From the front page of today’s New York Times: an article about how some insurance companies are themselves using captives as reinsurance vehicles. Of course, this is far from the core use of captives which, generally speaking, are used as genuine insurance affiliates set up to provide insurance coverage on the basis of premiums that are calculated according to arm’s-length actuarial principles and reserves that are set by regulators in accordance with generally applicable insurance principles. Whether the use of captives by insurance companies represents an abuse is a legitimate question — although far removed from what my colleagues and I do! I hope, though, that the debate and its upshot does not serve as a drag on the clearly proper use of captives as a regulated self-insurance mechanism.
Here’s a pretty little IRS revenue ruling issued recently that reaffirmed the deductibility of medical malpractice premiums paid to a captive. The beauty of this ruling is not that it carves out new law — it really doesn’t — but that it nicely describes the mechanics of how captives work generally and how all the pieces come together. (It does not address, however, the deductibility of premiums received by a captive under IRC §831(b).)
The Delaware Supreme Court has just announced that it will address an issue recently answered in the affirmative by the New York Court of Appeals in its Kramer ruling last November, namely whether an insured can immediately transfer a life insurance policy to a third party who would otherwise not have an insurable interest. In addition, the Delaware court will also address whether the expiration of the two-year statutory incontestability period acts as an absolute bar to raising the insurable interest issue thereafter. See this article which appears in today’s Life Settlements Wire, published by DealFlow Media.
There’s an interesting discussion on LinkedIn concerning a wrong-headed article about the risks of forming a captive insurance company, basically warning about IRS and ERISA traps. The discussion corrects many of the inaccuracies in the article and is very educational. I commend it to any student of the topic.
Here’s a link to an interesting little article on a service that will clean up your digital “afterlife” — soon, I’m sure, to be considered another basic document in this digital age! There must be equivalent services offered by other vendors, but I present this one to stimulate thought. Cheers.
As many observers are aware, I am the successor trustee in the (in)famous Kramer litigation, in which the estate of Arthur Kramer, one of the name partners of the Kramer Levin law firm, is suing the investors who bought Mr. Kramer’s life insurance policies from his beneficiaries. The key issue has been that of “insurable interest,” namely whether the insured (here, Mr. Kramer and the trust he established) had to have a bona fide or “good faith” intention to benefit someone having a lawful and substantial interest in the continued life, health or bodily safety of the person insured, either due to a blood or legal relationship of love or affection, or an economic relationship (i.e., a “key man” policy). In the Kramer case, the argument went, the “insurable interest” requirement wasn’t met, because the policy was transferred by the beneficiaries — Mr. Kramer’s children — immediately to stranger investors. Although New York law expressly permitted immediate assignment of an insurance policy, a recent case, Life Product Clearing, LLC v. Angel, 530 F.Supp.2d 646 (S.D.N.Y. 2008), had read in such a “good faith” requirement.
On September 1, 2009, the U.S. District Court for the Southern District of New York, Judge Batts presiding, issued a partial summary judgment order dismissing several counts of the original complaint, but retaining the allegation of a violation of the insurable interest requirement relying on the Angel case’s “good faith” requirement. The decision authorized an immediate interlocutory appeal to the U.S. Court of Appeals for the Second Circuit, which was duly filed. The Second Circuit, in turn, certified the question of the “good faith” requirement to the New York Court of Appeals — New York’s highest court — which answered resoundingly on November 17, 2010, that no such requirement existed, and that in fact it was perfectly legal for the insured to intend to transfer his or her policy to a third party immediately upon issuance prior to taking out the policy — an outcome very favorable to the life settlement industry. Subsequently, the Second Circuit has vacated and remanded Judge Batts’ original decision for proceedings consistent with the New York Court of Appeals’ opinion, and Judge Batts has issued an order to the parties to show cause why the entire case should not be dismissed.
Judge Batt’s Partial Summary Judgment Order Sept 1, 2009
NY Court of Appeals Decision of Nov 17, 2010
Second Circuit Decision Vacating and Remanding Judge Batts’ Decision
Welcome to my Blog! Here I’ll post thoughts, musings, observations, links and articles that I think are of interest to my clients and other visitors to my website. They will be categorized according to topic or, if no category fits, will be found here, under the “General” moniker. You should be able to find what you’re looking for (if I’ve posted it) by using the search tool on the web site. Enjoy!
