In addition to gaining the ability to self-insure and to own a profitable second business, a captive insurance company is one of the most formidable asset protection vehicles available to businesses and business owners.
However, prior to addressing this unique benefit, it’s worth noting the primary reasons that businesses form their own insurance company – specifically a captive insurance company (CIC).
- To manage business risk by formally self-insuring certain risks with pre-tax dollars
- To protect assets from creditors of the operating business and its owners or other risks
- To realize profits and accumulate wealth inside of a separate business entity
These are well known reasons that legitimate captive insurance companies are formed by businesses. Assuming a captive insurance company is formed for the above reasons (or similar ones), it can also serve as the backbone (and full body armor) of a business owner’s asset protection strategy.
A Common Business Challenge– Protecting Accumulated Wealth from Lawsuits and Creditors
I’ve heard many successful business owners say that one of the worst things about building a successful business is the fear of losing their business and/or wealth in a lawsuit. Most of us know good people who were acting in good faith who have been seriously hurt financially (possibly even destroyed) as a result of a lawsuit.
The Significance of the Challenge
Juries and judges are notorious for delivering exorbitant rewards in many lawsuit cases. And, many states allow for punitive damages above and beyond compensatory damages. In some cases, even a well insured business owner acting in good faith can be wiped out in a lawsuit.
A business that owns a captive insurance company can insulate a significant amount of wealth from lawsuits and creditors. This is the case because a captive insurance company is a C Corporation with a very limited purpose. This limited purpose protects the assets in the captive.
So, wealth protected in a properly structured captive insurance company is safer than Fort Knox. Let’s face it -if you kept your money at Fort Knox and lost a lawsuit beyond the policy limits of your insurance, your wealth would be removed from Fort Knox by court order and given to your legal opponent and his attorney.
Why is Owning a Captive Insurance Company an Effective Solution?
There are almost no circumstances where a captive insurance company would be liable for its actions. Likewise, there are almost no circumstances where a business or business owner’s creditors would be able to level a claim against a captive insurance company. In a matter of speaking, a captive insurance company is like an innocent bystander that is lawfully disassociated from the business and its owner in matters of liability.
How Does a Captive Insurance Company Provide Creditor Protection Benefits?
First, future creditors of the business or its owners will find it extremely difficult to establish a cause of action against a legitimate CIC as the CIC does not engage in activities that will likely expose it to lawsuits.
Second, under the laws of some jurisdictions, assets of insurance companies enjoy varying degrees of statutory protection. Assets are preserved for the benefit of policyholder claimants.
Third, for CICs incorporated in many international jurisdictions, the laws of the international jurisdictions make it nearly impossible for any non-policyholder future creditor (especially creditors in the US) to reach the assets of the CIC.
Fourth, even if a creditor were successful in obtaining a judgment against the CIC, the CIC can invest its assets in a way that results in the creditor obtaining little or no value from the judgment. This is often achieved by having the assets of the CIC invested into an asset protection limited liability company which has charging order protection.
What Is A Captive Insurance Company?
A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure risk, and captives are generally formed to insure primarily though not exclusively the risks of one or more businesses owned by the same or related parties.
How Does a Captive Insurance Company Work?
A captive primarily insures its parent company or related companies. Hence, the parent company is able to purchase insurance from its captive, and it can insure risks that third party insurers will not insure or risks where third party insurance cost is unaffordable.
Some examples include (but are not limited to):
- Loss of a key account
- Loss of key personnel
- Loss of a license or certification
- Loss of a sales or distribution territory
- Loss of dealership rights
Premiums are paid from the parent company to the captive with pre-tax dollars. The captive can invest its assets mostly as its owners choose (some domiciles have restrictions).
Call us to discuss whether or not a captive insurance company or additional captive insurance company is the right move for your business.
Phone – 865- 599-6104
E-Mail – Randy@CICServicesLLC.com
Web – www.CICServicesLLC.com