In conjunction with the great people at TaxConnections, we’ve published a new eBook on captive insurance titled “Who Should Form a Captive Insurance Company?”. You can buy a copy HERE. Cost: $4.98.

To help potential captive owners determine if they should form a captive, I’ve written the “10 questions,” one of which is:

Am I able to actually negotiate the coverage terms with my current insurance carrier, or, do they hand me a policy to sign?

An insurance policy is actually a contract between the insurance company and the insured. Contract law governs all aspects of the policy, from determining whether a contract was formed to interpreting the policy provisions. Contracts are one of the most important legal contributions to business, as they allow two parties to completely define a relationship between themselves. Perhaps the most important feature of this legal area is parties have the ability to determine the nature of their relationship through the standard give and take of negotiation.

Unfortunately, negotiation is lacking when it comes to determining the terms and conditions of insurance policies. Instead, insurance companies hand policies to the insured (sometimes months after the first premium payment), most of which are based on boiler plate forms issued by ISO. It’s not unheard of for the insured to not even read all or any part of the policy. And if an insured wants to change a specific policy provision, chances are the insurance company will laugh. To counter the inherent pro-insurer bias in policy drafting, courts have adopted certain interpretive presumptions but the basic problem of having no control over the drafting process remains.

The ability to write your own insurance policies is one of the best features of forming a captive insurance company. Instead of being constrained by the terms and conditions of industry boiler plate, the insured has free rein to write the policy as they see fit. For example, writing a broad triggering clause (the clause which activates or “triggers” the coverage) allows the insured to have a policy that applies to a wide range of circumstances. Controlling policy language also gives the insured the ability to eliminate technicalities that prevent the application of coverage. In fact, the only constraints on policy language are standard contractual boundaries such as the policy can’t violate public policy or the contract can’t be for an illegal purpose.

In fact, having complete control of the drafting process is probably one of the greatest benefits of owning your own insurance company.

In accordance with Circular 230 Disclosure