Risk Management

Bad Facts Make Bad Law

One of the first things that a first-year law student learns in law school is that bad facts make bad law.  Well, the most recent example of the truth of that adage was delivered by the United States Tax Court in an opinion filed on March 10, 2021, in Caylor Land & Development, Inc., et al v. Commissioner T.C Memo. 2021-30, another victory for the IRS in a captive insurance case.  However, the facts in this case were so bad and so untethered from the typical captive insurance arrangement that it is difficult to see how this case will have any negative impact on the captive insurance industry.

Findings of Fact

The lead petitioner in the case, Caylor Land & Development, Inc. (Caylor Land), was an Arizona corporation engaged in commercial and residential real estate development.  Its owner, Rob, was the son of the founder of another general building contractor, Robert Caylor Construction Company (Caylor Construction).  Over time, Rob bought Caylor Construction from his father and also formed a number of different entities representing different construction projects.  The Tax Court found that this was not uncommon in the real estate business, where every project carries a separate risk.  The Tax Court also found that Rob ran the “empire” through Caylor Construction.

It is important to note the relationship between Caylor Construction and Caylor Land and between Caylor Land and the other members of Rob’s “empire”.  It appears that most of the revenue generated by Rob’s business ventures was concentrated in Caylor Construction.  Those funds were then distributed to the other entities through “consulting fees” paid to Caylor Land.  For example, the Tax Court found that, in 2009, Caylor Land had $1.4 million in gross revenue, of which $1.2 million were consulting fees paid by Caylor Construction.  Caylor Land then paid much of what it received from Caylor Construction to the other entities, also as “consulting fees”.  The “consulting fees” paid by Caylor Land to the other entities in Rob’s “empire” constituted a significant part of the revenue of those entities.

Why does this matter?  First, the Tax Court questioned whether the payments called “consulting fees” were really consulting fees.  There were no written agreements between any of the parties and no records of what consulting actually took place.  In addition, the entities used almost all of the “consulting fees” to pay insurance premiums.

The Captive

In 2007, Rob engaged Tribeca to form and manage a captive insurance company called Consolidated, Inc. (Consolidated).  Consolidated was incorporated under the laws of Anguilla in December, 2007.  Here is where the facts get a bit sketchy.  The Tax Court found that Caylor Construction paid insurance premiums of $1.2 million in December, 2007, which it deducted on its 2007 tax return.  It thought this unusual, because Caylor Construction had not yet provided any underwriting information to Tribeca and the actual insurance policies were not issued until sometime in 2008.  The Tax Court found this strange, because the policies were “claims-made” policies but were not issued until after the policy coverage period had ended.  In addition, it found that Caylor Construction had paid premiums of $1.2 million for, at most, ten days of coverage in 2007 and possibly for “none at all”.

What the Tax Court did not say in its opinion, but must be true, is that the policy coverage period was the calendar year.  Otherwise, if the policy coverage period were December, 2007, to December, 2008, a policy delivered in early 2008, would not have been issued after the expiration of the policy coverage period.  In addition, premiums paid in December, 2007, would not have been for ten days of coverage.

IRS Audit

The IRS audited all of the entities for the 2009 and 2010 tax years.  It denied Caylor Construction’s deduction for the “consulting fees” paid to Caylor Land.  In addition, it denied a deduction for the payments made by the other entities to Consolidated.  The cases of all taxpayers were consolidated were trial.

Since the years under audit were 2009 and 2010, whatever happened in 2007 should have been immaterial to the result in this case.  However, the Tax Court clearly was affected by what happened in 2007.  In addition, it found that this pattern repeated itself in subsequent years – premiums were paid before the policies were even priced, and the policies were not issued until after the expiration of the policy coverage period.  In addition, the Tax Court found that, while premiums were paid by all of the entities, actual policies were issued to only a small number of the Caylor entities.  If the other entities were even covered under the policies, they were covered as additional insureds.

The Tax Court’s Opinion

In the opinion, the Tax Court said that there are three issues in the case:

  1. whether the “consulting fees” paid by Caylor Construction to Caylor Land were deductible as ordinary and necessary business expenses;
  2. whether the payments to Consolidated were “insurance expenses”; and
  3. whether the IRS could impose accuracy-related penalties.
1. Consulting Fees

The Tax Court resolved this issue fairly easily.  It found that there was no consulting agreement between Caylor Construction and Caylor Land, no invoices for consulting services and no evidence that consulting services were actually provided.  As a result, the money transferred from Caylor Construction to Caylor Land was more like a distribution of profits and not an ordinary and necessary business expense.

