The A, B and C's of Most Business Insurance Policies

A Commercial General Liability policy (CGL) is a comprehensive insurance product that companies buy to protect themselves in case of losses such as fire, water damage, acts of nature, bodily injury, and damage to property or criminal activity. Purchasing this policy is the first step businesses take to protect their assets. This safety net is critical in a society in which the number of lawsuits and the value of judgment awards have increased over the years.

The CGL is subdivided into 3 sections - Coverage A, Coverage B and Coverage C.

Coverage A - Bodily Injury & Property Damage.

This section of the policy agrees to cover the costs the insured becomes legally obligated to pay due to property damage, bodily injury and products/completed operations. It will also cover all costs incurred to defend the insured against any/all claims that allege such damages. This section offers a wide range of coverage that protects the premises and the product. However, there are also many exclusions that are standard throughout most industries. Most common exclusions as follows:

Aircraft, auto, Watercraft
Pollution
Workers compensation
Expected or Intended injury
Recall of Products/work

There are 2 types of limits that coverage A defines.

Occurrence Limit - the limit insurer will pay for all damages resulting from bodily injury or Property damage from a SINGLE Occurrence

Aggregate Limit - the limit the insurer will pay for ALL claims during the policy period

Coverage B - Liability for Personal & Advertising Injury

Under this section of coverage, the insurer agrees to pay for damages as a result of personal and advertising injury. Examples of this coverage include libel, slander, copyright infringement, false arrest, using others advertising ideas and or slogans. The limit of liability is most often the same limit as the occurrence limit as per Section A.

Coverage C - Medical payments

This section of the policy covers medical expenses the insured is legally obligated to pay in case any person (other than insured) that is injured on the insured's premises or as a result of the insured's operations. It is important to note that this limit is just a small fraction of the limits provided in sections A & B. Atypical Medical expense limit is $5,000 on most traditional policies. This limit can be increased by way of a special agreement/endorsement with the insurance company.

By having a CGL in place, companies can relax knowing that they can conduct business without having to worry about a claim and how it will be handled. If a claim is filed against an insured business, the insurance company will conduct a thorough investigation to eliminate any claims that are proven to be unjust. Legal fees, including court costs, are covered under the policy. If the business is found liable and the incident is covered under the policy, their insurance company would pay the award amount up to the coverage limit purchased by the insured.

When considering business insurance coverage, one should consider the following:

    The coverage limits of the policy that will cover exposures related to your business
    Coverage should be customized to your unique business needs
    Additional policies or endorsements may be required to cover specific business activities and needs

Captive Insurance Company - Reduce Taxes and Build Wealth

For business owners paying taxes in the United States, captive insurance companies reduce taxes, build wealth and improve insurance protection. A captive insurance company (CIC) is similar in many ways to any other insurance company. It is referred to as "captive" because it generally provides insurance to one or more related operating businesses. With captive insurance, premiums paid by a business are retained in the same "economic family", instead of being paid to an outsider.

Two key tax benefits enable a structure containing a CIC to build wealth efficiently: (1) insurance premiums paid by a business to the CIC are tax deductible; and (2) under IRC § 831(b), the CIC receives up to $1.2 million of premium payments annually income-tax-free. In other words, a business owner can shift taxable income out of an operating business into the low-tax captive insurer. An 831(b) CIC pays taxes only on income from its investments. The "dividends received deduction" under IRC § 243 provides additional tax efficiency for dividends received from its corporate stock investments.

Starting about 60 years ago, the first captive insurance companies were formed by large corporations to provide insurance that was either too expensive or unavailable in the conventional insurance market.

Over the years, a combination of US tax laws, court cases and IRS rulings has clearly defined the steps and procedures required for the establishment and operation of a CIC by one or more business owners or professionals.

To qualify as an insurance company for tax purposes, a captive insurance company must satisfy "risk shifting" and "risk distribution" requirements. This is easily done through routine CIC planning. The insurance provided by a CIC must really be insurance, that is, a genuine risk of loss must be shifted from the premium-paying operating business to the CIC that insures the risk.

