In 2018, the IRS and Tax Court ruled that Reserve Mechanical Corp, Inc. did not meet the criteria to be treated as an insurance company for federal tax purposes. Why? Incredibly, the Court found the risk of a pandemic to be “too minimal” to justify insurability. That decision—made just two years before COVID-19 devastated global economies—is now under appeal.
That verdict, alongside the fact that many traditional insurers now exclude pandemic-related losses, has accelerated a shift: businesses are increasingly turning to alternative risk management strategies like Captive Insurance.
What is Captive Insurance?
Captive insurance—sometimes referred to as small or micro-captive insurance—allows a business to form its own insurance company. Rather than paying large premiums to third-party insurers with limited flexibility, the business retains control over its risk and capital.
Why It Matters More Than Ever
In today’s volatile economic landscape, driven by tariff pressures, supply chain disruptions, and the lingering threat of global pandemics, businesses need more than traditional coverage—they need a strategic financial weapon.
Captive insurance offers exactly that.
Key Economic Advantages
Offset Tariff-Induced Costs:
Tariffs are driving up operational costs across industries. With a captive, businesses can retain premiums that would otherwise exit the company, helping recycle capital to manage new expenses introduced by trade policy shifts.Insure Against Supply Chain Disruptions:
Traditional insurers often won’t cover losses from key supplier failure or shipping delays. A captive can underwrite these exposures, protecting income when a fragile global supply chain breaks.Pandemic Risk? Covered.
Many insurers now exclude pandemic clauses entirely. A captive, on the other hand, allows you to insure business income loss from forced shutdowns under “regulatory change” and pandemic response plans.Premiums Become a Profit Center:
Unlike commercial insurance where premiums are a sunk cost, captive insurance allows you to reinvest premiums and potentially generate a return. That’s a strategic asset, not a liability.
Key Benefits
Establish your own insurance company
Retain and reinvest premiums
Tailor coverage to your actual risks
Shield assets through integrated estate planning
Insure non-traditional risks like:
Loss of a key contract
Regulatory changes
Business income interruption
Supplier failure
Accounts receivable default
Who’s Eligible?
Businesses with:
$10M+ in annual revenue and/or...
$250,000+ in annual insurance premiums (excluding health insurance)
Why Veteran-Owned Businesses Should Pay Attention
Veteran entrepreneurs understand risk, structure, and resilience—core principles of both military service and sound financial strategy. Captive insurance is especially powerful for veteran-led firms seeking autonomy, asset protection, and long-term financial efficiency.
Conclusion
The IRS may have underestimated pandemic risk in 2018, but your business doesn't have to. Captive insurance is no longer just an advanced tax strategy—it’s a strategic defense system against the economic shocks of the modern era.
Schedule a Consultation
Dan Nuwash is the Founder and Managing Partner of Finance For Thought, a veteran-owned consulting firm dedicated to equipping other business leaders with smarter tax and risk management strategies.
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Sources:
https://captivereview.com/news/coronavirus-shows-irs-was-wrong-microcaptives/
https://www.nytimes.com/2020/03/20/your-money/coronavirus-insurance-small-business.html
https://www.nytimes.com/2015/04/11/your-money/irs-is-looking-into-captive-insurance-shelters.html
https://en.wikipedia.org/wiki/Coronavirus_disease_2019
https://www.captive.com/news/2018/11/19/what-is-a-micro-captive