After losing the case regarding Notice 2016-66, the Treasury and IRS proposed regulations identifying micro-captive transactions as abusive tax transactions. The Notice of Proposed Regulations can be found in this article and the proposed regulation link is located in the first sentence of the notice, or at the Federal Register website.

An article regarding a recent determination by the IRS concerning small captive insurance companies is a must read for captive owners and captive service providers... [continue reading]. 

Tee up your captive's future with the Arizona, Missouri, and Utah captive insurance domiciles at this year's 9th Annual Western Region Captive Insurance Conference scheduled for May 20–22 in Scottsdale, Arizona.

Hosted jointly by the Arizona, Missouri, and Utah captive insurance associations, this golf-themed event features a schedule packed full of sessions about captive taxation, captive investments, captive utilization, emerging issues, analytics, structures, and domicile regulation. Mixed in will be ample opportunities for golfing with clients and colleagues as well as networking and happy hour events along with various offsite activities.

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Repost from Captive Insurance Times

Missouri licensed 10 new captive insurance companies last year, an increase on the eight captives licensed in 2017.

Statistics from the Missouri Department of Insurance, Financial Institutions and Professional Registration revealed that four captives surrendered their licences due to relocation or closure in 2018, the same number as in both the two previous years.

The net growth in the number of total captives last year was six, meaning at year-end 2018, there were 72 captives licensed in Missouri, 54 of which were active.

Of the 54 active captives, 39 were pure captives, 12 were special purpose life reinsurance captives, two were branch captives and one was an association captive.

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By Nicholas Meriage and Derek Ruzicka

In June of 2016, there were more than 370,000 active civil lawsuits pending in the federal district courts nationwide¹. This number does not include any of the lawsuits filed in the state courts across the country, which far outnumber those in federal courts.  Today, more than ever, companies are facing a greater risk of litigation.  Companies who in the past had nominal litigation involvement are now finding they face multiple lawsuits in different jurisdictions around the country. 

The increasing number of lawsuits poses a unique set of obstacles for companies.  While in-house attorneys may be very competent dealing with the typical day-to-day legal and managerial issues a company faces, often litigation matters, especially multiple complex litigation matters, can require significant allocation of time that would be better spent on other duties.  It is at this point that many companies employ outside counsel to manage the litigation.  Because of the growing number of lawsuits, this often results in a company engaging multiple different local outside counsels around the country to handle different lawsuits.    

The challenges faced in managing multiple outside attorneys can further become a sink on efficiency.  The solution to this problem is to employ what is called “national coordinating counsel.”  National coordinating counsel are tasked with providing a link between the company being sued and the local attorneys – the boots on the ground - who handle the day-to-day litigation issues arising in the individual cases.  Often the decision to retain national coordinating counsel is only made when multiple lawsuits have already been initiated.  However, to get the most benefit out of the national coordinating counsel, companies should begin exploring retention of counsel as soon as the first lawsuit is filed when the underlying issues can balloon into multiple related lawsuits affecting more than one plaintiff.  Identifying this risk early results in significant cost savings over the span of these lawsuits because the national coordinating counsel can maintain a central file for the related issues, can coordinate consistent litigation case strategies, and will allow for efficient coordination with the company.  

National coordinating counsel are often used in mass tort litigation and serial tort litigation, although the benefits of outside national coordinating counsel can be applies to other areas as well.  The use of a national coordinating counsel streamlines the litigation process as the national coordinating counsel is familiar with and has specialized knowledge of the products, personnel, defendants and typical injuries involved in these cases.  This knowledge is brought to bear in each of the cases and does not require each local counsel to recreate the central knowledge bank.  The national coordinating counsel develops an understanding and knowledge of the company’s business that is paramount to creating a theme for the defense of these matters.  The national coordinating counsel helps witnesses organize and understand the often complex facts of the cases and prepares the witness to provide credible and consistent testimony between matters.  

Often, mass tort litigation involves claims arising out of asbestos exposure, pharmaceutical litigation, and environmental litigations. Serial tort litigation involves product liability claims arising out of the same types or similar product defects resulting in injury, death, or property loss.  Examples of serial litigation include defective product claims involving power tools and automobiles sold in multiple jurisdictions.  These cases incorporate common witnesses, experts, and evidence across multiple cases where a consistent, effective approach to the defense of the matter is imperative.  This presents unique risks because inconsistent testimony and evidence between cases can create significant increases in the cost to defend the matter and in the cost to resolve a matter, as well as potentially undercutting the credibility of the defense strategies.     

The use of national coordinating counsel is critical when evidence is going to be produced in multiple cases because national coordinating counsel develops a consistent streamlined process for searching, reviewing, and producing documents.  The efficiency developed in preparing these productions should result in substantial cost savings in situations involving multiple lawsuits.  Cases involving a similar mechanism of injury and common witnesses also benefit from national coordinating counsel. 

