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Captive Insurance Companies

Practices

Many business owners are unaware of the benefits that can be provided by use of a captive insurance company. Though often we find that these owners have heard of “captives”, our experience is that they think of a captive as something that only very large corporations, and even only public companies, utilize.

But, the fact is that thousands of closely-held companies have risks insured by one or more captive insurance companies, and use of a captive insurance company by companies desiring to better address their business risks has become increasingly popular due largely to issuance of several revenue rulings by the Internal Revenue Service in 2002 that provided guidance on the tax treatment of captives. A captive insurance company provides much flexibility in taking control of business risk. As an alternative risk mechanism, a captive insurance company offers flexibility in the types of risks that can be insured.

In addition to providing enhanced risk management, a captive can provide insurance cost reductions and significant tax benefits. And, with sensible risk management, the captive can accumulate underwriting profit.

A captive insurance company is a legally licensed limited-purpose property and casualty insurance company. It provides insurance for a limited base of customers – typically only for a company and its affiliates or only for a company if it has no affiliates. This limited number of insureds enables control of the types of risks and the risk environment for which the captive provides insurance. The typical arrangement in establishing a captive insurance company involves the formation of a corporation that will be the insurance company. Such corporation is often owned by the owners of the insured company(ies), but the captive can be owned family members of the owners of the insured company, trusts for such family members, and even by executives of the insured company. As with any insurance company, accumulated underwriting profits of a captive can be used for a variety of financial planning needs of its owners. Underwriting profits can be made available to the insured company as well for its business needs.

At Carlile Patchen & Murphy, we focus on use of a captive insurance company by closely-held companies that we believe are qualified by revenue (at least $5.0 mil) and pre-tax profits (at least $1.5 mil) to benefit from use of a captive. We counsel such companies on the insurance features, risk assessment, formation, planning and ongoing management of the captive. A captive insurance company is a “small” insurance company, and there are over 30 states that have adopted insurance legislation and regulations that accommodate formation of small insurance companies – including nearby (Kentucky) and more distant (Florida, Utah, and Hawaii).

We provide a no-cost review to assess whether a captive insurance company may be suitable. Contact Jack Butler (jbutler@cpmlaw.com) if you desire more information on captive insurance companies.

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