Captive Insurance

  • A captive insurance company is typically established to provide coverage to insure risks that would otherwise be uninsurable, or for which coverage was unreasonably priced in the commercial marketplace, as well as to provide coverage for the deductible portion of commercial insurance and an excess layer of insurance, if needed by the business. Holland & Knight's Captive Insurance Team advises clients on whether captive insurance is a suitable risk vehicle for their operating businesses.
  • Holland & Knight's Captive Insurance Team also represents taxpayers – including the captive insurance company itself, the owner(s) of the captive insurance company, and the operating company/insured – in Internal Revenue Service (IRS) audits and U.S. Tax Court litigation.
  • Captive insurance may offer legitimate tax savings to business owners, but has come under scrutiny by the IRS the past few years. Our attorneys ensure that captive insurance plans comply with the applicable state and federal laws and regulations, and we represent clients in audits and enforcement actions.
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Overview

Captive insurance companies have been in existence for more than 100 years, and may be established as an insurance subsidiary that is set up by a parent company and controlled by its policyholders. Within this structure, the insured party is the principal beneficiary of underwriting profits and corresponding investment income. A properly structured and managed captive insurance company can provide attractive tax and non-tax benefits.

Our captive insurance attorneys are experienced in navigating the complex related regulatory compliance issues, and they regularly counsel clients on the advantages and disadvantages of creating an offshore versus a domestic captive, including the tax implications of each structure.

Our Captive Insurance Team advises clients on the formation of captive insurance companies, including pure or "single parent" captives and microcaptives, as well as group, agency, association and rent-a-captives.

The roster of Holland & Knight clients includes both Fortune 500 companies – the majority of which use captive subsidiaries – in addition to smaller businesses, doctors and other high-income professional service providers. Our clients include both captive companies and managers, including the nation's largest microcaptive manager.

In guiding the proper structure and management of a captive insurer, our attorneys provide a valuable platform for clients to save money on insurance, sharpen their focus on risk management and segue into an entirely new business opportunity.

Global Reach and Cross-Disciplinary Support

When clients come to us for advice on whether to put their capital at risk by creating their own insurance company and working outside of the commercial insurance marketplace, our attorneys are prepared to help them achieve their risk financing objectives. Holland & Knight's captive insurance lawyers draw from the knowledge of the firm's insurance, transactional, tax and compliance services attorneys, providing our clients with diverse resources with which to address complex issues.

Multifaceted Practice Ensures Industry Leadership

Whether a client is motivated to shape a captive insurance company because of excessive pricing, limited capacity or coverage that is unavailable in the traditional insurance market, our attorneys can help achieve stability in pricing, increased control and broader coverage through a captive arrangement. We educate clients on an array of concepts, such as risk shifting and risk distribution, giving them information that is critical in meeting IRS requirements and in determining the best course for their business.

Handling the Full Range of Captive Insurance Matters

Insurance is an ever-changing industry riddled with economic uncertainties for both insurers and policyholders. The planning, formation and management of a captive are complex undertakings, and our attorneys help to ensure compliance with the heavy regulations of running an insurance company. In addition, the broad experience of our team can support clients with structuring captive management arrangements, reinsurance agreements and protected cell company structures.

Establishing a captive insurance company is not realistic for all businesses, but where appropriate, it can provide substantial tax benefits to shareholders and their families. In addition, non-tax benefits for captive insurers can relate to estate planning, asset protection planning, business succession and deferred compensation. The collaborative approach of Holland & Knight allows us to guide clients through a wide-ranging area of business.

Extensive Tax Experience on Captive Issues

Our Captive Insurance Team handles all aspects of federal and state tax matters related to captives, captive owners and the insured businesses. Our substantial tax knowledge encompasses all issues related to the organization and reorganization of captive insurance companies, as well as ongoing operations. We further advise on tax issues in connection with the termination and liquidation of a captive.

The 831(b) election, which exempts captive premiums from federal taxes, places complex restrictions on ownership of captives and related entities. Our attorneys are well versed in what clients must do to be and remain compliant. If necessary, we can show clients alternatives to the 831(b) structure. For microcaptives electing to be treated under 831(b), we ensure that the captive is structured to comply with applicable statutory and regulatory tax requirements.

In the international context, we advise on tax issues bearing on the choice between a domestic or offshore captive, including whether to elect 953(d) treatment (to be taxed as a U.S. entity), the applicability of excise taxes and implications under onerous anti-deferral rules.

Members of our Captive Insurance Team have represented numerous taxpayers with respect to captive issues in income tax examinations, before IRS administrative appeals and in U.S. Tax Court litigation.

IRS Targets Captives

The IRS has placed "abusive tax shelters," including captives, on its "Dirty Dozen" list of tax scams that includes such obvious fraud as phishing, phone scams and fake charities. Used properly for insurance needs that address risk management in an operating business, with the ancillary benefit of tax benefits and intergenerational wealth planning, captives should continue to pass scrutiny with the IRS. Our attorneys are skilled in setting up captives that satisfy the requirements of the IRS, and we also advise clients on how to respond to audits and enforcement actions.

Recent IRS Victories in Court May Alter Captive Landscape

The IRS has prevailed in three recent captive insurance cases that reflect the IRS's increased scrutiny of so-called "microcaptives":

  • Avrahami v. Commissioner, 149 T.C. No. 7 (Aug. 21, 2017): The Tax Court held, generally, that in this matter, 1) there were grossly excessive premiums for coverages provided by the captive; 2) it was unlikely that a covered loss would occur; 3) no claims were made for six years; 4) after audit, claims were made and approved that were outside of the applicable coverage period; 5) there were insufficient "exposure units" and therefore no risk distribution; and 6) there was a "circular flow of funds."
  • Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86 (Aug. 18, 2018): The Tax Court held that a captive arrangement lacked sufficient exposure units resulted in finding of no risk distribution. The Court cited the circular flow of funds and the "lack of due diligence" by the actuary in determining premiums and coverages as the main reasons why the captive at issue was not deemed to be an insurance company.
  • Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34. (April 10, 2019): The Tax Court determined that the captive at issue was not an insurance company. Primarily, the Court cited the following factors in reaching its holding: 1) premiums were not actuarially determined; 2) losses that were covered by a policy issued by the captive were not claimed; 3) the taxpayer fired the original captive manager after that manager recommended captive premiums be reduced; and 4) the captive's assets at one point were more than 50 percent concentrated in a life insurance policy subject to a split-dollar agreement (possibly impairing the captive's liquidity to meet claims).

Expect More Captive-Related Litigation

The IRS is increasing its examination of taxpayers who are involved with captive insurance companies, especially those captives that have made the 831(b) election. While it is possible at least partially to dismiss the Avrahami, Reserve Mechanical and Syzygy cases as "bad facts" cases (in which the taxpayers at issue committed many fatal errors in planning and administering the captive at hand), practitioners and taxpayers would be well advised to review existing captive structures and, if necessary, document the non-tax reasons for the implementation of the captive, make sure all premiums and coverages were determined by sound actuarial principles, and timely submit any claim for which coverage is provided by the captive insurance arrangement.

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