Captive Review 2010

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					                                                                                          caribbean report

     Managing the
     middle ground
         Stewart a Feldman, of the Feldman Law Firm and general counsel
        to Capstone associated Services, reveals the Fortune 1000 planning
             techniques that are now available for the middle market

               ecades ago, the largest US          they occur). Meanwhile, the captive’s           cleaning up industrial waste. It wishes
               companies came to realise the       investment income can build up on               to insure these non-patentable proc-
               benefits of captive insurance       a tax-advantaged basis to help fund             esses against competitors’ wrongful
               programmes. Today there are         future losses.                                  appropriation of these technologies.
  approximately 10,000 captive insurers          • Federal Industrial Cooling LLC                  Its captive insures the integrity and
  worldwide, the majority of which are af-         provides industrial cooling equip-              exclusivity of these processes against
  filiated with American businesses. Some          ment and services to commercial                 devaluation caused by the misap-
  of the reasons for the migration to captive      and industrial customers. It relies             propriation of these processes by
  insurers by middle-market companies can          on its experienced heating, ventilat-           competitors.
  be demonstrated through the following            ing, and air conditioning engineers           • Plastic Surgery Associates, LLP
  real business scenarios:                         and salesmen to interface with                  unknowingly self-insures serious
     • Acme Manufacturing is a closely-            architects and mechanical engineers             exposures, including changes in
        held business, generally offering a        who design projects. Its COO and                reimbursement rates, the costs of
        one-year warranty on its products,         CFO are also critical members of the            Centers for Medicare and Medicaid
        which can be supplemented with a           executive management. The loss of               Services (CMS) and insurance compa-
        multi-year extended service warranty.      any of the engineering or sales staff           ny audits, the risk of delisting by an
        The extended service contract can          or the executive management would               insurer, malpractice deductibles, em-
        be structured as an insurance ar-          significantly impact Federal. While             ployment practices, accounts receiva-
        rangement wherein a captive insurer        key man policies are widely available           bles exposure and disability. These
        assumes Acme’s financial obligations       in the marketplace, it is more difficult        significant exposures are not covered
        in exchange for a premium. Struc-          to come by polices that insure against          under the company’s traditional pro-
        turing the contract as an insurance        disability, retirement or quitting. Its         fessional liability coverage. The client
        arrangement allows Acme to deduct          captive can insure these risks.                 finds that owning its own captive
        the costs of its extended service war-   • Enviro Services Ltd has developed, at           insurer helps control the rising cost
        ranty upfront (rather than deduct          great expense, certain processes and            of risk and provides added insurance
        warranty-related service expenses as       trade secrets used in containing and            protection by filling the holes and ex-
                                                                                                   clusions in its conventional coverages,
                                                                                                   while providing a more stable level of
                                                                                                   income for its owners.

                                                                                                 Practically speaking, in none of these
                                                                                              situations is insurance available from a
      policies issued by captive                                                              conventional carrier to cover company-
                                                                                              specific risks, at least not at a reasonable
  insurers can be custom-designed                                                             premium for a mid-market company.
                                                                                                 Tens of thousands of businesses

  to more clearly delineate
                                                                                              representing industries ranging from
                                                                                              medical services to manufacturing to
                                                                                              fabrication to distribution, finance and
  coverage and to eliminate holes                                                             construction, are now participating in
                                                                                              some type of alternative risk planning

  in conventional insurers’ policies”                                                         programme, whether it is a group captive,
                                                                                              a cell captive, a single parent captive

www.Captivereview.Com                                                                                                Captive review 43

