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More Self Defense for Captive Insurance Company Owners

February 27, 2018 by Ike Devji, Asset Protection Lawyer Leave a Comment

Slide1Captive insurance companies may be ticking times bombs of legal and financial liability for their owners. Captive owners must act quickly, be educated about specific risks and be well represented by counsel.

I previously provided specific examples of the abusive fact patterns that have drawn the ire of the I.R.S. and a list of red flags to look for in your own captive or in a captive that you may be considering according to two top attorneys that practice in this area of the law and that I myself often turn to for help, Jay Adkisson and John Michael Johnson.

One of the most surprising things they have helped me understand in reviewing these issues with doctors across the country is how quickly you can end up playing “hot-potato” with your own captive team and the dirty tricks they may employ against you to protect themselves. This “material advisor” liability goes beyond just the captive manager and may extend to all forms of promoters including CPAs, lawyers, financial advisors and others, licensed or not, that help sell captives and get paid by the promoter either directly in the form of a cash referral fee or who get to sell something else to the client or the captive itself, including life insurance or even their services.

If you currently own a captive and have had notice from your administrator that they are either under the “promoter audit” I described last time and/or that they have tuned your captive’s info over the I.R.S. Johnson says you have a few basic options:

1. Move your captive to a different captive manager that is not being audited, if they will actually take you. Johnson said a “clean” manager that has legally compliant captives and is not being audited may not wanted to be “infected” with the liability and attention (including their own audit) your captive may bring with it;

2. Cut bait and try to exit your captive and get your money back from your current risk pool, this may not include the significant set-up and management expenses you have incurred to get this far. Dave Slenn, a Florida attorney and immediate past chair of the American Bar Association’s Captive Insurance Committee describes three key exit issues to consider including the form of the exit, wind down and liquidation, the specific legal and contractual process required to exit and perhaps most importantly, the tax consequences of no longer being an insurance company;

3. Last and least recommended, just hang tight, cross your fingers and hope the captive manager and risk pools remain solvent, your coverage and premiums are found to be valid by the I.R.S. and that none of the other folks in your risk pool panic and make a “run on the bank” and try to get all their money out before you do.

Finally, be aware of the moves that your own team may employ against you to shift risk and keep your money:

– They may charge your account with a variety of new fees and penalties including “surrender penalties” that may or may not have been contractually agreed upon including fees that the jurisdiction, not the manager, should be charging;

– They may keep a large portion of your funds on reserve for future expenses and risks, including the risk of inflated claims by others in the pool trying to cover themselves;

– They may unilaterally increase your premiums or may even dramatically increase your coverage so that additional premium payments are required just so they can keep your funds which Johnson terms a “retroactive assessment of premium”;

– They may ask you to sign releases and indemnity agreements allow them to settle out of any exposure you may incur for a faction of what it will cost you

This isn’t specific legal advice and is not a complete list, we look at a dozen other issues when evaluating a client’s captive risk. All three diverse legal experts I consulted, (Adkisson in Vegas, Slenn in Tampa and Johnson in Oklahoma), unanimously agreed that you should be immediately represented by counsel, you should be among the first to act and you should consider a proactive internal audit of your own captive to spot problems and proactively address them before the I.R.S. does.

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Filed Under: Business Owners, captive insurance company, Doctors, FINANCIAL ISSUES FOR DOCTORS, liability insurance, Medical Practice Management, Medical Practice Risk Management, tax deductions, tax fraud, taxes, Wealth Transfer Strategies Tagged With: arizona, audits, captive insurance, dirty dozen, Doctors, I.R.S., Ike Devji, phoenix, risk management, tax fraud

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