Captive insurance companies: Why you should consider them now more than ever

As frequent speakers at medical conferences, there is no topic about which we get more interest than captive insurance companies (CICs) and how physicians can use them.

This has been especially true in the last few years, as medical malpractice insurance premiums have soared.

Certainly, CICs can be ideal tools, if established and maintained properly, and if suited to the individual doctor's or group's economic need. In this article, we will examine the benefits and costs of CICs and explain the beneficial legal changes that occurred in the last year.

The CIC we will address here is a legitimate insurance company, licensed to write insurance in the United States, but typically based in an offshore jurisdiction, such as Bermuda or the British Virgin Islands. Most CICs are established in these countries because of their favorable insurance laws and tax treatment, although the funds in the CICs can be maintained and managed in the United States.

In fact, these offshore CICs have grown to more than 4,000 companies, writing an estimated $60 billion in premiums per year, or more than a third of the total commercial insurance market in the United States. While Fortune 500 companies have long used CICs to protect assets and gain tax advantages, it is only in the last decade that individuals, business owners and professionals have begun to take advantage of them as well.

How can it be used?

The physician/group's CIC may be used to insure all, or portions of, the medical practice's significant risks, such as malpractice or high liability non-malpractice risks such as wrongful termination, sexual harassment or loss of electronic medical records (see following discussion of CIC as asset protector). Alternatively, the CIC might be used to insure relatively low liability risks like the loss of licensure.

Regardless of the type of risk, like most insurance, the CIC will transfer most of its risk to another reinsurer. Thus, the CIC can be structured to have as much or as little economic risk as the physician chooses, while allowing the significant tax benefits described below.

CIC as asset protection tool

The CIC has a number of asset protection advantages.

First, physicians can use the CIC to supplement (or in some, cases, even replace) their existing malpractice policy. Such supplemental malpractice protection may allow the physician to (1) have a larger deductible from his/her traditional carrier or (2) lowering limits from the traditional carrier. Either strategy will save the doctor significantly in out-of-pocket premium costs each year.

Further, the physician could use the CIC to provide additional coverage beyond the traditional limits. As physicians see more and more outstanding jury awards in medical malpractice cases, this protection can be significant.

Also, using one's own CIC gives the physician flexibility in using customized policies, which one would not get using large third party insurers.

For example, many physicians would like a malpractice policy that would pay the doctor's legal fees (and allow full choice of attorney), but would not be available to pay creditors or claimants (what we call "shallow pockets" policies). This prevents the physician from appearing as a "deep pocket" - a necessary asset protection strategy today.

Finally, the physician's CIC has the flexibility to add coverage for liabilities ignored by traditional malpractice policies, such as wrongful hiring/firing, economic losses from the practice, or even HCFA or HIPAA violations. Given that the awards in these areas can be more than $1 million per case, physicians would be well-advised to use the CIC for this alone.

Although physicians can sometimes purchase policies like the ones described above from traditional third party insurers, they would not enjoy the powerful tax advantages described above. In essence, the question for the doctor becomes: If you are going to use insurance to protect your assets, why give away the potential profits to the insurance company, when you could own the company yourself? Let's examine this more closely.

Compared with self-insuring

Because our society has become so litigious in recent years, many physicians have been "self-insuring" against potential losses like the ones named above.