Forbes has an interesting article on captive insurers. The main point is that captive insurers should actually insure actual risk, or else they are simply a fraudulent tax shelter.
Showing posts with label captive insurer. Show all posts
Showing posts with label captive insurer. Show all posts
Superior court holds that insurer's mistaken belief that one policy period applies does not estop it from recovery under the correct policy period
Jacob Hanks suffered brain damage as a result of complications during his birth at UMass Medical Memorial Center, an affiliate of UMMHC. For some reason his parents filed three separate actions against UMMHC personnel in three different years. Those claims settled for $4.9 million. Defense costs totalled $1,034,140.
UMMHC had claims-made insurance policies. Its primary provider was CPAC, a captive insurer of UMMHC. UMHHC's excess policies were with other carriers.
In a claims made policy the policy providing coverage is the one in effect when the insurer was notified of the claim. (This is in contrast to an occurrence policy, in which the policy providing coverage is the one in effect when the underlying incident occurred.)
While the lawsuits were pending, UMMHC believed it had given notice of the claim to the excess insurers during the 2003-2004 policy period, when the CPAC policy had a limit of $5 million. It later came to light that the excess carriers may have been notified in the 2001-2002 policy period, when the policy limit was $2.5 million.
UMMHC then sued the excess carriers to recover the additional $2.5 million, the difference between the underlying limits of the two policy years.
In UMass Memorial Health Care, Inc. v. Lexington Ins. Co., 2010 WL 5071868 (Mass. Super.) the Massachusetts Superior Court ruled on the motion for summary judgment of excess carrier First Specialty.
First Specialty argued that UMMHC had suffered no loss within the meaning of the policies because between CPAC and the excess carriers it actually received more than the loss amount.
UMMHC responded that amounts paid by CPAC are not a recovery by UMMHC, because UMMHC funds CPAC itself and is essentially self-insured.
The court held that under the language of the policy, whether loss below the excess policy was paid by a captive insurer, self-insurance, or a regular insurer was irrelevant.
The court held, however, that indemnity under an underlying policy is not a recovery for the purposes of determining UMMHC's loss, because doing so would count the same amount twice -- first as the underlying policy limit and then as a recovery.
It also held that UMMHC did not "elect" to use the later policy period; it merely made a claim under the policy it believed applied. In fact, the earlier policy applied, and First Specialty's obligations needed to be determined under that policy.
UMMHC had claims-made insurance policies. Its primary provider was CPAC, a captive insurer of UMMHC. UMHHC's excess policies were with other carriers.
In a claims made policy the policy providing coverage is the one in effect when the insurer was notified of the claim. (This is in contrast to an occurrence policy, in which the policy providing coverage is the one in effect when the underlying incident occurred.)
While the lawsuits were pending, UMMHC believed it had given notice of the claim to the excess insurers during the 2003-2004 policy period, when the CPAC policy had a limit of $5 million. It later came to light that the excess carriers may have been notified in the 2001-2002 policy period, when the policy limit was $2.5 million.
UMMHC then sued the excess carriers to recover the additional $2.5 million, the difference between the underlying limits of the two policy years.
In UMass Memorial Health Care, Inc. v. Lexington Ins. Co., 2010 WL 5071868 (Mass. Super.) the Massachusetts Superior Court ruled on the motion for summary judgment of excess carrier First Specialty.
First Specialty argued that UMMHC had suffered no loss within the meaning of the policies because between CPAC and the excess carriers it actually received more than the loss amount.
UMMHC responded that amounts paid by CPAC are not a recovery by UMMHC, because UMMHC funds CPAC itself and is essentially self-insured.
The court held that under the language of the policy, whether loss below the excess policy was paid by a captive insurer, self-insurance, or a regular insurer was irrelevant.
The court held, however, that indemnity under an underlying policy is not a recovery for the purposes of determining UMMHC's loss, because doing so would count the same amount twice -- first as the underlying policy limit and then as a recovery.
It also held that UMMHC did not "elect" to use the later policy period; it merely made a claim under the policy it believed applied. In fact, the earlier policy applied, and First Specialty's obligations needed to be determined under that policy.
Appeals Court holds that ch. 176D applies to captive insurer
Lemos was injured in 2001 as a result of defects in a lawnmower manufactured by Electrolux. He obtained a jury award of $550,500. He then brought an action against Electrolux's captive insurer, Equinox, alleging that it engaged in unfair claim settlement practices in breach of Mass. Gen. Laws chs. 176D and 93A.
As explained by the court in Lemos v. Electrolux North Am., Inc., 78 Mass. App. Ct. 376 (2010), a captive insurance company is formed to bear the risks of the parent company. Premiums paid to a captive may be tax-deductible, and a captive has the potential to produce lower insurance costs.
Electrolux was the parent and sole shareholder of of Equinox. The director of risk management at Electrolux, who was also the president of Equinox, stated that Equinox had no employees, only a board of directors. Its role was purely that of a funding vehicle for the reimbursement of Electrolux for claims that are paid by Electrolux.
Equinox argued that because it is a captive company, Electrolux is in effect a self-insurer, and that Equinox is therefore not engaged in the business of insurance so that the requirements of ch. 176D to not apply to to it.
The Superior Court agreed and granted summary judgment to Equinox.
The Appeals Court reversed. It noted that Equinox is a separate, for-profit entity that calculates the premiums it charges based on loss experience and costs, calls itself an insurance company, and issued a policy that states it provides commercial general liability and other coverage. It also noted that Electrolux receives a financial benefit from using a captive insurer rather than being self-insured.
As explained by the court in Lemos v. Electrolux North Am., Inc., 78 Mass. App. Ct. 376 (2010), a captive insurance company is formed to bear the risks of the parent company. Premiums paid to a captive may be tax-deductible, and a captive has the potential to produce lower insurance costs.
Electrolux was the parent and sole shareholder of of Equinox. The director of risk management at Electrolux, who was also the president of Equinox, stated that Equinox had no employees, only a board of directors. Its role was purely that of a funding vehicle for the reimbursement of Electrolux for claims that are paid by Electrolux.
Equinox argued that because it is a captive company, Electrolux is in effect a self-insurer, and that Equinox is therefore not engaged in the business of insurance so that the requirements of ch. 176D to not apply to to it.
The Superior Court agreed and granted summary judgment to Equinox.
The Appeals Court reversed. It noted that Equinox is a separate, for-profit entity that calculates the premiums it charges based on loss experience and costs, calls itself an insurance company, and issued a policy that states it provides commercial general liability and other coverage. It also noted that Electrolux receives a financial benefit from using a captive insurer rather than being self-insured.
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