insurance arrangement or some other
form of alternative risk financing. These
companies do not necessarily cancel their
conventional liability or property or auto/
truck coverages. Rather, these businesses
supplement their conventional coverages
with tailored policies that pick up where
conventional carriers fall short.
   For years, the largest US companies
have realised the benefits of alternative
risk financing and captive planning.
Principal among the reasons is the ability
to customise coverages to the insureds’
needs rather than simply relying on
‘standard’ conventional policies riddled
with restrictive exclusions. Insureds have
found the vexatious claims submission
processes of conventional property and
casualty carriers, especially when faced
with substantial commercial claims,
are often more cost-effectively handled
through captive insurance arrange-
ments. Traditional carriers only pay out a
portion of premiums received for actual
losses, with marketing costs, regulatory
expenses, executive compensation, com-
missions, investment losses and litigation
with insureds absorbing a disproportion-
ately high amount of actual premium dol-      insurance company when filing claims. It       coverages. If the conventional markets
lars. A well-designed and implemented         is commonplace for many conventional           are not providing the needed coverages,
captive arrangement can recoup these          insurers, especially on larger commercial      these are provided by the captives.
dollars for the insured.                      claims, to deny bona fide claims as part          Capstone concentrates its efforts on
   Therefore, it is not surprising that       of the ‘negotiation process’, especially       the largest growing segment of alternative
captive insurance, as an alternative risk     when facing a significant loss. As a result,   risk planning: captives for closely-held,
management strategy, has long been used       businesses have to sue their insurance         non-public companies with substantial
by most Fortune 1000 corporations.            companies to recover unpaid claims or          operations. Our clients’ captives, gener-
   The past decade has seen an increasing     face declaratory judgement actions where,      ally speaking, retain appropriate risks
demand for more targeted and cost-ef-         in a classic role reversal, the insured can    through their captive and insure other
fective insurance coverages which quickly     be liable for the insurer’s legal fees. The    risks through the conventional market.
lead to captive insurance and other al-       certainty of payment from a captive is, for       It is no surprise that up to half of the
terative risk financing techniques. For the   many, a better alternative.                    total property and casualty premiums
past 10 years, Capstone has been translat-       Traditional insurers often rely on policy   paid in the US are written through a
ing sophisticated alternative risk financ-    exclusions, which create uncertainty           captive or other alternative risk planning
ing techniques used by large corporations     among insureds, regarding whether the          arrangement.
into techniques which can be used by the      claim will be paid. In contrast, policies         Since 1998, Capstone Associated
middle-market, privately held company         issued by captive insurers can be custom-      Services, Ltd. and Capstone Insurance
and its principal owners. Turnkey out-        designed to more clearly delineate cover-      Management, LLC together with their
sourced providers such as Capstone, with      age and to eliminate holes in convention-      affiliated law firm, structure, design,
legal, regulatory, risk management, statu-    al insurers’ policies. A captive can provide   implement and operate captive insur-
tory accounting, claims management and        cost-effective coverages which are not         ance arrangements on behalf of more
policy manuscripting skills, have reduced     readily available in conventional markets.     than 80 companies. Capstone is based in
the complexity of captive planning for        In some cases, the captive’s policies are      Houston, TX and has offices in Anguilla
these businesses.                             designed to specifically take over when        and Delaware where many of its captives
                                              the conventional carrier denies coverage       are domiciled.
                                              on the underlying policy.
Growing confidence                               A captive insurer offers considerable
One factor which continues to fuel the        flexibility. It may provide primary cover-
                                                                                                                Stewart A Feldman is
growth of captive insurers among middle       ages, or it may just insure the policies’                         managing partner of
market companies is the conventional          exclusions. The client often keeps most of                        The Feldman Law Firm
carriers’ recalcitrance in responding         its conventional insurance in one place,                          and general counsel
to claims. Conventional property and          using the captive to cover the ‘expectation                       to Capstone Associ-
casualty insurers have a well-deserved        gap’ where the items’ exposures that were                         ated Services, which
reputation for not paying claims. Yet         thought to be covered are not covered by                          designs, forms and
businesses sometimes depend on these          the conventional carriers. Our middle-                            administers property
same carriers for protection when they        market clients throughout the US want to                          and casualty insurance
                                                                                                                companies for third
are sued. Middle-market companies are         protect their significant businesses with
looking for more certainty from their         comprehensive and tailored insurance

44 CAPTIVE REVIEW                                                                                           WWW.CAPTIVEREVIEW.COM

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Description: Captive insurance planning for the mid market business.