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:

Has there been a problem with my existing property and casualty insurance plan?

Two real life stories will help to explain this particular point. One client is located in New Jersey. His business owns commercial real estate which was covered by a very robust property policy. As a result of Super Storm Sandy, he had to shut down his business for a week, losing about $200,000 in gross income. He thought he was covered for this loss under this property policy because it contained a “loss of income” provision, which is supposed to provide for this exact contingency. But after filing his claim, he discovered his policy also had an “out” clause for the insurer; in the event the “loss of income” was caused by the failure of a utility, the insurer’s payment was capped at $25,000. The insurer claimed an electrical shutdown was the proximate cause of the loss, capping its payment to my client at $25,000.

A second client was a commercial real estate company which owned several large apartment buildings in and around the Houston area. Like the client above, they had a very solid series of property policies. After Hurricane Ike hit Houston, they filed several large claims for two properties. However, the insurance company spent an inordinate amount of time processing these claims. My client was finally “made whole” after two years of negotiating. Unfortunately, the company went bankrupt as a result of the storm – an event which their insurance was supposed to help insure against.

The two situations above highlight some fairly common problems with insurance companies. Policies are riddled with “escape clauses” that allow the insurer to either not pay a claim, or greatly limit the amount paid to the client, thereby defeating the purpose of having insurance in the first place. Or, the insurers delay in the payment of the claim, thereby hoping to grind the insured down through a long and arduous negotiation process. Both of these scenarios greatly defeat the fundamental purpose of having insurance in the first place and make the idea of forming a captive that much more attractive.

In accordance with Circular 230 Disclosure