Captive Insurance Company Claims: Problems That Can Arise When Captives Dispute (Or Should Dispute) Claims Made By Their Parent

(Prepared for IIR Captive Insurance Company Conference (London Oct 2000) and subsequent reproduction in Captive Insurance Company Review: January 2001 edition.)

Introduction

Captive insurance companies are no longer considered to be a new concept, and more and more are considered to be the norm in Fortune 500 companies. However the problem of disputes between Captives and Parents has been the subject of much less debate. Conferences that deal with Captive insurance companies often concentrate on far more exciting topics, such as the taxation of Captives. It may be assumed that as between Parent and captive, all, will always be well. Certainly, it is assumed, there will never be issues of bad faith alleged. These may be unsafe assumptions.

There are several recurring issues that arise, including:

The management of the claim

Conflicts of interest

The importance of acting in a proper and business like manner

These issues will be addressed in different forms in this paper.

Notification of a Claim

Companies that use captive insurance companies as part of their risk management strategy, should always bear in mind that the captive insurance company must behave like a proper insurance company. This principle applies equally to single-Parent captives, association captives, rent-a-captives, and any other clever type of captive that the industry creates.

The Parent company should always bear in mind whether it has a contractual obligation to formally notify the Captive of any claim, and ensure that it abides by the precise wording of the Claims Notification Clause in the insurance policy, as between Parent and Captive. It is not sufficient for the Parent to assume that since the Risk Manager of the Parent, is also the president of the Captive, that the knowledge of the one officer stands as notification to the other. Regardless of the realities, it is useful to develop the habit of reducing claim notifications to writing, and passing these notifications up the reinsurance contractual lines, promptly and in accordance with the various policy requirements.

It is imperative that the Captive insurance company give notice to its reinsurers or retrocessionaires, as the case may be, promptly and in accordance with the claims notification clause. Failure to give prompt notification can result denial of coverage.

If there is a fronting company involved, then the fronting company should now remember that, even if it is 100% reinsured, that it still bears 100% of the risk, and that it too has a duty to deal with the claim in a proper and professional matter. The fronting company should give formal notice to the Captive or to whomever is the next link in the reinsurance contractual chain.

Managing the Claim

A claim has now been notified to the Captive. Several questions now arise. Is the Captive managed internally or externally, ie, is there a management company involved? Which ever is in place, they will likely have internal protocols that should be followed generally, in relation to claims on the Captive. When there is a large claim, different people will take a closer look when there are controversial coverage issues. This is not to say that generally no interest is taken in claims, but that with large claims, there is a larger interest, and more interest by more people, eg retrocessionaires, regulators, auditors, etc.

The balance of this paper will be devoted to this latter category of claims, ie large controversial claims in which contesting interests come into play.

The first question is who will be responsible for making decisions in relation to the claim. If there is a management company involved, does their authority expressly extend to making final decisions on claims of this nature, or must they put such final decisions to the officers of the Captive or the board of directors of the company.

It is noteworthy that the officers and directors of the Captive company are probably made up mostly of officers and directors of the Parent. In this case there is...