2. Insurance

The Tax Court’s analysis of whether the payments made by the various Caylor entities to Consolidated were insurance premiums should be familiar to anyone who has read the opinions in the Avrahami, Reserve Mechanical and Syzygy cases.  In fact, the judge in the Caylor case is the same judge who decided Avrahami.

The Tax Court repeated that insurance premiums are generally tax deductible as ordinary and necessary business expenses.  However, money set aside as “a loss reserve or a form of self-insurance are not”.  So, the issue in the case was whether the amounts paid to Consolidated were insurance premiums or a loss reserve.

The Tax Court also repeated the familiar refrain that the Internal Revenue Code does not define the term “insurance”.  That has been left to case law, and the Supreme Court has said that insurance has four characteristics:

  • risk-shifting;
  • risk-distribution;
  • insurance risk; and
  • whether an arrangement looks like commonly accepted notions of insurance.

Finally, the Tax Court said that it would focus on two of those factors – risk-distribution and commonly accepted notions of insurance – as it had done in Avrahami, Reserve Mechanical and Syzygy.

a. Risk Distribution

Risk distribution depends upon the concept of the “law of large numbers”.  By accepting premiums and risk from a large number of insureds, an insurance company protects itself against the adverse experience of a small number of insureds.  In Avrahami, Reserve Mechanical and Syzygy, the captives used a reinsurance pool to establish risk distribution.  In each of those cases, the Tax Court had found that the pool was not insurance, so it could not be used to establish risk distribution.  The implication is that, if the pool had been properly managed and, as a result, had been found to be insurance, it could have been used to establish risk distribution.

However, in the Caylor case, this issue was moot.  Although Tribeca maintained an “insurance pool” and told its clients that they had to participate in the “insurance pool” in order to have adequate risk distribution, Consolidated chose to not participate in the pool.  Of all the bad facts in this case, this is perhaps the worst and most curious.  It is also the reason why this case may have little impact on the captive insurance industry as a whole.  Why would a captive insurance company make the conscious decision to forego the best tool available to distribute risk among other captives and other insureds?

Instead of participating in a reinsurance arrangement to distribute risk, Consolidated chose to rely on the fact that it was providing insurance to twelve brother and sister entities.  This argument was based on the holding of Revenue Ruling 2002-90, in which the IRS said that there would be sufficient risk distribution, if a captive provided insurance to at least twelve related entities and no entity represented less than 5% or more than 15% of the total risk insured by the captive.

Unfortunately for the petitioners, the Tax Court did not buy this argument.  First, the Tax Court said that the number of related entities is not determinative.  Instead, the issue is the number of risk exposures assumed by the captive that matters.  This position is very troubling for a couple of reasons.  First, the Tax Court relied on cases that involved captives that were not microcaptives to support its position.  These cases involved multi-national corporations and thousands of insureds.  No microcaptive could possibly satisfy that test.  Second, and perhaps, most importantly, the Tax Court completely ignored Revenue Ruling 2002-90, which is one of the few pieces of guidance that the IRS has issued in the area of captive insurance and has never been withdrawn.  If a court can overrule the stated position of the IRS, no taxpayer can be safe from persecution.

What’s even more disturbing is that the Tax Court did not even have to ignore the holding of Revenue Ruling 2002-90 in order to achieve its desired, and probably pre-determined, result.  The Tax Court found that Caylor Construction represented more than 30% of the risk assumed by Consolidated.  So, Consolidated could not satisfy the requirements of Revenue Ruling 2002-90, even if the Tax Court were to have given effect to that guidance.

b. Commonly Accepted Notions of Insurance

The Tax Court next discussed whether Consolidated was operated in accordance with the commonly accepted notions of insurance.  The Tax Court acknowledged that it did not have to reach this issue, since the failure of risk distribution would be enough to uphold the tax deficiency.  However, this did not stop the Tax Court from discussing this issue.

There are five factors that a court takes into consideration when trying to determine whether an arrangement looks like insurance:

  • whether the company was organized, operated and regulated as an insurance company;
  • whether the company is adequately capitalized;
  • whether the policies were valid and binding;
  • whether the premiums were reasonable and the result of arm’s-length bargaining; and
  • whether claims were paid.

i. Organized, Operated and Regulated

The Tax Court acknowledged that Consolidated was organized as an insurance company under the laws of Anguilla, although there was some question whether Anguilla had ever actually regulated the company.  Apparently, the taxpayer did not even introduce a copy of Consolidated’s insurance license into evidence.  However, the Tax Court found that did not matter whether Consolidated was regulated like an insurance company, because it found that Consolidated was not operated like an insurance company.

