive Insurance Personal Insurance

An Insurance Policy is a Contract

When it comes to insurance, one mistake that many people make is failing to read their policy.  Most insureds believe that they understand what their policy covers simply by the name of the policy.  For example, an auto policy covers everything car-related, and a homeowner’s policy covers everything that can happen to your home.  However, this is a big mistake.

An insurance policy is a contract between the insured and the insurance company, and, like any contract, its effect depends upon the language of the contract.  In addition, since contract interpretation is a matter of state law, the state where your policy is issued is a huge factor.  The same language in one state can have a completely different meaning in a different state.

A Business Interruption Policy Doesn’t Cover All Interruptions of Business

The need to read your policy has never been more clearly illustrated than during the Covid-19 pandemic, which has affected businesses from the hospitality sector to the travel industry to medical practices.  Whether as a result of government orders or the fear of customers to leave their homes, businesses of all types have either had to shut down completely or reduce their capacity.  As a result, businesses have lost significant revenue during this time.  Fortunately, many of these businesses have business interruption insurance policies and have asserted claims under their policies.  Unfortunately, without exception, the insurance companies issuing those policies have denied coverage.  Why?

The quick and cynical answer is that the insurance companies do not want to pay these claims.  The full extent of business loss in the American economy is not yet clear.  However, one estimate is that businesses have been losing close to $40 billion a month.  Yet, the entire property and casualty insurance industry has collected approximately $6 billion in premiums.  Clearly, the premiums will not cover the losses.  However, another reason may be that the insurance companies are simply reading the language of the policies and enforcing the policies as written.

The typical business interruption policy contains language that protects a business against the inability to operate due to loss or damage to property.  In most states, the courts have interpreted this language to require actual physical damage to a business’ building.  Without demonstrated physical damage to property, there is no coverage.

Claims Have Turned to Lawsuits

The result has been that, since the pandemic began, over 5,000 lawsuits have been filed against insurance companies.  While none has been fully adjudicated yet, we are beginning to see some results.  In most cases, an insurance company will respond to a lawsuit by filing a motion to dismiss.  A motion to dismiss challenges the sufficiency of a complaint, and, by a large margin, insurance companies are prevailing on their motions to dismiss.

In order to overcome a motion to dismiss, a business must allege that its business property was damaged in the same way that it would have been damaged by fire or flood.  This is a difficult bar to eclipse.  Most business closures have been caused by government shut-down orders, rather than actual physical damage to busines property, which prevents its use.  Some plaintiffs have tried to get around this problem by claiming that their property has been damaged by the presence of the Covid-19 virus on the premises.  This has worked but only in a small number of cases.

The reason that this claim has not been more successful is that many business interruption insurance policies contain a virus exclusion.  This virus exclusion was generally added to business interruption policies in 2006.  However, there are some business interruption insurance policies that do not contain a virus exclusion.  In those cases, the plaintiffs have been able to defeat the insurance company’s motion to dismiss.

Governmental Action

Another way in which businesses are trying to get around the “physical loss or damage” requirement is by claiming that their business interruption was caused by governmental action.  Therefore, whether their physical location was damaged is irrelevant.  The government order caused the loss of their ability to use their premises.

Again, this approach has been only marginally successful.  In a very small number of states, the courts have said that the policy’s use of the phrase “loss or damage to property” must be read to mean that “loss” and “damage” are not synonymous.  Otherwise, if they meant the same, one would be what courts call “surplusage”.  In other words, either loss or damage would be excess language without adding any real meaning to the phrase.  Courts tend to avoid surplusage.  However, this argument has worked in only a few states.  In most states, the courts have said that the typical business interruption insurance policy does not cover governmental orders, as would a regulatory change policy.

What’s an Insured To Do?

The obvious answer is – READ YOUR POLICY!  However, this is not a very satisfactory answer for a couple of reasons.  The first is that insurance policies are not pictures of clarity.  They are often ambiguous and contain confusing endorsements and exclusions.  Even a highly educated businessperson may have difficulty understanding a policy if he or she is not experienced at reading policies.  The second is that, by the time you’ve read your policy, it is often too late.