In addition to tax benefits, principal advantages of a CIC include increased control and increased flexibility, which improve insurance protection and lower cost. With conventional insurance, an outside carrier typically dictates all aspects of a policy. Often, certain risks cannot be insured conventionally, or can only be insured at a prohibitive price. Conventional insurance rates are often volatile and unpredictable, and conventional insurers are prone to deny valid claims by exaggerating petty technicalities. Also, although business insurance premiums are generally deductible, once they are paid to a conventional outside insurer, they are gone forever.

A captive insurance company efficiently insures risk in various ways, such as through customized insurance policies, favorable "wholesale" rates from reinsurers, and pooled risk. Captive companies are well suited for insuring risk that would otherwise be uninsurable. Most businesses have conventional "retail" insurance policies for obvious risks, but remain exposed and subject to damages and loss from numerous other risks (i.e., they "self insure" those risks). A captive company can write customized policies for a business's peculiar insurance needs and negotiate directly with reinsurers. A CIC is particularly well-suited to issue business casualty policies, that is, policies that cover business losses claimed by a business and not involving third-party claimants. For example, a business might insure itself against losses incurred through business interruptions arising from weather, labor problems or computer failure.

As noted above, an 831(b) CIC is exempt from taxes on up to $1.2 million of premium income annually. A CIC must receive premium payments of at least $350,000 annually to qualify for the favorable tax treatment under IRC § 831(b). As a practical matter, a CIC makes economic sense when its annual receipt of premiums is about $500,000 or more. A captive company commonly insures businesses outside of the captive's economic family, thereby increasing annual premium totals. A group of businesses or professionals having similar or homogeneous risks can form a multiple-parent captive (or group captive) insurance company and/or join a risk retention group (RRG) to pool resources and risks.

A captive insurance company is a separate entity with its own identity, management, finances and capitalization requirements. It is organized as an insurance company, having procedures and personnel to administer insurance policies and claims. An initial feasibility study of a business, its finances and its risks determines if a CIC is appropriate for a particular economic family. An actuarial study identifies appropriate insurance policies, corresponding premium amounts and capitalization requirements. After selection of a suitable jurisdiction, application for an insurance license may proceed. Fortunately, competent service providers have developed "turnkey" solutions for conducting the initial evaluation, licensing, and ongoing management of captive insurance companies. The annual cost for such turnkey services is typically about $50,000 to $150,000, which is high but readily offset by reduced taxes and enhanced investment growth.

A captive insurance company may be organized under the laws of one of several offshore jurisdictions or in a domestic jurisdiction (i.e., in one of 39 US states). Some captives, such as a risk retention group (RRG), must be licensed domestically. Generally, offshore jurisdictions are more accommodating than domestic insurance regulators. As a practical matter, most offshore CICs owned by a US taxpayer elect to be treated under IRC § 953(d) as a domestic company for federal taxation. An offshore CIC, however, avoids state income taxes. The costs of licensing and managing an offshore CIC are comparable to or less than doing so domestically. More importantly, an offshore company offers better asset protection opportunities than a domestic company. For example, an offshore irrevocable trust owning an offshore captive insurance company provides asset protection against creditors of the business, grantor and other beneficiaries while allowing the grantor to enjoy benefits of the trust.

For US business owners paying substantial insurance premiums every year, a captive insurance company efficiently reduces taxes and builds wealth and can be easily integrated into asset protection and estate planning structures. Up to $1.2 million of taxable income can be shifted as deductible insurance premiums from an operating business to a low-tax CIC.

Warning & Disclaimer: This is not legal or tax advice.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Copyright 2011 - Thomas Swenson

http://swenlaw.com

Thomas Swenson practices law in the areas of asset protection, business planning and intellectual property.

Among his specialties are the design and implementation of offshore dynasty trusts holding private placement life insurance (PPLI). In full compliance with U.S. tax laws, an irrevocable, discretionary, offshore PPLI dynasty trust provides a life insurance benefit, tax-free investment growth, asset protection against all creditors, financial security, and perpetual tax-free enjoyment of trust assets by beneficiaries.

He also provides counseling and services to US business owners regarding captive insurance companies, which reduce taxes, build wealth and improve business insurance protection.