First, the Tax Court was troubled by the way in which the policies were issued.  There was expert testimony that Consolidated backed into the premiums.  According to the expert, no other insurance company priced policies as Consolidated had.  In addition, the expert testified that no other insurance company would issue a policy after the expiration of the policy coverage period, as Consolidated uniformly did.

Second, the Tax Court was troubled by the way in which Consolidated paid claims.  The Tax Court found that, over a period of four years, the insureds had submitted two claims.  In each case, Tribeca, as captive manager, had requested documentation to support the claims.  However, instead of providing such documentation, Rob simply overruled Tribeca and ordered Consolidated to pay the claims.  The Tax Court found that no insurance company would pay a claim without an adequate showing that the claim was covered by the policy.

ii. Adequately Capitalized

The Tax Court found that Consolidated met the minimum capitalization requirements of Anguilla and that is all that is required.

iii. Valid and Binding Policies

As discussed above, the Tax Court found that the policies written by Consolidated were “claims-made” policies.  This means that the policies only cover claims that occur during the policy coverage period and are reported to the insurance company during the policy coverage period or within sixty days thereafter.  However, the Tax Court also found Consolidated did not issue the policies until after the expiration of the policy coverage period.  The Tax Court found this to be abnormal.  No insurance company issues a policy after the expiration of the policy coverage period when there is no longer a risk of loss.

iv. Reasonable Premiums

The Tax Court found that the premiums were not actuarially determined.  Instead, they were “backed into” in order to add up to $1.2 million.  The biggest issue was that Tribeca did not ask for “loss runs” from the insured.  In addition, Tribeca did not review the loss history of any prior policy coverage period before renewing a policy at the same premium as before.  No insurance company would determine premiums, let alone issue a policy, without reviewing an insured’s loss history.

v. Payment of Claims

As discussed above, the Tax Court found that Consolidated’s claims procedure was abnormal and unlike any real insurance company’s.

For all of the foregoing reasons, the Tax Court found that Consolidated was not an insurance company in the commonly accepted notions of insurance.

3. Penalties

The IRS imposed accuracy-related penalties under section 6662 of the Code.  The Tax Court upheld the penalties, and this is, perhaps, the most important takeaway of the case.

Penalties can be imposed in a tax deficiency case if the taxpayer understates the amount of its taxable income by a certain percentage or if the taxpayer is negligent in asserting a tax position.  The Tax Court found that both apply in this case.

However, a taxpayer can avoid penalties if it can establish “reasonable cause” for its position.  In most cases, reasonable cause requires a taxpayer to show that it reasonably relied upon the advice of an independent tax professional.  The tax professional may not have a conflict of interest, must have knowledge and experience in the area and must have all of the facts.

The taxpayers claimed that they consulted with Tribeca, their CPA and their tax attorney before participating in the captive insurance transaction.  However, there were problems.  First, Tribeca was the captive manager and had an obvious conflict of interest.  A taxpayer cannot rely on the advice of the promoter of a transaction to establish reasonable cause.  Second, both the CPA and the tax attorney had advised the taxpayers that they were not familiar with captive insurance and that they were not comfortable with the transaction.  In addition, both testified at trial that they provided no advice to the taxpayers.

A captive insurance company is a complex undertaking.  Taxpayers are always advised to seek independent, knowledgeable advice before entering into the arrangement, if for no other reason than to make sure that they understand the nature of the transaction.  However, Caylor provides another reason to seek independent advice.  It is the only way for a taxpayer to avoid penalties.

Risk Management

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.

Risk Management

4 Ways to Prevent Claims and Lower Insurance Premiums

You don’t have to go far to find easy and innovative ways to help your business run more profitably.

Look at any millennial… you will see that the entire culture has shifted toward technology. This is no surprise in 2020, but has your risk management strategy made the same shift?

Times are Changing

Are you still holding occasional safety meetings in the breakroom using your VCR? And posting the OSHA sign somewhere you hope your employees see it? It may be time to upgrade.

Times are changing and so should your procedures and trainings to help reduce claims activity. Some of these improvements could possibly lower your insurance premiums as well.

