Guest Editorial by George Simpson, Attorney, Cranfill Sumner & Hartzog, LLP . Reprinted from the North Carolina Insurance Law blog
On June 19, 2013, Governor Pat McCrory signed into law House Bill 473, the North Carolina Captive Insurance Act, bringing North Carolina in line with more than thirty states that already have similar captive insurance laws. Touted as an economic development tool, the bill was supported by North Carolina Insurance Commissioner Wayne Goodwin, and it was one of the few pieces of legislation during the 2013 legislative session to receive widespread support in both the House and Senate.
Legislation that receives such broad support across the political spectrum clearly has a lot going for it. But just what is a captive insurance company?
A common form of captive insurance company (“CIC”) is an entity created and funded by an individual business to cover losses incurred by the business itself. A CIC is a real insurance company in its own right and is similar to a traditional insurance company, but it provides coverage only to the business that creates and owns it. CICs are commonly used to provide businesses with affordable coverage for losses that are typically either covered by costly insurance purchased from traditional insurance companies, or else uninsured due to cost concerns or to the lack of available coverage in the private market.
CICs can be beneficial to businesses in several ways. Most fundamentally, captive insurance provides a business with a way to protect itself against loss that would otherwise be very costly or completely uninsured. Unlike traditional insurers, using a CIC will allow businesses to select their own defense counsel and to settle claims (or refuse to settle claims) as they see fit. The use of CICs also has certain tax implications that can benefit the businesses that use them. And in contrast to traditional insurance premiums, which a business never sees again after they have been paid to a private insurer, the premiums paid to the CIC can be invested by the CIC’s owners.
Will North Carolina prove to be a desirable domicile for CICs? Since North Carolina finds itself behind quite a few states in enacting similar captive legislation, we have some catching up to do to compete with the likes of captive strongholds like Vermont and South Carolina. But according to Alex Webb, Chairman of the recently-formed North Carolina Captive Insurance Association, the legislation is designed in part to make it easy for existing captive insurers based in other states to re-domicile here in North Carolina. And, in an article touting the benefits of operating captives in the state, the North Carolina Department of Insurance has expressed its active support for the development of the captive industry. So, there is reason to believe that there is enough legislative, regulatory, and industry support to encourage the growth and health of CICs in North Carolina in the years to come. Read More.