August 31, 2013

Inside Business Law

Each of the committees within the Business Law Section of the ABA exists because of a need within the legal or business community. When new needs arise, new committees are formed and previously existing committees sometimes develop the resources needed by the practitioners in those committees to understand and master the emerging field. The Section's response to the emergence of captive insurance companies demonstrates this process beautifully. 

The Rise of Captive Insurance Companies 

Captive insurance companies scarcely existed 20 years ago, but today they are so popular that the overwhelming majority of Fortune 500 companies and many thousands of smaller companies use captive insurance companies as their primary tool for managing enterprise risks. More than 30 states have adopted captive insurance enabling legislation, and nearly all states are predicted to do so by 2020. 

In a nutshell, a captive insurance company is a subsidiary formed to underwrite the insurance risk of a single organization, with the idea that insurance profits that otherwise would be lost to third-party carriers can now be retained for the benefit of shareholders. In the typical scenario, an organization uses the policies issued by its captive to cover nearly all of its risks, and then the captive purchases reinsurance (usually at a large discount to direct commercial policies) to lay off its largest risks. 

Two Approaches to Captive Insurance Companies 

Two committees in the Section have approached the rise of captive insurance companies from different angles: the Committee on Captive Insurance offers its members an opportunity to dig into every aspect of captive insurance company law, while the Middle Market and Small Business Committee has prepared an overview to alert its members to the ways in which captive insurance company law may affect their practices. 

The Committee on Captive Insurance 

The Committee on Captive Insurance, chaired by Jay David Adkisson, was formed to further the education of those who work with captive insurance companies and related alternative risk transfer structures and transactions. 

The Committee assists practitioners in addressing the myriad issues involved with captives, including disclosure requirements to shareholders, risk assessment and actuarial services, formation and management of the captive, tax considerations and benefits, policy drafting, and claims payment. The Committee has proposed to the Uniform Law Commission the drafting of a new Uniform Captive Insurance Act, to codify and make uniform the various disparate state captive insurance laws. 

If you want to know how the Captive Insurance Committee can help you and your clients, please contact: Committee Chair Jay David Adkisson at jayadkissonmail@gmail.com

The Middle Market and Small Business Committee 

The Middle Market and Small Business Committee’s mission is to serve corporate and transactional lawyers who counsel small and mid-sized enterprises controlled by families, entrepreneurs, PEGs, or VC firms, and smaller publicly-held companies. 

Within the context of that mission, the Summer 2013 issue of Business Visions, the Middle Market and Small Business Committee Newsletter addressed captive insurance companies. 

Captive Insurance Companies for Small and Mid-Sized Businesses,” by Sara K. Stock, Lewis, Rice & Fingersh, L.C., discusses how a small or mid-sized business could use a microcaptive insurance company in order to decrease tax liability and manage risks. In essence, the article culls the whole of captive insurance law to present the aspects of that area of the law that are essential to the use of a captive insurance company by a small or midsized business. 

The Middle Market and Small Business Committee is chaired by Gregory Charles Yadley. He can be reached at gyadley@slk_law.com