Broker Check

Captive Insurance: How the IRS Got it Wrong and How to Manage Future Pandemic Risks

| February 03, 2021

If you have done any research on Captive Insurance, there is an off chance you may have come across a 2018 verdict in which the IRS and Tax Court found Reserve Mechanical Corp, Inc. to NOT meet the criteria to be considered an insurance company for federal tax purposes. The IRS and Tax Court essentially found the risk of a pandemic to be so minimal that it did not meet the criteria to be insured. It should not surprise you that the ruling is now being appealed.

The obvious flawed ruling against Reserve Mechanical Corp and the fact that some insurance companies have exclusions that will not cover Pandemic loss (meaning claims do not have to be paid if the root cause of said claim was a pandemic), are a couple of key factors to why so many businesses are now exploring alternative methods of risk management beyond the traditional insurance market.

One of those alternative methods is Captive Insurance, sometimes also called micro captive or Small Captive Insurance. Captive Insurance is a proactive way to manage a business’s risk and gives the business more control over their risk management coverage. It also allows a business to cover risks which cannot be done in the traditional insurance market, and can turn insurance premiums into a profit center rather than an expense. Some of the key benefits and eligibility guidelines are below.

Key Benefits:

  • Creates an Insurance Company to accept some of a Business’s risk
  • Keeps a significant amount of your current insurance premiums in profit center
  • Creates a more cost-effective way to cover the need of commercial insurance
  • Gives the business the ability to re-invest insurance premiums
  • Creates another estate planning vehicle that offers the same asset protection as a business
  • Enables a business to more effectively manage its insurance risks
  • Gives the business the ability to insure risks that most commercial insurance companies won’t, such as; loss of a key contract, business income protection, regulatory change, key supplier and/or accounts receivable.

General Business Eligibility Guidelines:

  • Doing $10,000,000+ a year in revenue
  • Currently paying $250,000+ a year in insurance premiums


The 2018 verdict has yet to be overturned, but this does not prevent businesses from using Captive Insurance to manage some of the risks brought on by the pandemic. If the federal or local government is forcing a business to close its doors, causing a business income loss, those are insurable risks under “regulatory change” and/or “business income protection.”


Dan Nuwash is the Founder and Managing Partner of Finance For Thought and can be reached through our website or you can schedule an introductory Zoom meeting or call with Dan and/or one of our other partners.