Husch Blackwell LLP partner Craig A. Adoor recently wrote a six-part series of blog posts on captive insurance – “Using Captive Insurance To Create Value for Your Company.” Companies operating in many different types of industries with different types of risks have formed captive insurance subsidiaries to help manage their risks.
This blog post points out that companies operating in the agribusiness industry may be able to economically manage their liability risks by forming captive insurance companies. It cannot be stressed enough, however, that the parent company must have valid and bona fide business, risk management and insurance reasons for forming and operating a captive insurance company. Although there may be tax benefits, they must be ancillary to the business, risk management and insurance reasons.
PLANTING THE IDEA: IS CAPTIVE INSURANCE A VIABLE RISK MANAGEMENT TOOL FOR YOUR AGRIBUSINESS COMPANY?
Companies operating in the agribusiness industry face liability risks that most all companies in other sectors of the United States economy do. However, producers including row crop growers, livestock producers, dairy and egg producers and countless other producers are confronted with a myriad of other types of risks that may not impact non-agricultural industries nearly as much – risks such as:
- environmental risks;
- risks presented by earthquake, wind, hail, flood, drought;
- animal diseases;
- crop diseases; and
- risks due to the use of pesticides, fertilizers.
Crop protection and specialty seed manufacturing companies, processors, equipment dealers, fertilizer dealers, seed dealers and grain elevator companies, none of whose businesses are directly tied to production but who support the producers, face these very same risks because their business existence depends on the producers.
Many companies operating in the food and agribusiness industry rely on self-insurance, betting the loss will not occur and if and when it does, they will pay it out of their current earnings or retained earnings. Many others rely on third party commercial insurers for liability protection but these third party insurers may not offer coverage for the special types of risks that impact agribusiness companies. Even if they do, commercial insurers may offer it at premiums that are so steep that they would cut into the agribusiness companies’ profits to such an extent that the insurance is effectively unavailable. Further, because the insurance may never be accessed if the risk never materializes into a loss, industry participants often view the premiums as an expense from which they derive no return other than, perhaps, piece of mind. For many companies in the agribusiness industry, captive insurance is a third and an attractive alternative (or perhaps an adjunct) to self-insurance or third-party commercial insurance.
There are various types of captive insurance. In short, a single parent captive insurance company is formed by a parent holding company as a wholly-owned subsidiary of the parent for the purpose of insuring the risks of the parent’s other subsidiaries or other third party insureds. The captive insurance company is formed under the insurance laws of its jurisdiction of incorporation and is licensed by that jurisdiction as an insurance company and is regulated by that jurisdiction’s insurance regulators.
The primary reasons supporting a company’s decision to implement captive insurance must be business, economic or insurance driven. Within the economic considerations may be tax benefits as well, although taking advantage of the tax benefits cannot be the sole or even the primary driver in deciding to implement captive insurance. During publication of the six-part series, an increase in the amount of the exclusion from the captive’s income of premiums paid to the parent-owned captive insurance company (from $1.2 million to $2.2 million to become effective on January 1, 2017) was enacted by Congress. Limitations on the use of captive insurance as an estate planning tool were enacted as well.
With apologies to comedian Jeff Foxworthy:
- if your food and agribusiness company has sales in excess of $50 million; or
- if your food and agribusiness company is profitable; or
- if your food and agribusiness company pays insurance premiums of $500,000 or more;
Your company might be a candidate for captive insurance!
Although there is far more to the economic, business, risk management and legal analysis than answering the above questions, you might find after consultation with professionals, that for certain risks, captive insurance provides an attractive alternative or adjunct to self-insurance or paying excessive insurance premiums to third party insurers. Cultivating knowledge of captive insurance, assessing the risks your agricultural business faces (including the insurance costs and expenses your business already incurs) should allow you to weigh the benefits of captive insurance against other methods of managing your company’s risks.