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What is captive insurance and why is it beneficial for businesses?

For businesses, managing risks is critical to ensuring the financial success of the company. There are a variety of ways business can address risks, and insurance coverage is an important one. While ordinary commercial plays an important role, business can often benefit from alternative insurance options, such as captive insurance.

Captive insurance is coverage provided by an insurance company completely owned and controlled by the insured business. The purpose of a captive insurance company is to address risks that aren’t adequately covered with ordinary insurance coverage, but an added benefit is that businesses that form captive insurance companies are able to keep the rights and investment income on capital used to fund insurance. 

Captive insurance can cover shortfalls in commercial policies, target specific business risks, and can cover the cost of deductibles and excess insurance. Captive insurance can also insure against risks which are more expensive to cover with ordinary commercial policies, and can protect a business from unanticipated denial of coverage and adjustment of claims, in addition to other benefits.

Several important points about captive insurance:

  • It should always fit within a comprehensive business risk management plan
  • Careful consideration should be given to the legal form and jurisdiction of the captive insurance company
  • Timing of the formation of a captive insurance company can make a difference

In our next post, we’ll say more about this last point, and the role an experienced attorney can play in the formation and planning of a captive insurance company. 

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