If a company receives a summons in a lawsuit, not only should consideration be paid toward the potential issues in that case, but also to whether the lawsuit is the first of potentially many such lawsuits.  It is important to consider what personnel and documents produced in the lawsuit could be relevant in other foreseeable lawsuits.  If these issues will more than likely arise in related litigation or similar claims, the early retention of national coordinating counsel could help avoid potential pitfalls in the future. 

¹http://www.uscourts.gov/sites/default/files/data_tables/stfj_c1_630.2016.pdf

By John Talley

Welcome to Missouri. As those of you that have worked with us before know, Missouri is a great state with a pro-business climate and we have built an exceptional market for the development and establishment of captives. Missouri has a strong offering for captive owners and I thank the Missouri Captive Insurance Association for their efforts to promote Missouri and the benefits of captive insurance in our state.

The department works closely with companies to accomplish their goals for their captive. Unlike some domiciles we only use internal staff for the licensing and regulation of captives. You’ll find this makes us responsive to the needs of our captives and keeps examinations costs extremely low compared to other domiciles. Although I’ve been a captive regulator for more than six years, I’ve never been with a department that has so many people, at the highest level, who truly understand captive insurance. My Division Director, John Rehagen, was the first captive manager in Missouri and started the program in 2007. Prior to joining the Missouri department, Director Chlora Lindley-Myers was actively involved in the successful resurrection of the captive insurance program in Tennessee. This is what Director Lindley-Myers has to say about the captive program in Missouri: “Upon my arrival in Missouri I was pleased to see that the captive program was well established. I am eager to work with staff and industry to continue to improve our offerings in Missouri for the benefit of our captive owners and Missouri businesses. I look forward to welcoming the conference attendees to Missouri and learning how the department may better serve the needs of the captive insurance marketplace. ”

The captive program in Missouri has been successful. At the time of this writing, Missouri has licensed 59 captives. They primarily consist of pure captives but have licensed association, special purpose life reinsurance and branch captives as well. Captive insurance has become a substantial industry in our state, with $3.4 billion in total premium and $25.5 billion in assets under management reported in 2016. Missouri’s captive laws offer several options for businesses and are specifically designed to minimize the need for mandated regulation and oversight. The department has the experience and flexibility to provide the level of regulation needed for nearly any situation. Captives of all sizes and complexity have the opportunity to be successful in Missouri. Captives in Missouri range from those with well over a billion dollars in assets writing dozens of lines of coverage to small single line captives with less than a million dollars in assets.

If your company is located in or near Missouri, you have the opportunity to keep your captive close to home. If you are not located in or around Missouri, there are daily non-stop flights between our two major metropolitan areas and most major cities across the country. In most cases, there’s no need for connecting flights and all-day travel for a simple meeting with our staff or with your captive company management or service providers.

We are here to provide solutions to those owners that are weighing their captive risk financing alternatives. With offices in St. Louis, Kansas City and Jefferson City, we’ll meet where it’s most convenient to you, or we will travel to your office and we are always just a phone call away.

John M. Talley, JD, Captive Program Manager Missouri DIFP
Email: John.Talley@insurance.mo.gov
Website: http://insurance.mo.gov/captive/index.php
Phone: (573) 522-9932

By Benjamin L. Gould, Esq.

When forming a captive, one of the first questions that a parent company will be asked is how it will structure its board of directors. (In the case of a captive organized as a limited liability company, the analogous body is the board of managers, while a captive organized as a reciprocal has a subscribers advisory committee, but the requirements and considerations are the same as for captives that are formed as corporations.) This question will need to be resolved before the license application is submitted to the Missouri Department of Insurance for approval.

The board of directors is a critical component for a captive’s success. The board is charged with decision-making over broad matters of policy, strategy, and governance with the best interests of the captive’s owner(s) in mind, along with appointing officers and management to handle day-to-day operational matters. The board is responsible for ensuring the continued financial health of the captive and making sure that the captive is compliant with legal requirements and ethical principles.

In order for a captive’s board to comply with Missouri law, the requirements are relatively minimal. All that is needed is a board with at least three members, one of whom is a Missouri resident, whose “character, reputation, financial responsibility, insurance experience, and business qualifications” will allow the captive to promote the general good of the state. The board must hold at least one meeting per year in Missouri, and the quorum for that board meeting can be set as low as one-third (subject to a minimum of two individuals). However, there are many ways to structure a board within the confines of these statutory requirements. There is no single ideal solution, and what makes sense for one captive might not be optimal for another. The following are considerations for captive owners to entertain when structuring their boards:

Number of Directors – When determining the number of directors to sit on a captive’s board, a captive owner must strike a balance. The board must be large enough to ensure that there are individuals who, taken as a whole, possess all of the desirable attributes for oversight of the captive, but if the board is too large, assembling all of the directors for meetings can become unwieldy. For a pure captive with a straightforward insurance program, the minimum of three might be adequate. For a group captive with larger and more diffuse membership, the board might need to be much larger in order to ensure that all of the members’ various interests are represented. While less-than-unanimous votes are extremely rare in the captive world, setting the board at an odd number of directors will ensure that someone can always be able to break a tie if everyone votes.

