A potential advantage of an incorporated cell is that it can further establish the goal of segregating cell assets and liabilities. For example, unlike unincorporated cells, incorporated cells can enter into contracts and thus can issue the insurance policies to the policyholder. Likewise, they can sue and be sued. Each of those characteristics of an incorporated cell can further protect the cell’s assets and liabilities from those of other cells and the core captive. However, incorporated cells may impose additional administrative burdens and costs that are not imposed by unincorporated cells.
Case law on these issues is sparse, to say the least. In one of the few decisions addressing the issue, a federal court in Montana ruled on one consequence of an unincorporated cell. Pac Re 5-AT v. Amtrust N. Am., Inc., 2015 WL 2383406, at *4 (D. Mont. May 13, 2015). There, the court found that, without a separate legal identity, and absent a statutory grant to the contrary, the unincorporated cell there lacked the capacity to sue or be sued. Id. As a result, and contrary to the unincorporated cell’s and the core captive’s arguments, the court found that the core captive was properly named as a party in a demand for arbitration for alleged breaches of a captive reinsurance agreement and would be appropriately bound by the results of the arbitration. Id. at *5. However, that court also recognized the Montana statute that protected the assets of a cell from the liabilities of other cells or the core captive. Id. at *4 (quoting Montana Stat. § 33-28-301(4), which provides that “[t]he assets of a protected cell may not be chargeable with liabilities arising from any other insurance business of the protected cell captive insurance company”).
Cell captive insurers could be brought into litigation involving insurance issued by an unincorporated cell. For instance, when a policyholder requests coverage from other insurance companies, those other insurers may argue that the policyholder’s captive insurance must provide coverage first. Those arguments can be based on other-insurance clauses or on contribution principles. They could also involve a policyholder seeking coverage under a vendor’s insurance policy or seeking indemnity from a vendor. In those circumstance, those other insurers may bring the captive insurer into any litigation between the policyholder and those other insurers. But, even if the core captive is a party to the arbitration, its assets may still be protected from paying the liabilities of a protected cell.
Ultimately, the decision of whether to incorporate cells within a captive cell program will likely depend on a variety of factors, including the goals and needs of the business as well as state-specific laws and regulations.