The best answer is that you should work with an experienced and knowledgeable insurance professional, like RMC, before you buy your policy.  After all, you wouldn’t sign a contract without first consulting an attorney, and an insurance policy is a contract.  Not only can your insurance advisor explain your policy’s provisions before you have a claim, a professional advisor will have access to the policies of multiple companies and can find the policy that best suits your needs.  In addition, an insurance professional can negotiate with an insurance company to obtain coverage that is not part of the standard form policy.

A second reason to work with a professional is that the professional can introduce you to innovative concepts, like a captive insurance company that may better suit your needs.  A captive insurance company is an insurance company formed by a business to insure the risks of the business.  It can work in concert with your commercial insurance, replace some or all of your commercial insurance or insure risks that are not insurable or are prohibitively expensive on the commercial market.  Because you own your captive insurance company, you control the risks that it can assume.  As a result, you can tailor its policies to cover your specific needs.  While it is too late to form a captive to insure against the Coved-19 pandemic, now is the time to plan for the next unexpected risk.

Captive Insurance Press Release

Courtney Boles Joins RMC Group as Captive Risk Consultant

RMC Group is excited to announce that Courtney Boles has joined the company as a Captive Risk Consultant. Courtney is responsible for building relationships and soliciting new business for the captive division of RMC Group.

Courtney Boles Headshot

“After my sabbatical on a remote tropical island, I’m recharged and excited to be back in the insurance industry. I’m happy to partner with a company like RMC Group that is cutting-edge and diverse enough to offer myriad risk management strategies, yet still retains personalized service,” Courtney said.

Many Years of Experience

Courtney brings over 10 years of experience in the captive insurance industry to RMC Group.  She has helped hundreds of businesses identify their risks and evaluate alternative risk management solutions. She has helped to form insurance companies in 14 domiciles using a variety of structures including single parent, cell, and agency captives. These captives, combined with her clients’ existing commercial insurance, medical stop loss and other programs, worked to create customized, comprehensive, and cost-effective enterprise risk management strategies. Courtney also has five years’ experience with commercial insurance for a large regional insurance broker.

Courtney is an Accredited Advisor in Insurance (AAI) and will complete her Associates in Captive Insurance (ACI) from ICCIE in 2021.

Mark Ewell, Executive Vice President of Risk with RMC Group, commented, “We are excited for Courtney to bring her knowledge and experience to our team at RMC. She will be an asset from day one and we look forward to her success.”

Captive Insurance

Supreme Court Grants Certiorari in CIC Case

In what can only be described as good news for the captive insurance industry, the United States Supreme Court on May 4, 2020, agreed to hear an appeal in the CIC Services, LLC v. Internal Revenue Service case.

To recap the procedural history of the case, CIC sued the IRS in 2017, after the IRS issued Notice 2016-66, identifying so-called “micro-captive insurance” transactions as transactions of interest.  This meant that taxpayers participating in a micro-captive insurance transaction were obligated to attach a Form 8886 to their tax returns for all years in which they participated in the transaction.  This requirement extends to the captive, itself, and the insured, as well as the owners of the captive and the insured.

CIC alleged that the IRS had violated the Administrative Procedure Act (APA) when it issued Notice 2016-66 and sought a declaration that the Notice was unlawful and of no effect.  The APA is the federal law that governs the manner in which a federal agency can issue rules and regulations.  It generally requires an agency to provide advance notice of the rule or regulation, as well as an opportunity for public comment.  The rule or regulation is initially issued in proposed form and does not become final until after the public comment period has expired.  Often, the final rule or regulation will differ from the proposed rule or regulation based upon the public comments received by the agency.  The IRS did not follow this procedure when it issued Notice 2016-66.

