Risks to Insure

The first step in evaluating if a captive is appropriate is to review the client's existing insurance coverage, which typically includes workers' compensation, errors and omissions, employee practices (EPLI) and general liability.  Often coverage is inadequate.  Many captives are utilized to take on a large deductible for such policies.  The captive seldom replaces traditional policies, but rather augments and provides excess coverage and coverage for many exclusions and differences in condition.  Common uninsured risks, in addition to deductibles and default, extended warranty, directors and officers, errors and omissions, litigation defense, construction defect, mold, earthquake, environmental and wind and weather.

 

A quick sampling of some general and expanded coverage available through your captive might include:

 

General Types:

  • General Liability
  • Professional Liability
  • Property and Facility Product or Service Warranties
  • Products Liability
  • Employment Practices
  • Directors' and Officers' Liability
  • Workers’ Compensation / Employers' Liability

Expanding Coverage:

  • Business Interruption / Evacuation / Disaster
  • Terrorism / TRIA (multi-peril and domestic)
  • Environmental Liability and Clean-up
  • Transport and Auto Fleet Liability (Large Deductible & Umbrella / Excess)
  • Shipping and Inland Marine
  • Equipment Maintenance & Repair
  • Title / Private Mortgage
  • Employee Benefits (ERISA and Non-ERISA )

 

 

Common Uninsured Risks, Insurable Through a Captive

 

Commercial Pollution:  Provides coverage for clean-up costs resulting from pollution escaping into the environment or buildings.


Commercial Property Plus:  Provides coverage for any direct or indirect los of property owned or under control of insured where loss is excluded from all other polices of insurance which policy holder has.  In addition, insurance company will cover the deductible of ANY loss under another policy, provided that deductible exceeds $10,000 (loss is not restricted to commercial property).
 
Computer Hardware:  Provides coverage for any losses sustained by the names individual insured’s company resulting from a computer malfunction or misuse of information on computers by an employee of insured.  Coverage is provided fro all expenses related to the elimination of computer viruses, data recover and loss of income related to the event.
 
Crime/Employee Dishonesty:  Provides criminal defense legal expense reimbursement to the names individual insured’s company for criminal matters and allegations against the insured’s company.
 
Cyber Risk:  Provides coverage for costs of data recovery and eliminating computer viruses.  Also, coverage is provided for all expenses related to extortion by an individual with plans to damage software or data, expenses related to copyright and trademark infringement as a result of improper contain on insured’s website, and loss of income for related events.
 
Disability Income:  Provides total disability insurance protection for the named individual insured.
 
Employee Practices:  Provides coverage for any loss resulting from a wrongful act.  A wrongful act includes any actual or alleged:

  • Termination of an employee relationship in a way that is against the law and wrongful.  Wrongful demotion, failure to hire, retaliation, misrepresentation, and interference of contract, which arise from a decision to employ, terminate, evaluate, discipline, promote or demote.
  • Defamation, infliction of emotional distress or mental anguish, humiliation, false imprisonment, invasion of privacy and other personal injury allegations which arise from the termination, disciplining, promoting or demoting of an employee.
  • Breach of an implied employment contract and breach of the covenant of good faith and fair dealing in the employment contract.
  • Discrimination, harassment, retaliation or any actual or alleged response of the insured to a threat made by an employee to disclose an illegal act by insured.

 
Errors and Omissions:  Provides coverage for errors or omissions in the insured’s performance of services.  Services are defined as activities undertaken by the insured for a client in relation to the following:

  • Legal and tax services as they relate to proper formation and operation of an insurance company;
  • Accounting or tax preparation services in regard to insurance activities; and,
  • Any other activity permitted by law and authorized by the board of directors of an insurance entity.

 
Excess Professional Liability / Claim Expense:  Provided legal/claim expense reimbursement to the named individual insured for professional/malpractice liability claims filed against the individual insured in excess of the primary policy.
 
Excess Professional Liability Loss Reimbursement:  Provides loss reimbursement to the named individual insured for professional/malpractice liability claims filed against the individual insured in excess of the primary insurance policy.
 
Franchise Legal Defense Costs:  Provides coverage for legal costs associated with loss or adverse amendment to a Franchise agreement.  For witnesses attending court, company will provide compensation in the amount of 500 dollars per person per day.
 
Injunction Relief Defense Legal Expense Reimbursement:  Provides injunctive relief defense legal expense reimbursement to the named individual insured company for injunctive relief actions against the insured’s company.
 
