Client Services / Tax / Captive Insurance and Reinsurance

Captive Insurance and Reinsurance

McDermott Will & Emery lawyers are pioneers in the structuring of alternative risk transfer mechanisms as well as in the legal aspects of the adjustment of self-insured claims that inevitably arise.  Our client services focus not only on the development of creative risk retention/transfer solutions but on the operation of efficient risk management programs specifically designed to enhance business performance by aligning economic incentives with loss minimization to lower the enterprise’s cost of risk.  The lawyers comprising our captive insurance and reinsurance practice provide legal advice on a wide variety of issues, transactions and disputes across the risk-funding spectrum.

Structuring Captives and Other Alternative Risk Transfer Mechanisms

McDermott lawyers regularly advise on the structure and operation of alternative risk financing mechanisms in numerous contexts using various jurisdictions and formats, including deductibles and self-insured retentions (SIRs), trusts, retro programs, offshore and onshore captives, risk retention groups (RRGs), risk purchasing groups (RPGs) and self-insurance groups (SIGs).  We are knowledgeable in stock, mutual and reciprocal formats and combine our insurance regulatory, federal and state tax, securities law and litigation experience to optimize the recommended structure of the program.  By applying innovative approaches to familiar and extraordinary problems, we have achieved tax efficient and regulatory compliant results in commonplace and complex insurance environments.  We work across a broad array of industries, including health care and construction, and in conventional as well as specialized areas of coverage such as employee benefits, terrorism, pandemic and other emerging risks.

Over the past 25 years, we have enthusiastically maintained and updated a wide network of personal and institutional contacts, including senior governmental insurance regulators and potential project service partners.  We are on a first-name basis with regulators in the major captive domiciles, including Arizona, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, the District of Columbia, Hawaii, Nevada, New York, South Carolina and Vermont.  We maintain an extensive library of organic documents needed to incorporate single-parent and group-ownership captive insurers in these and other captive domiciles.  We also have generated and archived many forms of surplus notes, subordinated debentures, reinsurance trust agreements, letters of credit, parent guarantees, reciprocal attorney-in-fact documents, captive risk financing offering circulars, etc.  We regularly counsel clients on securities law compliance and draft and update dozens of group captive disclosure documents annually for various formats, domiciles and factual situations.

Tax Planning and Audit

McDermott has a major practice focusing on the federal, state and local tax treatment of commercial and captive insurance and reinsurance companies and their products.  We provide a full range of legal services in this area, including planning advice and representing clients in contested settings at U.S. Internal Revenue Service (IRS) administrative proceedings and in federal and state courts.  Firm lawyers have a wealth of experience and have obtained successful outcomes representing captives and their owners in tax controversies in federal district courts and the U.S. Claims Court, and on appeals of tax issues to the U.S. Courts of Appeal.  Firm lawyers also advise clients regarding state income and premium tax planning and controversies in numerous jurisdictions.

Drafting and Interpretation of Policies and Reinsurance Agreements

We regularly draft policy forms, facultative certificates and treaty provisions for clients involved in all aspects of the insurance and reinsurance industry.  These documents often are customized to achieve internal and external consistency and for applicability with particular insurance and reinsurance programs.

We also frequently advise captives and other clients participating in the insurance markets concerning the interpretation of policies and fronting and reinsurance agreements, including to facilitate prudent claims handling, to render or to assess coverage determinations, and to assist in the underwriting and binding process.   This aspect of our practice draws upon our deep knowledge of captives and other insuring entities, our insurance and reinsurance disputes practice, and our familiarity with legal, tax and other business issues arising under, and in some cases across, a variety of insurance products.

In addition, we have reconstructed past insurance and reinsurance programs by locating evidence and other indicia of contracts in order to assess claims exposure.

Litigation and Dispute Resolution

Our lawyers have advised numerous policyholders and major U.S., Bermuda and European property and casualty insurers, including captives, reinsurers and liquidators with respect to a variety of claims, ranging from environmental, mass tort and other long-tail claims to more specialized claims, such as directors and officers liability, errors and omissions, business interruption and other first-party-property coverages, crime and fidelity, disability and worker’s compensation.  We provide counsel on national trial coordination, claims and coverage positions.  Additionally, we develop and coordinate national positions on key policy and treaty language; work with underwriters on policy, certificate and treaty wording; and analyze insurance and reinsurance law nationally and internationally.

Notwithstanding appropriate claim handling, disputes between captives and their “fronting” carriers, as well as cedents and their reinsurers, are inevitable.  Many reinsurance contracts require arbitration, yet other options may be available, including mediation and litigation.  Our vast experience litigating complex coverage disputes enables us to develop successful strategies for resolving claims through litigation or alternative dispute resolution, as appropriate, in the United States and internationally.  In this capacity, we have litigated and arbitrated complex, and sometimes novel, coverage issues on behalf of captive owners, captives, liquidators of insolvent captives, commercial insurers, policyholders and brokers.  Our insurance disputes practice is known for delivering exceptional results in our clients’ most complex and high-value matters, including disputed World Trade Center property damage, business interruption, and bodily injury claims; property damage and business interruption claims arising out of Hurricanes Katrina, Gustav, Hugo and Ike; liability insurance and reinsurance disputes arising out of the childhood sexual abuse scandal confronting the Roman Catholic Church in the United States, including, among other matters, our role as liaison counsel to twelve insurer participants in the largest settlement of such claims in history; “pre-packaged” asbestos bankruptcies targeting the debtor’s insurers and related appeals; the largest long-tail environmental claim in U.S. history involving sites in nearly all fifty U.S. states; and in state and federal cases arising out of the pollution of the “Love Canal” in upstate New York, “Agent Orange” bodily injury claims, DES birth defect claims, asbestosis and mesothelioma claims, and breast implant litigation.

Similarly, group captives and their participants can become adverse in, for example, withdrawal and dissolution situations.  We have represented numerous captives or captive participants in resolving disputes of this nature.

Through our understanding of the developing case law on significant issues involving insurance and reinsurance, including underwriting and claims handling procedures, we regularly update our clients concerning emerging trends in the law and their potential impact on our clients’ businesses.

Regulatory Compliance and Governmental Investigations

Our insurance lawyers also have represented captives and commercial insurers with respect to regulatory compliance, state and federal investigations, and other governmental inquiries.   For example, we have counseled a captive insurer with respect to testimony by its President and CEO before the United States Congress, and the captive’s reporting to various municipal, state and federal authorities.  We also have advised a major U.S. property and casualty insurer with respect to contingent commission investigations by U.S. states’ Attorney Generals and insurance departments and we represented that insurer in policyholder litigation arising out of those investigations.

Claims Administration

Our Firm insurance lawyers also have advised captive and other insurers with respect to claims administration in complex matters, including high-profile mass tort litigation.  We also have served as national coordinating claims counsel for captives and insurers with respect to coverage issues and in negotiations with their policyholders, co-insurers and reinsurers.

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Tax Client Services

McDermott Will & Emery

McDermott Will and Emery