Quorum Requirement – While most other business entities are required to have a majority of their boards present to constitute a quorum, captives benefit from a provision allowing that quorum requirement to be set as low as one-third. Setting the quorum requirement as low as possible will lessen the burden of assembling directors for meetings, but it will allow the captive’s business to be validly carried out by a minority of the board. A captive owner will need to determine its tolerance for allowing such potential minority rule to take place. In addition, if a captive has directors who are elected by different classes of members, it is certainly possible to institute a requirement that one or more directors elected by each of those different classes be present in order to form a quorum.

Staffing the Board – Again, there is no one-size-fits-all combination to staff a captive’s board, but most successful pure captives tend to include, at a minimum, representatives from the parent company’s risk management and finance departments, along with the resident director. It is also common for captive boards to include members of the parent company’s in-house counsel unit, treasury department, or executive team. For privately-held parent companies, the ultimate owner (or his/her designee) often sits on the captive board. If a captive owner operates in multiple business sectors, or has substantial international operations, it is often advisable to include directors who have familiarity with those matters. Smaller group captives typically require each of its members to provide a nominee to the board, while the boards of larger group captives are often structured to ensure they include representatives of each of the captive’s various different constituencies.

A director must be able to devote sufficient attention to the captive’s affairs in order to discharge the legal duty of care; if the director is unable to make this commitment, he or she would be well-advised to step aside in favor of someone else who can. For this reason, it is often advisable that a captive’s board not just be the same as (or a subset of) the parent company’s board, but instead include individuals who are closer to the parent company’s day-to-day risk management operations. Finally, note that all captive directors are equals whose votes count the same, even if one is the subordinate of another within the parent company’s organizational structure.

Resident Director – Back when captives were the domain of small, out-of-the-way jurisdictions, the resident director requirement was a proxy to ensure that a captive’s board included somebody with significant industry experience who is at arms’-length from the parent company – usually a representative from the captive management firm or the captive’s legal counsel. With the proliferation of domiciles and many more parent companies forming captives in their home state, the resident director requirement can often be met by an employee of the parent company. Although it might not necessary to fulfill a statutory requirement, a captive owner should consider whether it might still be desirable to include the perspective of a detached industry expert on its board. (As a counterpoint, note that a captive board will receive the same professional advice from a captive manager or attorney regardless of whether that person actually sits on the board.)

Independent Directors – There is no requirement for a captive board to include any “truly-independent” directors, i.e. individuals with no connection to the parent company or its service providers other than membership on the board. With most captive directors being employees of the parent company, it is relatively easy to ensure that the directors’ interests are aligned with those of the shareholder(s). However, some captive owners might find it desirable to appoint a truly-independent director in order to flesh out the talents of the board, and parent companies that are subject to heightened scrutiny by the public or regulators might consider the use of a truly-independent director in order to demonstrate exemplary governance practices. A truly-independent director can receive compensation from the captive for his/her services without compromising that director’s independence; in fact, truly-independent directors of for-profit captives will typically expect compensation, which can be significant, as consideration for their service.

Regulatory Oversight – Newly-forming captives must include biographical affidavits for their initial directors in their license application, while directors who are elected to the board of existing captives must file biographical affidavits with the regulator within 30 days after their election. These biographical affidavits are the mechanism by which the regulator ensures that a captive’s board, taken as a whole, possesses the adequate “character, reputation, financial responsibility, insurance experience, and business qualifications” required by statute. While it is extremely rare for a regulator to object to a director (after all, the parent company is typically in the best position to determine its own destiny), a regulator may occasionally offer gentle suggestions for a parent company to fill a perceived talent gap on the board.

The final piece of advice on this subject is that nothing is permanent. If a particular structure for a captive board isn’t working, it is very straightforward for the sole shareholder of a pure captive to replace directors or elect new directors at anytime. Even where it is necessary to amend a captive’s articles of incorporation or bylaws to make these changes, it is relatively easy for the captive to do so. At worst, captive owners need only wait for the next regularly-scheduled shareholder meeting, which occurs at least annually, to make any changes. As a result, captive owners are urged to regularly evaluate their board structure and make adjustments – or even engage in outright experimentation – to find a structure that works best for them.

Benjamin L. Gould, Esq. is a director with the Burlington, Vermont-based law firm of Paul Frank + Collins P.C. He is admitted to practice in Missouri and represents a number of captive insurance companies domiciled in Missouri, along with Vermont and several other states.