Captive insurance, a self-insured structure that covers unlikely risks, is proving to be beneficial as coronavirus pandemic impacts spread across the economy, according to reports.
Some of the more common captive insurance coverage options, such as business interruption or supply chain disruption, are claims that business owners need to make in these uncertain times.
While commercial business interruption insurance may not pay out business interruption claims due to the current health pandemic, captives may, according to experts.
“You have these policies that are loosely drafted,” David J. Slenn, a lawyer in Tampa, Fla. and a former chairman of the American Bar Association’s captive insurance committee, told The New York Times. “They’re interpreted in favor of the insured. Even if they’re not the strongest policies from a tax perspective, they still have binding contracts to pay claims.”
During a recent presentation on the state of the captive insurance market, Brady Young, president of Strategic Risk Solutions, said there is “more interest, more activity than ever.”
“People that may have looked at captives 3 or 4 years ago when it didn’t make sense are resurfacing,” Young said, according to Captive Insurance News.
As the traditional insurance market conditions become more challenging, Young sees captive insurance company owners able to use their captives to influence renewals, as well as to fill holes in their programs.
The I.R.S. has put captive insurance on its “dirty dozen” list of the most abusive tax practices since 2014.
The I.R.S. has been watching captives because they can insure risks that are so unlikely to pay out a claim, all those premiums can become part of the business owner’s estate and pass on to their heirs with little or no tax.
In the current economic climate, captives are showing the I.R.S. precisely what they were set up to do, say lawyers.
“A lot of captives underwrite low-frequency, high-severity risks,” Kacie Dillon, a partner at the law firm Woolston & Tarter, told The New York Times. “They don’t happen often, but when they do, they’re very large events. I can’t think of a time when businesses were told to close because of an outbreak of a virus. Those types of claims are low frequency, but the policy should have been underwritten with that in mind.”
“It’s not great that we have the coronavirus, but it does show how captives can be a useful tool for business,” Dillion added.
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