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Developments in Vermont
Continued Impact of COVID-19
The measures taken by the Vermont Department of Financial Regulation (the “DFR”) in 2020 in response to the COVID-19 pandemic have been extended through 2022. These include a recognition that in-person board meetings in Vermont may not be advisable. Captives are invited to request a waiver of the physical presence requirement for their 2022 annual meetings.
2022 Captive Legislation
Later this spring, the Vermont legislature is expected to pass its annual captive “housekeeping” bill, which was jointly proposed by the DFR and the Vermont Captive Insurance Association. The new legislation includes the following notable provisions:
- Authorization for Sponsored Captives to Write Controlled Unaffiliated Business. The definition of Sponsored Captive is revised to permit a sponsored captive to insure controlled unaffiliated business, subject to approval by the DFR.
- Parametric Contracts. Language is added to make it clear that captives are authorized to utilize parametric contracts. A parametric contract is a contract to make a payment upon the occurrence of one or more specified triggering events without proof of loss.
- Delinquency of Protected Cells. Language is added to make it clear that the provisions governing the delinquency of a sponsored captive also apply to protected cells. The DFR is also granted authority to separate delinquent protected cells from a sponsored captive.
- Sponsored Captive Books and Records. New provisions are added governing the maintenance and storage of a sponsored captive’s books and records.
In addition to the above, Vermont is expected to adopt a new Insurance Data Security law applicable to traditional insurance carriers. Captive insurance companies and risk retention groups are excluded, but we will be monitoring this area closely for future developments.
2021 Vermont Formations
In 2021, 45 new Vermont captives were licensed, bringing the total to 1,242 captives licensed, of which 589 were active as of December 31, 2021. The types of active captives break down as follows:
| Pure | 368 |
| Risk Retention Group | 89 |
| Special Purpose Financial | 39 |
| Sponsored | 52 |
| Industrial Insured | 21 |
| Association | 13 |
| Branch | 3 |
| Affiliated Reinsurance Company | 2 |
| Agency | 2 |
Notably, Vermont’s 52 sponsored captives have experienced significant growth, with over 500 cells and separate accounts, of which nearly 100 were added in 2021.
2020 Aggregate Data
The aggregate amount of gross premium written by all Vermont captives for the year 2020 was $30 Billion; total net written premium was $23.3 Billion. Aggregate total capital and surplus as of December 31, 2020 was $60 Billion and total assets were $198 Billion. Total Vermont premium tax paid on 2019 gross written premiums was approximately $26 Million.
Federal Issues
IRS v. Delaware
In June of 2020, the Internal Revenue Service (the “IRS”) petitioned the U.S. District Court for the District of Delaware (the “District Court”) for an order to enforce document requests served on the Delaware Department of Insurance (“DDOI”). The IRS is seeking records relating to filings by Artex Risk Solutions, Inc. (“Artex”) and Tribeca Strategic Advisors, LLC (“Tribeca”) relative to the role of Artex in transactions involving micro-captive insurance companies formed under Section 831(b) of the Internal Revenue Code.
These micro-captive programs were designated as “Transactions of Interest” by the IRS in 2016, meaning that the IRS believes they have the potential for tax evasion. The IRS is also investigating whether Artex or Tribeca promoted micro-captive programs and whether their actions may result in penalties applicable to promoters of abusive tax shelters.
In its suit against the DDOI, the IRS alleges that the DDOI has failed to provide records responsive to its summons for records. The DDOI has moved to “quash” the IRS Petition on the grounds that, among other things, enforcement of the summons would require the DDOI to violate a Delaware statute that prohibits disclosure by the DDOI of captive insurance licensing information unless the insurer consents to disclosure or such information is disclosed to another state insurance department or to a state or federal law enforcement agency and the department or agency agrees to hold the information as confidential. The DDOI also argues that, under the McCarran-Ferguson Act, the regulation of insurance is within the exclusive authority of the states.
On July 16, 2021, a magistrate judge assigned by the District Court to review the matter ruled in favor of the IRS and recommended that the DDOI be compelled to turn over the requested documents.
The District Court then reviewed the magistrate’s findings and recommendations and, on September 29, 2021, issued an opinion adopting the magistrate’s recommendations.
On November 1, 2021, the DDOI appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit. That appeal remains pending.
State Issues
Washington State Implements Premium Tax
Following several high-profile disputes between the Washington State Insurance Commissioner (the “OIC”) and Washington-based multinational corporations, the state of Washington, on May 12, 2021, enacted a legislative framework allowing for the taxation of Washington-based companies and public institutions of higher education that utilize captive insurance arrangements. Several months later the OIC adopted implementing regulations.
This new regulatory framework applies to “eligible captive insurers,” which are defined as insurance companies that, among other things, (i) include among their insureds at least one person or entity whose principal place of business is in Washington; and (ii) have assets that exceed their liabilities by at least $1 million.
The principal place of business of an insured is “the place where a business entity’s management direct, control, and coordinate” the business’ activities. Subsidiaries must be analyzed separately from their parent or holding company. So, for example, if a multinational enterprise that is headquartered in New York uses its captive to insure a subsidiary that has its operations in Washington, the Washington-based subsidiary will be deemed to have its principal place of business in Washington even if all of its operations are directed out of the enterprise’s New York headquarters.
Eligible captive insurers are authorized to provide property and casualty insurance to their owners and their owners’ other affiliates (and to assume unrelated risk from other insurers as a reinsurer), but only if they register with the OIC.
The OIC will approve a registration if the captive (i) establishes that it meets the surplus criteria described above (verified by audited financials); (ii) is in good standing with its domiciliary regulator; and (iii) pays a fee of $2,500. Registrations must then be renewed annually, for a further fee of up to $2,500.
Each registered eligible captive insurer will be required to pay a 2% premium tax on all Washington-based risks. This new premium tax is applied retroactively for any premiums written after January 1, 2011.
“Washington risk” is defined as “the share of risk covered by the premiums that is allocable” to Washington, “based on where the underlying risks are located or where the losses or injuries giving rise to the covered claim arise.” Registered eligible captive insurers have some discretion in determining the methodology for allocating risk, but such methodology must be reported to the OIC.
Eligible captive insurers that fail to register are subject to fines and penalties applicable to unauthorized insurers.
It remains an open question as to whether this taxation scheme is permissible under the Todd Shipyards line of cases, but unless and until it is challenged captives insuring the Washington-based risk of an affiliate located in Washington will need to give careful consideration to its applicability.
DRM is available to assist with that analysis.