The IRS moved to dismiss CIC’s lawsuit based on the Anti-Injunction Act (AIA).  The AIA is also a federal law.  It precludes an action against the IRS seeking to enjoin the collection of any tax.  The IRS took the position that the penalty that would be imposed against a taxpayer upon failure to file Form 8886 was a tax and that, as a result, CIC’s lawsuit was seeking to enjoin the collection of a tax in violation of the AIA.

CIC responded that the focus of its lawsuit was the disclosure obligation, not the penalty.  It was not seeking to enjoin the collection of a tax, because no tax had yet been imposed.  It also said that, if the court refused to hear its challenge to the Notice, a taxpayer’s only recourse for challenging the reporting obligation would be to not attach Form 8886 to its return, pay the penalty and sue for a refund.  CIC claimed that this was fundamentally unfair.

Unfortunately, the District Court was not persuaded by CIC’s arguments and held that the AIA required the dismissal of CIC’s action.     CIC appealed the dismissal of its lawsuit to the Sixth Circuit, which upheld the decision of the District Court in a 2-1 decision.  The Sixth Circuit also denied CIC’s request for a rehearing en banc.  CIC then filed a Petition for a Writ of Certiorari with the Supreme Court.

There are certain types of cases where Supreme Court review is mandatory.  For example, if a state supreme court were to hold a federal law unconstitutional, appeal to the Supreme Court is automatic.  A Petition for a Writ of Certiorari is the way that a party gets to the Supreme Court when the Court is not required to hear its case.  The Supreme Court has unfettered discretion in deciding whether to grant a Petition for a Writ of Certiorari.  And, it grants very few Petitions.

While no one can predict how the Supreme Court will ultimately resolve this case, the fact that it granted CIC’s Petition for a Writ of Certiorari is huge news for the captive insurance industry.  If the Supreme Court were inclined to uphold the decision of the Sixth Circuit, there would be no reason to take the case.  Even without Supreme Court review, the decision of the Sixth Circuit is already settled law; at least in the states within the circuit.  It is reasonable to speculate that the Court – or at least the Justices who voted to hear the case – has something else in mind.  It may be that the unfettered power of the IRS to indiscriminately wreak havoc on the captive insurance industry will finally be checked by a higher authority.

Captive Insurance

Is a Captive Insurance Company the Solution to Business Interruption?

A restaurant in Washington, D.C. has joined the ranks of businesses suing their insurance company for coverage under a business interruption insurance policy as a result of the COVID-19 pandemic.  The suit claims that the restaurant was forced to close after Washington, D.C.’s mayor issued an order barring sit-down service, thereby limiting its business to take-out and delivery and eliminating 95% of its business.

After closing its business, the restaurant filed a claim with its insurance company.  The carrier denied the claim on the grounds that the restaurant was not forced to close as a result of physical damage to its premises, which is a precondition for coverage under most business interruption policies.  In addition, the carrier claimed that the COVID-19 pandemic falls under a virus exclusion in the policy.

In the suit, the restaurant claims that it was not forced to close as a result of the virus.  Instead, it claims that it was forced to close by reason of the mayor’s order.  In addition, it cites a provision in the policy, which provides coverage if the business is denied access to its premises by government action.

Similar lawsuits have been filed in Illinois, Indiana, Florida and Texas.  In some of those suits, the plaintiff has alleged that its policy did not contain a pandemic exclusion.  However, in others, the issue is the same as the lawsuit filed by the Washington, D.C. restaurant – that the reason for the closure was government action, not the virus.  It could be months, if not years, before these lawsuits are resolved.

So, what do these lawsuits tell the average business owner about insurance?

The lesson to be learned is that commercial insurance may provide less protection than you think.  There is a huge misconception about the business of insurance.  Most people buy an insurance policy expecting the carrier to bail them out when a crisis strikes.  However, insurance companies are not just in the business of paying claims.  Like any business venture, they are also in the business of making a profit.  And, the best way for an insurance company to make a profit is for premiums to exceed claims.  That is why an insurance policy, which may appear to provide broad coverage, may contain a boatload of exclusions.  It is also why a policy will generally require the insured to mitigate its damages and may also impose conditions on the insured’s ability to recover.  And, it is why the plaintiffs in these lawsuits were forced to sue their insurers.

