Top 10 Captive Myths – #5 – If Commercial Coverage Isn’t Available, It’s Not An Insurable Risk

Time and again, the I.R.S. has argued that captive insurance companies should be operated like or resemble the practices of commercial insurers.  This line of argument and its permutations have repeatedly been struck down by the U.S. Tax Court in cases between the Service and captive owners.  In fact, it was most recently shrugged off by the Tax Court in the January 2104 Rent-A-Center ruling.

A common parallel to this argument is often opined about by self-proclaimed captive experts, earning this worn out line of misinformation the #5 slot in our Top 10 Captive Myths.  The myth is “If Third Party Commercial Coverage Isn’t Available, It’s Not Really An Insurable Risk.”  Said another way, if third party commercial insurers don’t offer a type of coverage, it must not really be an insurable risk.

This argument falls short in so many ways.  First, it makes the incorrect assumption that all businesses and business owners face the same risks and challenges.  Second, it assumes that third party commercial insurers offer fairly priced insurance coverage for all real risks that every conceivable business faces.  Third, by implication, it assumes that all policy exclusions by third party commercial insurers are fair and only exclude risks that are not “real.”    Taken one by one, it is easy to see that these assumptions don’t hold water.

In many cases if a third party commercial insurance policy or an equivalent does not exist, it is because the risk is even greater than previously imagined.  After all, commercial insurers are in business to make a profit.  If commercial insurers are unwilling to insure or take on a risk, it is often because they are unable to price insurance coverage to earn a profit on the risk they are insuring.   This is often the case when the magnitude of loss is potentially high or the likelihood of an occurrence is particularly hard to project.  There is a difference between insurable risk and insurable risk where profit is a certainty.

Don’t let myths promulgated by self-proclaimed experts hinder you from doing what is right for your business.  Almost all businesses face significant risks – many which aren’t insured via third party commercial insurance – that could and should be insured by a captive insurance company.  The benefits of owning your own captive insurance company are significant.