Change in Liability Insurance | Fall Edition | 2022 | JD Supra

Events in Vermont

Top Updates

After more than five years, Vermont’s leadership team has seen major changes in 2022. In April, Michael Pieciak, Commissioner of the Department of Financial Regulation (“DFR”), announced that he is stepping down to run for State Treasurer. . Mike will be replaced by Kevin Gaffney, DFR’s Deputy Insurance Commissioner. Kevin has many years of insurance management experience and we look forward to his success in his new role.

Closer to home, David Provost, Deputy Commissioner of Bonded Insuranceannounced that he will step down at the end of the summer after serving as Vermont’s top captive manager since 2008. Only the third person to hold the office since he passed his insurance laws in 1981, Dave has been an exceptional leader for Vermont’s captive industry and will be greatly missed.

Fortunately, DFR practices what it preaches when it comes to succession planning, and Sandy Bigglestone, the long-time Director of Insurance, will become the new Vice President of Bonded Insurance. A recipient of numerous awards and honors, Sandy has worked alongside Dave for many years to lead the captive community and has established himself as one of the leading voices in the captive industry. We hope for lasting change and that, under Sandy’s guidance, Vermont will remain the “Gold Standard” for captive populations.

Beyond the Impact of COVID-19

DFR’s 2020 response to the COVID-19 pandemic has been extended to 2022. This includes recognizing that public gatherings in Vermont may not be safe. Holders are invited to request removal at their 2022 annual meeting.

2022 Boundary Rules

On May 31, 2022, Governor Phil Scott signed Vermont’s annual “housekeeping” bill into law. The 2022 rule, which was co-sponsored by DFR and the Vermont Captive Insurance Association, contains the following:

In addition to the above, Vermont adopted a new Insurance Data Security law that applies to insurance carriers. Insurance companies that are held by risk management groups are not included, but we will be monitoring this area closely for future developments.

2021 Vermont Formations

In 2021, 45 new Vermont operators were licensed, bringing the total to 1,242 licensed operators, with 589 in operation as of December 31, 2021.

In particular, the 52 slaves supported by Vermont have grown significantly, with more than 500 cells and separate accounts, of which about 100 were added in 2021.

2021 Aggregate Data

The total income recorded by all Vermont slaves in 2021 was $30 Billion; The total amount recorded was $25.2 Billion. Total assets and liabilities as of December 31, 2021 were $65 Billion and total assets were $193 Billion. Vermont’s total taxable income for 2020 was approximately $28 Million.

Federal news

IRS v. Delaware

In June 2020, the Internal Revenue Service (“IRS”) petitioned the US District Court for the District of Delaware (“District Court”) to issue an order to compel documents sent to the Delaware Department of Insurance (“DDOI”). The IRS is seeking records related to the gambling activities of Artex Risk Solutions, Inc. (“Artex”) and Tribeca Strategic Advisors, LLC (“Tribeca”) regarding Artex’s role in dealing with captive insurance companies under Section 831(b) of the Internal Revenue Code.

These small programs were labeled “Transaction of Interest” by the IRS in 2016, meaning that the IRS believes they have the potential for tax evasion. The IRS is also investigating whether Artex or Tribeca promoted subsidized programs and whether their actions could result in penalties applicable to promoters of predatory taxes.

In its counterclaim against DDOI, the IRS alleges that DDOI has failed to provide documents relevant to its records subpoena. DDOI has moved to “dismiss” the IRS’s request on the grounds that, among other things, compliance with the subpoena would require DDOI to violate a Delaware statute that prohibits disclosure by DDOI of the consent information of a captive insurance company unless the insurer agrees to the disclosure. or such information is disclosed to another state insurance department or to a state or federal law enforcement agency and the department or agency agrees to keep the information confidential. DDOI also states that, under the McCarran-Ferguson Act, insurance laws are in the hands of the states.

On July 16, 2021, an arbitrator appointed by the District Court to review the case ruled in favor of the IRS and urged the DDOI to be forced to provide the requested documents.

The District Court reviewed the judge’s findings and opinion and, on September 29, 2021, issued a decision based on the magistrate’s opinion.

On November 1, 2021, DDOI appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit. That complaint did not happen.

Reserve Mechanical: The 10Th Circuit Drops the Hammer on Micro-captive Abuse

In a long-awaited decision, the 10-member United States Court of AppealsTh The Circuit issued its decision recently Reserve Mechanical Corp. v. Commissioner of Internal Revenue. The decision concluded Reserve Mechanical’s appeal of a 2018 United States Tax Court ruling that we filed. Here. The 10Th The Circuit agreed with the Tax Court’s findings regarding the abusive nature of the micro-captive system at issue, to the extent that it showed all the flaws in the design and operation of the micro-captive. These mistakes are, by now, well known to the industry so we won’t repeat them here. However, one thing that stands out about the decision is that it is 10Th The Circuit affirmed the Tax Court’s determination that fictitious payments made by a captive owner could no longer be classified as capital contributions because the captive owner did not intend them to be capital contributions. In fact, a small victim should see fake payments as money. These types of abusive arrangements, therefore, may be subject to double taxation due to the fact that any deductions that the parent/insured may have on false payments may be prohibited and the victim may be required to recognize that the amount is income or other withholding tax.

Government Affairs

Washington State Implements Premium Tax

Following extensive negotiations between the Washington State Insurance Commissioner (“OIC”) and Washington state corporations, the state of Washington, on May 12, 2021, enacted legislation allowing the taxing of Washington corporations and public institutions of higher education that use captive insurance. . A few months later the OIC began to follow the rules.

The new policy applies to “qualified insurers,” which are defined as insurance companies that, among other things, (i) include among their insureds at least one person or entity whose principal place of business is in Washington; and (ii) have assets that exceed their liabilities by at least $1 million.

The key business center of an insurance company is “the place where business managers control, supervise, and coordinate” business activities. Subsidiaries must be evaluated separately from their parent or company. So, for example, if a multinational business located in New York uses a captive to verify a company operating in Washington, the subsidiary company in Washington will be considered to have its place of business in Washington even though all of its operations are from the company’s headquarters in New York.

Qualified captive insurers are allowed to provide property and casualty insurance to owners and other owners’ associations (and to take risks unrelated to other insurers as reinsurers), but only if they are registered with the OIC.

The OIC will approve the registration if the hostage (i) is determined to meet the additional requirements described above (confirmed by the amount calculated); (ii) is in good standing with his landlord; and (iii) pays a fee of $2,500. Registration must be renewed annually, to receive additional funding of up to $2,500.

Each licensed insured will be required to pay a 2% tax on all perils originating in Washington. The new tax is applied retroactively to any payments made after January 1, 2011.

“Washington’s risk” is defined as “the portion of the risk that is covered by the coverage” in Washington, “based on the risk or loss or injury that causes the coverage.” Certified underwriters have some discretion in deciding how to allocate risk, but such options must be disclosed to the OIC.

Qualified insurers who fail to register are subject to the same fines and penalties that apply to unauthorized insurers.

It is still an open question whether this tax system is permissible under Todd Shipyards line of charges, but unless they are challenged, the slaves who are defending Washington’s threat to allies in Washington will need to think carefully about how to use it.