What is a business owner to do?

One option is a captive insurance company.  A captive is an insurance company owned by the business that it insures.  A captive is formed primarily to cover the risks of that business, although it may also be required to insure unrelated risks.  Because the purpose of the captive is to provide real coverage to its related business, its policies can be tailored to the needs of the business in order to maximize the likelihood of coverage.  A captive can provide coverage that is either unavailable on the commercial market or prohibitively expensive.

In addition, it can cover gaps in a business’s existing commercial insurance.  For example, a captive may be more likely than a commercial insurance company to write a business interruption insurance policy that does not require physical damage to property or does not exclude business interruption caused by a pandemic.  A captive can provide greater protection to the business and greater comfort to the business owner.


If you do not already have a captive, it may be too late for you to obtain coverage for the COVID-19 pandemic under your existing insurance.  However, if this crisis has taught us anything, it is that another crisis is around the corner.  It may not be a health-related crisis.  But we can say with certainty that something is likely to interrupt your normal business operations in the future.  Now, is the time to prepare for the next crisis.  A captive can be a vital part of your risk management plan and help ease the pain caused by the next crisis.

If you are interested in learning more about captives and other risk management solutions, contact RMC Group.

Captive Insurance

Captive Insurance Covid-19 Claims

We have received a number of calls asking whether the economic disruption caused by the Covid-19 pandemic can be covered by a captive insurance company and how a captive should respond to the crisis.

What is a coverage trigger?

Insurance is the transfer of risk from a person or company, called the insured, to an insurance company in exchange for the payment of a premium.

The risks covered and the conditions of coverage are documented in a written insurance policy.

The policy details the incidents, events, or circumstances that trigger coverage under the policy. The triggers of coverage under a policy depend on the type of policy and the language of the policy. The type of policy and the language of the policy are based on the underwriting/actuarial report obtained by the insured company.

What happens after coverage is triggered?

It is important to differentiate between triggers of coverage and conditions of coverage.

Conditions of coverage are the steps that an insured must take after a trigger of coverage occurs before the insurance company will accept liability under the policy.

Conditions of coverage include notifying the insurance company that a claim has occurred, with a detailed description of the claim, and submitting proof of loss.

What types of policies might cover COVID-19?

Some of the policies that may provide coverage for losses triggered by the Covid-19 pandemic are:

  • Business Interruption
  • Contingent Business Interruption
  • Supply Chain Interruption
  • Communicable Disease Liability
  • Regulatory Change
  • Political Risks

How do you determine if COVID-19 is covered?

Whether or not a policy provides coverage depends upon the language of the policy.

Each policy has a unique definition of Insured Occurrence and Insured Loss.  The definition of Insured Occurrence determines whether a certain event, such as the Covid-19 pandemic, is covered under the policy.  The definition of Insured Loss determines the types of economic loss covered under the policy.

The first question to ask is whether the economic disruption caused by the Covid-19 pandemic falls within the definition of Insured Occurrence contained in the policy.

If it does, the next question is whether the losses suffered by the insured fall within the definition of Insured Loss.  Only if the answer to both questions is yes will the policy provide coverage.

What are the steps if you think you have a claim?

If you desire to make a claim under a policy as a result of the Covid-19 pandemic, it is important for you to document any potential claim.

You need to identify the nature of the disruption to your business and when and why it occurred.  In addition, you need to document your losses.

We understand that losses may be incurred over a period of time.  However, it is important that you provide notice of a claim to your captive as soon as you are aware of the claim, even if you do not know the exact amount of loss.

Every claim submitted will be investigated and adjusted.  This process can be made much easier by gathering information, both loss specific and financial when an event occurs and providing it in a timely manner.