Broker Check

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

| March 30, 2020

The recent pandemic is causing a lot of businesses to re-evaluate their financial risks and insurable risks. At Finance For Thought we’ve been putting our nose to the grind stone and have been working double time to address just that. If you haven’t see our latest newsletter covering 4 commonly overlooked ways to cut business expenses, you can see that here.

One of the topics we touch on is Captive Insurance. It is not necessary, but it may behoove you to read my original article covering Captive Insurance at a high level here before continuing with this article/newsletter.

If you’ve done any research on Captive Insurance, there’s an off chance you may have come across a 2018 verdict in which the IRS and Tax Court found a company (Reserve Mechanical Corp), to NOT meet the criteria to be considered an insurance company for federal tax purposes. The primary reason behind this is the fact that the company was insuring the loss of business income due to a pandemic. The IRS and Tax Court essentially found the risk to be so minimal that it did not meet the criteria to be insured. This is exactly why the IRS and Tax Courts should stick to tax and not risk management. It shouldn’t 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, such as COVID-19), are the two primary reasons why many companies are beginning to review their current insurance coverage.

For some of those companies that qualify, it may behoove them to explore the possibility of Captive Insurance, sometimes also called micro captive or Small Captive Insurance. To get a more in depth understanding of Captive Insurance I’d again refer to my original article here, but the key benefits and guidelines are below. Note that the eligibility guidelines are a rule of thumb that can be lower or higher, a feasibility analysis is required to determine actual eligibility.

Key Benefits:

  • Creates an Insurance Company to accept some of a Business’s risk
  • Keep a significant amount of your current insurance premiums in a company that you own
  • Create a more cost-effective way to cover the need of commercial insurance
  • Gives the business owner 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 at least $10,000,000 a year in revenue
  • Currently paying $250,000 a year or more in insurance premiums


If you’ve made it this far in this newsletter/article, let me first applaud you for having a greater attention span than most. You also may have noticed some bold red text in the above bullet points. If in your micro-captive, those were an insurable risk, it is possible, that you may be able to file a claim. Business income protection, regulatory change and key supplier are risks that can be covered. If the government is forcing a business to close its doors, causing a business income loss, that sounds exactly like the loss of business income due that maybe regulatory or legislative change. This is exactly what many businesses are dealing with due to the COVID-19 pandemic.

Lastly, if you are enough of a masochist to be a constant reader of my newsletters, you will know that myself, and the rest of the team at Finance For Thought, are big on transparency. So, in full transparency, the IRS has not always been a big proponent of Captive Insurance, and honestly for good reason. Captive Insurance has been used for tax avoidance and tax abuse in the past. Let me be clear, Captive Insurance is not a tax planning tool. Captive Insurance is first and foremost a risk management tool in which the tax benefits can at best be referred to tax arbitrage. It is in no way supposed to be used with tax planning as the primary focus. If a “professional” is urging you to explore a captive for that purpose, I would seriously consider a second opinion.

If you’d like to determine your eligibility for Captive Insurance you can reach out to my office here, or reach me directly at my contact information listed below to inquire about a feasibility analysis.


Warmest Regards,

Dan Nuwash


Founder, Managing Partner

Finance For Thought

Direct: 910.546.5463