Captive insurance: How doctors can benefit from owning CIC

Key Points

As frequent speakers to physicians on asset protection and advanced planning, we are often asked about captive insurance companies (CICs).

Certainly, CICs can be ideal tools if they are created for the right type of practice and are established and maintained properly.

In this article, we will examine the benefits and costs of CICs, and then offer a case study of two doctors who use CICs to significantly enhance many areas of their comprehensive financial planning.

The CIC we will discuss here is a fully licensed insurance company - domiciled either in one of the states that has special legislation for small captive companies or in an offshore jurisdiction which has similar captive legislation. Whenever a CIC is established offshore, it is critical that the CIC be compliant with all U.S. tax rules, and must be handled by captive managers, tax attorneys or CPAs experienced in these matters.

CIC as risk management tool

The CIC must always be established with a real insurance purpose - that is, as a facility for transferring risk and protecting assets. The transaction must make economic sense. Beyond this general rule, there is a great deal of flexibility in how the CIC can benefit a client.

First, clients can use the CIC to supplement their existing insurance policies. Such "excess" protection gives the client the security of knowing that the company and its owners will not be wiped out by a lawsuit award in excess of traditional coverage limits.

As doctors, you should be concerned with all types of lawsuits - from medical malpractice to practice risks to employment liability - this protection can be significant. Further, the CIC may even allow the client to reduce existing insurance, as the CIC policy will step in to provide additional coverage, if needed.

Also, using one's own CIC gives the client flexibility in using customized policies which one would not easily find when using large third-party insurers.

For example, many clients would like a liability policy that would pay the client'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 client from appearing as a "Deep Pocket" (a prime lawsuit target). Avoiding this appearance is a necessary asset protection strategy today.

In addition, the CIC has the flexibility to add coverage for liabilities excluded by traditional general liability policies, such as wrongful termination, harassment or even ADA violations. Given that the awards in these areas can be more than $1 million per case, doctors should understand the value of the CIC for this benefit alone.