“A more conservative
approach is to pay state
premium taxes on the captive’s
insurance policies and take
advantage of one or more state
exceptions to licensing.”
As with direct procurement, requirements for industrial insurance
vary by state. For example, some states require an entity to pay
higher minimum annual premiums to qualify as an industrial insured,
and some states limit the exemption to insurance coverage that is not
readily available from insurers licensed in the state. In addition, the
industrial insured exemption presumes that state premium tax will be
paid—either by the captive or by the insured.
The direct procurement and industrial insured exceptions raise the
issue of where any premium tax that is owed should be paid. A full
discussion of this issue is outside the scope of this article, but suffice
to say that the law in this area is unsettled.
Some states take the position that the tax should be paid pro rata
according to the distribution of insured risks among the states.
Others insist that 100 percent of the tax on any particular policy is
owed in the “home state” for that policy, which generally is the state
where the insured has its corporate headquarters or, in the case of
an insured affiliated group, the affiliate responsible for the greatest
amount of premium has its headquarters.
It is too early to say what effect, if any, Washington State’s action
against Microsoft ultimately will have on captive insurance regulation
in the US. Nevertheless, captives owners may want to review their
policies and procedures now to ensure that they are as effective as
possible with respect to reducing the risk that a captive’s operations
could give rise to regulatory issues or unexpected premium tax
liabilities in states outside its domicile.
Joseph Holahan is of counsel in the insurance practice at Morris,
Manning & Martin. He can be contacted at: firstname.lastname@example.org
To this end, the captive and its owner should have policies and
procedures in place to ensure, to the greatest extent practicable, that:
1. All insurance contracts are negotiated, executed, issued and
delivered in the domicile or a “neutral jurisdiction” in which the
captive does not insure risk and the owner does not do business.
Achieving this goal may require an officer of the owner to travel to
the domicile or neutral jurisdiction to negotiate and take delivery
of insurance contracts. A second-best alternative is to appoint a
representative of the owner in the domicile or neutral jurisdiction to
perform these functions on its behalf.
2. Premium payments are made in the domicile.
3. Captive board meetings and committee meetings take place in the
4. Communications concerning the captive directed to or originating
from a jurisdiction where the captive insures risk or insureds are
located are minimised.
5. Activities relating to the adjustment of claims in states in which the
captive insures risks or insureds are located are minimised.
6. Especially with respect to group captives, activities that could
be construed as marketing or soliciting insurance are avoided in
states in which the captive’s insureds are located.
Following these guidelines can be difficult, especially in the case
of an active captive insurance programme that requires ongoing
management by the owner. Still, it is not unusual for a captive owner
to take a broad view of Todd Shipyards, adopt policies and procedures
to limit the captive’s activities outside its domicile and accept the risk
of being challenged at some point by a state regulator on the position
that the captive’s insurance transactions are not subject to regulation
or premium tax anywhere outside its domicile.
A more conservative approach is to pay state premium taxes on
the captive’s insurance policies and take advantage of one or more
state exceptions to licensing. Some 43 US states have exceptions to
licensing for insurance that is directly procured by the insured and
for which the insured pays a premium tax.
State direct procurement requirements vary, but generally require that
the insurance be negotiated primarily or, in some states, entirely outside
the boundaries of the state and that the insured report the transaction to
the state within 60 to 90 days and pay a premium tax on it.
A captive owner availing itself of a direct procurement exception must
be careful to conduct discussions preceding the issuance of insurance
outside the state, but generally there is less need to be concerned
about originating premium payments from the state or adjusting claims
in the state, as long as licensed adjusters are used when required.
Another exception to state licensing that captive owners may want
to explore is an exemption for insurance issued to an “industrial
insured”. Thirty-three states have such an exemption, which allows an
unlicensed insurer to issue insurance to more sophisticated insureds.
A typical definition of an “industrial insured” is an entity that
procures insurance through a full-time insurance manager or buyer or
a regularly and continuously retained qualified insurance consultant,
pays a minimum of $25,000 in aggregate annual premiums for all
insurance risks, and has a minimum of 25 full-time employees.
38 US Captive 2018 www.captiveinternational.com