Case Law: Kidde Industries, Inc. v. United States

In Kidde Industries, Inc. v. United States [(1997) 40 Fed Cl. 42], Kidde was a large conglomerate with approximately 100 subsidiaries.  In 1976, there was a products liability crisis and many insurance carriers restricted or ceased to provide coverage.  This same year, Kidde formed a wholly-owned captive subsidiary in Bermuda called Kidde Insurance Company Ltd. ("KIC").  KIC provided coverage to the Kidde subsidiaries, and then it reinsured such coverage through two American International Group ("AIG") subsidiaries.  KIC and one of the AIG subsidiaries entered into an indemnity agreement. 

The Court of Federal Claims held that except for the period when the indemnity agreement was in effect, the payment of insurance premiums by the Kidde subsidiaries to KIC was deductible under IRC section 162 as insurance.  The court further held that KIC was not a sham and was formed for legitimate business purposes.  In addition to finding that risk shifting and risk distribution existed in this arrangement, the court found that the arrangement was consistent with commonly accepted notions of insurance because the insurance contracts allocated risk (the risk that one party will face uncertain and variable claims against it) and there was an established claims process.