Congress Passed 831(b) Because of an Economy Wide Insurance Crisis

Even when we don’t see eye-to-eye, we still like to give credit when credit is due.  For example, we often find ourselves in disagreement with the Internal Revenue Service (IRS), but we did give them credit for Acknowledging 831(b) Captive Insurance Companies ARE A LEGITIMATE TAX STRUCTURE (CLICK HERE).

In the same way, we have had some differences in opinion with Hale Stewart, Tax Attorney and Financial Advisor in Houston, Texas.  However, this week we are tipping our hat to Mr. Stewart for his excellent article titled: “Congress Passed 831(b) Because of an Economy Wide Insurance Crisis.”

In his article, Hale points out that:

By the mid-1980s, U.S. business faced an insurance crisis caused by the following events: a Tsunami of litigation stoked by changes in tort law, aggressive plaintiff’s bars, more liberal insurance policy interpretations that broadened coverage beyond that contemplated by actuaries and, finally, larger jury awards, especially for punitive damages.  The problem was so pervasive that Time Magazine placed the crisis on a 1986 cover. 

Importantly, he concludes his article by saying:

Just remember: Congress passed 831(b) to solve an economy–wide problem.  While this obviously benefited farm mutuals, it also benefited a large swath of American business.   

We find ourselves in agreement.  Congress also recognized that small and mid-market businesses have very fragile business models, at  least compared to their Fortune 1000 brethren. The former often have concentrated revenue streams, are geographically concentrated, and can’t simply issue more stock/bonds to get them through challenging times when something goes wrong. This is one reason why, according to Small Business Administration statistics cited on Ready.gov, 40% of small and mid-market businesses never reopen their doors after a natural or human-caused disaster. This fragility takes a costly toll on the economy, and 831(b) is one way to help make small businesses more robust. By forming an 831(b) captive, a small business (or its owners, at least) can (all else being equal) have both more insurance AND more after-tax liquidity, both of which are key to survivability. 831(b) served (and continues to serve) very important public policy objectives besides just throwing a bone to farm mutuals.

To read Hale Stewart’s entire article, CLICK HERE.