1. 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
D
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

2. CARIBBEAN REPORT
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
parties.
looking for more certainty from their comprehensive and tailored insurance
44 CAPTIVE REVIEW WWW.CAPTIVEREVIEW.COM