4 Ways to Improve

1. Safe Driver Discount

We’ve all heard or seen the commercials that claim to give you a safe driver discount, if you’re willing to stick a monitoring device in your car.

But did you know that this discount may also be available for your business auto insurance (depending on the state and insurance company). Are you doing that for your commercial cars, vans, and trucks? And for that matter, why don’t you have a camera mounted in those vehicles for extra protection.

2. Security Cameras

If we monitor the front door of our homes by installing a fancy, video doorbell… shouldn’t we also utilize those same devices at work? Installing security cameras in service bays, showrooms, and even office spaces can add an extra layer of security. Which in return could mean a discount on your insurance and offset some of the cost of the equipment.

3. Artificial Intelligence

Artificial Intelligence (AI) was created for more than just an Arnold Schwarzenegger movie! We are living in the age of the Jetsons and it’s time to embrace it. For example, retailers can use online customer support chats to improve efficiency and minimize calls.

4. Security Software

From drones to software that can monitor emails for fraud, embezzlement, and a whole host of other dangers. Cyber-attacks are becoming more frequent, so it is important to have your business protected in all areas.


Risk management strategies can strengthen the value of your company. It can also help you enjoy greater profits. Just simply implement more efficient methods for the same procedures you’ve been using to run your business for years.

For more information or help with your risk management strategy, contact RMC Group at 239-298-8210 or [email protected].

Press Release

RMC Makes Shortlist for European Captive Review Awards 2020

RMC Group has made the shortlist for the European Captive Review Awards 2020. The European Captive Review Awards recognize and celebrate captive insurance in Europe by highlighting captive owners and service providers’ excellence and innovation.

RMC Group has been nominated for Captive Manager of the Year. This award is open to all captive management companies that have performed exceptionally well during the last 12 months. The nominees will be judged on their growth by revenue, client numbers, service offering, and client satisfaction. Judges will consider the implementation of technology, accessibility for clients, and initiatives developed.

The winners will be announced during a virtual awards ceremony on November 26, 2020.

For more information on this virtual event, CLICK HERE.

Risk Management

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.

Risk Management

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.

Personal Insurance Retirement Plans

7 Ways to Improve Your Finances During Financial Literacy Month

April is tax season, so a lot of people are thinking about their finances these days. But if you’re like most people, you’re probably thinking in the short term: What’s my refund going to be—or how much do I owe? And what is that going to do to my monthly budget?

It’s good to be thinking about those things. It’s also important to look at the bigger picture. Financial Literacy Month, which is also in April, gives you the perfect chance to do just that. Surveys have showed that an alarming number of Americans lack even basic financial knowledge; in an era when we collectively have trillions of dollars in consumer debt, and many people live paycheck to paycheck, that can be a recipe for disaster.

But it doesn’t have to be that way! This Financial Literacy Month website, created by nonprofit credit-counseling firm Money Management International, features tools and resources to help you understand your finances better and build a bright financial future. In that spirit, we’ve come up with seven tips that can help you become more savvy with your money. Some are easy things you can do today. Others might take a little more work. But all are worth the effort!

  1. Make your saving automatic. It’s important to have money set aside for emergencies—and to save for retirement. But once your paycheck hits your account, it can be a lot easier to just spend it all. The solution? Schedule automatic transfers to a separate account for your emergency fund, your retirement plan, or both. Start with something like 10%. You might even find that you don’t miss it.
  2. Pay your credit cards off every month. If you can’t do this now, pay them down until you can. One popular way is the “snowball” method, which in a nutshell, works like this: Make only the minimum payment on all of your debts—except the smallest one. Put as much money as you can toward that. When the smallest debt is paid off, repeat the process and continue until everything is paid!
  3. Check your tax withholding. People love getting big tax refunds, but that really means you’ve loaned the government your money over the course of the year—interest-free. For example, instead of a $2,500 refund in April or May, you could have more than $200 extra in your paycheck every single month. Wouldn’t that be nice?
  4. Don’t throw away free money. Who would do that? Well, you—if your employer offers a match on your retirement savings and you don’t contribute enough to get the full amount. Say your company matches the first 3% of salary you contribute to a 401(k); you should save as much as you can, but at the very least, you’d want to save that 3%.
  5. Pay less for services. Are you paying more than you should for cable, internet or your mobile service? Maybe not—but you won’t know unless you ask. Often, companies have discounts or special packages available, especially if you’re a loyal customer and you haven’t been on a promotional deal for a while.
  6. Consider a credit card that rewards you. This can be a great way to earn points toward free travel or other rewards, just for buying the things you would buy anyway. Don’t spend more than you normally would just to get rewards, though. And remember, if you regularly carry a balance, the rewards probably won’t outweigh the interest you’re paying. (Go back to item #2 in our list.)
  7. Track your spending for a while—and then review it. You probably spend money on a lot of little things without realizing how much it adds up. Maybe you get takeout for lunch a couple of times a week, or stop for coffee every day on your way to work. Try tracking everything you spend for a month or two. Then, take a look at your habits.

