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:

Can I 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’s formation and interpretation. But while, in an ideal world, two parties are supposed to negotiate the terms and conditions of a contract, the typical give and take of an active negotiation don’t occur with an insurance policy. Instead, the insurance company basically hands the policy to the insured. In fact, most policies are issued by ISO – insurance services office – which uses the insurance equivalent of boiler plate for the vast majority of insurance coverage. Should the policy holder want to change a term or condition, chances are the insurance company won’t accept said changes.

Courts have developed two interpretive maxims to theoretically overcome the inherent pro-insurance company bias in the policy drafting process. The first of these is the concept of an adhesion contract: when one party drafts the entire contract, the court will interpret the contract’s terms and conditions against the drafter. Secondly, when dealing specifically with an insurance policy, a court will assume coverage exists if a reasonable policy holder would assume coverage is part of a policy. However, the proper application of these doctrines is left to judicial discretion which may not rule for the policy holder.

Forming a captive insurance company helps policy holders overcome the inherent problem of the insurance company having complete control of the policy drafting process. With a captive, the insurance owns the insurance company, thereby giving him the same freedom and control over policy language. This can allow for far greater coverage and far more pro-policy holder language. From a legal perspective, this is by far one of the best advantages of forming a captive.

In accordance with Circular 230 Disclosure