Third Circuit Denies Stay In Microcaptive Insurance Case; Delaware Appeals To Supreme Court

• Published date: 04 August 2023
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Tax, Insurance Laws and Products, Trials & Appeals & Compensation, Tax Authorities
• Law Firm: Steptoe LLP
• Author: Lawrence Hill and Shree Sharma

The IRS secured a win in the Third Circuit against a Delaware state agency regulating the insurance industry in a recent decision that arose out of a microcaptive insurance investigation. In United States v. State of Delaware Department of Insurance¹, a three-judge panel in the Third Circuit denied the Delaware Department of Insurance's (the "Department") motion to stay the issuance of the mandate enforcing an IRS summons pending the Department's petition for a writ of certiorari to the Supreme Court.² As part of its initiative to examine microcaptive insurance transactions, which have been designated as "transactions of interest"³ and have found themselves periodically on the IRS's so-called "Dirty Dozen" lists⁴, the IRS summonsed information from the Department regarding specific entities involved in microcaptive insurance plans.⁵ The Department refused to comply with the summons, citing a state statute protecting the confidentiality of materials and information that captive insurers submit as part of the application and licensing process.⁶

Notwithstanding the conflict between federal and state interests and apparent uncertainty regarding the applicable test to determine which law takes precedent, the Third Circuit denied the motion to stay. The IRS's win has been held in abeyance, however, because the IRS agreed to abide by the confidentiality provisions of Delaware law until the Supreme Court rules on the matter if it so chooses. If the Supreme Court were to deny certiorari or uphold the Third Circuit's decision, state insurance regulators would have no choice but to turn over sensitive data involving insurers, insureds, and other participants in the insurance marketplace. Having issued proposed regulations on the subject as recently as April of this year, IRS initiatives to combat microcaptive insurance arrangements show no sign of slowing down.

Relevant Law

As noted above, this case arose from an IRS promoter penalty investigation of alleged promoters of microcaptive insurance transactions. As part of the investigation, the IRS issued a summons to the Department requesting insurance certificates of authority, testimony, records, and electronic mail between the Department and the alleged promoters related to the captive insurance program. Compliance with the summons would have contravened Delaware Insurance Code section 6920 which protects the confidentiality of such materials. Specifically, section 6920 provides that the Department is prohibited...