1) Given the changes recently in legislation, new regulatory enforcement and court decisions regarding small captive insurance companies making an 831(b) tax election, how would you advise a client seeking alternative risk transfer today? Please address specifically a recommendation regarding the below fact pattern.
Client is a health services provider based in California. "HealthToYou, LLC" provides mobile testing for various health markers. Client has come to you seeking review and recommendations of how to more efficiently use operate its captives.
HealthToYou has commercial liability from a third-party carrier. Client formed 5 captives over 4 years, all making an 831(b) election. In 2020, the client paid a premium of $2,000,000 to each captive for a total of $10,000,000 and $50,000,000 in coverage. These 831(b) captives are located in North Carolina and cover non-traditional risk. There is a captive manager that has client participating in a risk pool to share 51% of the reserves in the pool. The client formed another captive in 2018 with another captive insurance manager. The captive is located in Bermuda. The coverage provided by this captive is deducible reimbursement. Premium has been $5,000,000 for the last 3 years with coverage written at $15,000,000. The Bermuda captive does not participate in a third-party risk sharing arrangement. The client also was closed for 3 months during 2020 because of the pandemic and local government regulations.
Management's main considerations are: Cost savings, regulatory compliance and putting money aside for a rainy day (e.g., pandemic type catastrophic future events). Discuss the history, benefits, drawbacks, and status of the captive market and how it applies to these facts. How would you advise HealthToYou,LLC?
Question 2)
You are a new associate at a thriving, yet small, personal injury law firm, named Bocelli & Cleese. As the new guy you are given an opportunity to sit second chair in a new complicated personal injury case. The facts and procedural history are described below.
The case is full of challenges and problems to consider; including, low liability limits, multiple claimants, settlement demands, difficulties collecting any jury award in excess of the policy limitations, and consideration of post judgment direct legal actions against the tortfeasors insurance carrier.
Please outline your recommended course of action, the specific causes of action, and the remedies available should you prevail.
Facts:
Your client, Mr. E. Morse, was involved in a motor vehicle accident on June 1, 2019 in Johnson County, Texas. The driver of the other vehicle, Mr. W.L. Weller, was intoxicated, over the speed limit, and not able to keep his vehicle in his traffic lane. He and his wife, C. Morse, and two children, A, Morse & B. Morse were in his car. All were injured. Mr. Morse and his wife both suffered broken collar bones and significant cervical disc bulges and both will require surgery. Each of them has incurred medical bills at this time of $25,000 and those bills are growing. Surgery has been recommended for each of them. Each child incurred an ER bill of $5,000 for transport and diagnostic testing. They each had soft tissue injuries that have resolved with rest and conservative care. A second automobile was also struck by the at-fault driver and, unfortunately, both occupants, Mr. & Mrs. Smith, died of their injuries. The heirs of Mr. & Mrs. Smith have filed personal injury/wrongful death claims against Mr. W.L. Weller.
After forwarding your medical claim information to Mr. Weller’s insurance carrier, Washington Indemnity & Liability Company, WILCO, offered to settle your clients’ claims for $60,000 as follows: $25,000 each for the parents and $5,000 each for the two sons in exchange for a full and final release. At the urging of your clients you rejected the WILCO offer and countered with a $100,000 demand. The carrier rejected your demand.
The negligent drive, of the 3rd vehicle, Mr. W.L. Weller, had. This information was not revealed to you until the discovery process of the lawsuit was underway.
The matter proceeded to litigation. Upon receipt of Mr. Weller’s responses to your Request for Disclosures you learned that Mr. Weller’s insurance policy was a state mandatory minimum limits policy with a liability limitation of 30/60/30, which was in full force and effect at the time of the loss as such… $60,000 was the maximum WILCO could offer your clients to settle. You relayed this information to your clients and in light of the new information they authorized you to accept Mr. Weller’s insurance company’s last settlement offer, $60,000.
Mr. Weller’s carrier informed you that in the interim they had settled the claims of Mr. and Mrs. Smith for $5,000 apiece, which left a mere $50,000 for your clients. You consulted with your clients who authorized you to accept. As such, you conveyed an acceptance of WILCO’s $50,000 offer.
While reviewing the settlement documents and preparing for the “Friendly Suit” prove ups on the two minor children you came across some unacceptable language in the release that constituted an indemnity agreement so unconscionable that it would mean your client would have to pay back the settlement in the event of the discovery of any other collateral source of funds (for instance from your client’s health insurance). WILCO refuses to drop the offensive language. The matter proceeds to trial.
At trial you win big and the jury awards your clients $800,000.
What now? Follow the path and lay out the course of action you recommend.
Sample Solution