International Kidnap/Ransom Investigation:  Provides kidnap/ransom investigation expense protection to the named individual insured’s company in the event the named individual is kidnapped while traveling abroad.
 
International Travel Medical Expense Reimbursement:  Provides medical expense reimbursement to the named individual insured’s company in the event the employees of the named individual insured incur medical expenses while traveling abroad.
 
Inventory Obsolescence:  Provides coverage for the costs of products that cannot be returned to the supplier and have not been sold in the last 24 months by the insured.
 
Loss of Hospital Privileges:  Provides reimbursement of expenses do to the involuntary discontinuation of medical staff membership or involuntary reduction in approved medical procedures at a hospital.
 
Loss of Key Customer:  Provides reimbursement of expenses due to the loss of a key customer to the named individual insured’s company.
 
Loss of Key Supplier:  Provides reimbursement of expenses due to the loss of a key supplier to the named individual insured’s company.
 
Loss of Patient Referrals: Provides reimbursement of expenses due to the loss of a key supplier of patients to the named individual insured’s company.
 
Market/COGS Fluctuation Loss of Expense Reimbursement:  Provides reimbursement of expenses due to the financial losses to the named individual insured’s company due to market/cost of goods sold cost fluctuations that exceed a specific percentage amount.
 
Regulatory Changes:  Provides coverage for any business interruption loss for 12 months as a result of a regulatory change that has an adverse effect on business.  Regulatory changes include:

  • Any legislative changes effecting permits;
  • Issuing of permits to competitors;
  • Any changes to environment, zoning, transportation or safety regulations;
  • Any changes to import/export laws or tariffs;
  • Any regulatory changes due to foreign political risk including the collapse of a foreign economy or government; and,
  • Freezing of foreign assets or war.

 
Regulatory Investigation Defense Legal Expense Reimbursement:  Provides regulatory investigation defense legal expense reimbursement to the named individual insured’s company for regulatory investigation by governmental units against the insured’s company.
 
Tax Audit Defense Legal Expense Reimbursement:  Provides tax audit defense legal expense reimbursement to the named individual insured’s company
 
Tax Liability:  Provides coverage for any unexpected tax liability equal to and above 115% of filed tax liability due to a final legal decision.  Also, coverage is provided for defense expenses to determine tax liability in court.
 
Tenant Discrimination, Harassment and Wrongful Eviction:  Provides coverage for any claims resulting from action or alleged discrimination, harassment or wrongful eviction.  Claims must be made by a tenant, legal occupant or non-employee of the individual insured.
 
Terrorism:  Provides coverage for lost, destroyed, impaired or damaged property resulting from a direct or indirect act of terrorism.
 
Trade Credit:  Provides coverage for corporate receivables in the event that debtors to the named individual insured’s company file bankruptcy or otherwise become insolvent.
 
Transportation Damages:  Provides coverage for loss of income and additional expenses resulting from damage to packages in the care of the insured.  Additional expenses include repair or replacement of the packages.  Coverage only applies to those customers who constitute 10% or more of the individual insured’s company revenue.  This policy is designed for distribution/transportation companies.
 
Warranty:  Provides coverage for all expenses incurred relating to the repair or replacement of products that are manufactured or rebuilt by the insured.  Insurance company is covering risk of dysfunctional products being distributed by insured.
 
Warranty Shortfall:  Provides reimbursement of expenses related to work on a product sold by the insured and not reimbursed by the manufacturer of the product as part of the manufacturer’s warranty.
 
Work Stoppage:  Provides coverage for all expenses incurred by insured relating to a work stoppage by any producer of the insured’s inventory.  Coverage includes loss of income and additional taxes that might be due as the result of the loss of a tax benefit in the form of tax saving derived from the LIFO method of accounting.  This policy is similar to the loss of key supplier policy, except here, the loss of the supplier is not due to a business decision, but rather some type of strike.

 

 

Coming Up Next . . .

The IRS Definition of "Insurance"

Risk Shifting and Risk Distribution

Economic Family Doctrine


Case Law

Humana v. Commissioner

Hospital Corporation of America v. United States

Kidde Industries Inc. v. Commissioner

Harper Group and Includible Subsidiaries v. Commissioner


Safe Harbor Rulings

Revenue Ruling 2002-89 (50 Percent Rule)

Revenue Ruling 2002-90 (12 Entity Rule)