You’ll find areas where you can save, likely without even feeling like you’re making a sacrifice. Insurance is an important tool for your financial well-being, too. Even though it’s easy to think of insuring your car or home as protecting your “stuff,” insurance really protects your finances. After all, insurance can’t prevent your car from being hit by another driver—but it can pay for the repairs, so that money doesn’t come from your pocket.

Take a little time to think about your finances this month, and try one or more of the tips above. As with many things in life, when it comes to money, small steps can have a big impact!

Reposted with permission from the original author, Safeco Insurance®.

Risk Management

Group Captive Case Study

How a group of like-minded business owners in the same industry saved money on business insurance with a group captive.

A group captive is a property and casualty insurance company owned by the members of a group.  It is often formed for a limited purpose and puts an emphasis on risk control and loss mitigation practices.


A hardening insurance market and increased competition drove members of a state concrete products association to look at alternative options for their rising property and casualty insurance costs; specifically General Liability, Workers Compensation, and Commercial Auto. 

Some members of the association banded together and formed a group captive insurance company to drive down costs, help control losses and provide greater control over claims experience.

Before forming the captive, the 31 members had obtained insurance on the commercial market, and each paid at least $253k in annual insurance premiums.  Collectively, they paid premiums just under $8M. The average rates for the group are listed below:



The members formed a group captive.  As part of the process, a selection committee was appointed to vet potential members of the group.  This ensured that only businesses that were committed to the i standards of the group were involved. 

The members of the group shared information and implemented safety procedures with the goal of minimizing losses and reducing premiums for the entire group.


The results so far have been positive, in the second year of operation, there was a premium increase in the group program. This increase paid by members was half of the increase seen by similar companies for the same coverage in the open marketplace. 

As the captive matures, the expectation is that premiums will continue to be less than comparable insurance purchased in the commercial market.

The members of the group maintain best practices and safety protocols that reduce loss frequency and loss ratios. This results in lower premiums for the members and greater profits for the captive. 

Risk Management

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.



Business Insurance Captive Insurance

What Does IRS Letter 6336 Mean For Your Captive?

It has come to our attention that the IRS recently sent a letter (Letter 6336) to all taxpayers who filed a Form 8886 in connection with their participation in a so-called micro-captive transaction.

How does this impact micro-captives?

This letter is not an existing IRS form letter but was specifically crafted for micro-captive transactions.

There is no need to respond to the letter unless you have shut down your captive in the last few years.

It has no legal effect and is nothing new.

The IRS is attempting to induce business owners to abandon their captives.

The letter advises taxpayers that the IRS has won “several” Tax Court cases on the basis that “certain micro-captive arrangements are not eligible for claimed Federal tax benefits”.

What the letter leaves out is that these “several cases” refer to only three, of which one has been appealed. Additionally, arrangements that lost in Tax Court had issues that are no longer generally present in the industry.

The captive insurance industry is hopeful to get a fair hearing in the Appeals Court.

So, what should you do in response to this letter?

As long as you formed your captive for legitimate business reasons, you can and should maintain your captive.

In addition, if your captive made an election under section 831(b) of the Internal Revenue Code, you must continue to attach a Form 8886 to your tax returns.

This includes not only the captive, but the insured business and the owners of the captive and the insured business.

Furthermore, the IRS letter suggests that you consult with your independent tax advisor. This is a good idea, and something that we always recommend.


It is no secret that the IRS does not like micro-captives and that it has been threatening increased audits for several years. And, this letter may forecast increased audit activity.

However, a captive insurance company is a legitimate risk management tool.

In addition, Congress specifically provided a tax benefit for small insurance companies, both captives and non-captives.

Small and mid-sized businesses should not let the IRS scare them from implementing a legitimate risk management tool; especially at a time when the commercial market is hardening.

Do you have more questions about this letter?

Please feel free to comment below or contact us for help.