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The 2006 Captive Act Amendments: Revolutionizing Protected Cell Laws in the District Stephen F. Donahoe On March 14, 2007, the District of Columbia amended its captive insurance laws by enacting the Captive Insurance Company Amendment Act of 2006 (the “2006 Amendments”). The 2006 Amendments update segregated cell provisions included in the District’s Captive Insurance Company Acts of 2000 and 2004 and offer clear advantages over other domestic domiciles with respect to protected cell flexibility, including the choice of incorporated or unincorporated cells, the right of cells to transact with each other, and enhanced freedom in connection with the ownership and operations of cells. Protected Cells and Incorporated Cells The 2006 Amendments authorize the creation of both traditional protected cells and incorporated protected cells. A traditional protected cell is a separate account established and maintained by a segregated cell captive insurer that has no legal identity separate from that of its parent insurer. Alternatively, an incorporated protected cell is a protected cell that is formed as a corporation or other legal entity and has a legal identity independent from that of its parent. As a result, incorporated cells may hold assets, sue and be sued in their own name, and do anything else that an ordinary corporation can do under District law. The incorporated cell structure reinforces the strength of the firewall between cells for each of the parent insurer’s clients or activities because it ensures that assets and liabilities are segregated as effectively as they would be among subsidiaries in a corporate group structure, even though the cells are not technically subsidiaries of their parent insurer. It is anticipated that an incorporated cell would have its own federal employment identification number (“FEIN”) and file its own tax return but that protected cells would be part of their parent insurer’s tax return. In addition, the 2006 Amendments permit each incorporated protected cell to have the same directors, secretary and registered office as its parent insurer, which will lead to significant administrative benefits and cost savings for captive owners and managers. Relationship Between Cells and Cell Companies The 2006 Amendments continue to provide that each protected cell shall be accounted for separately on the books and records of its parent insurer. Consequently, if a protected cell captive insurer enters into a transaction with respect to a particular protected cell or incurs a liability arising from an activity or asset of a particular protected cell, a claim by any person in connection with the transaction or liability shall extend only to the general assets of that individual cell. Likewise, if a protected cell captive insurer enters into any transaction or incurs any liability in its own right and not in respect of any of its protected cells, any claim in connection with the transaction or liability shall extend only to the general assets of the parent insurer. The 2006 Amendments also allow for a great deal of flexibility with respect to the relationship between cells and cell companies by permitting a protected cell to enter into an agreement with its parent insurer or with another protected cell of its parent insurer that is enforceable as if each protected cell were a separate legal entity, even if the protected cell is not organized as an incorporated protected cell. This enhanced contracting capacity will help eliminate the uncertainty that has previously hindered the use of the protected cells and should facilitate the creation of reinsurance or risk pooling cells within a protected cell structure. Conversion To or From a Protected Cell Captive Insurance Company Another benefit of the 2006 Amendments is the enhanced flexibility they give to the protected cell captive structure. Under the 2006 Amendments, a captive insurer already licensed in the District may amend its organizational documents to become a protected cell captive insurer upon receiving the approval of (i) two-thirds of the captive’s shareholders and (ii) all of the creditors of the captive insurer. Conversely, the 2006 Amendments permit a protected cell captive insurer licensed under District law to cease to be a protected cell captive insurer and to become a traditional captive upon receiving the approval of (i) two-thirds of the captive’s shareholders; (ii) all of the creditors of the captive insurer; (iii) two-thirds of the participants of each protected cell; and (iv) the Commissioner. The 2006 Amendments also allow for a protected cell, including an incorporated cell, to transfer from one protected cell captive to another upon receiving similar shareholder, creditor and regulatory approval. Furthermore, under certain circumstances, the revised legislation gives existing captive insurers the flexibility to become a protected cell of a protected cell captive and permits a protected cell to separate from its protected cell captive and become an independent captive insurer. Conclusion The administrative conveniences associated with the protected cell structure continue to remain attractive to both small organizations seeking to take advantage of the captive market and to larger companies with high premiums and difficult exposures. Once a protected cell company is established, repeat transactions can be executed more quickly and efficiently, as new cells can be added at a fraction of the cost and time that would otherwise be necessary. The 2006 Amendments, which are unlike any other domestic protected cell laws, make the District a more flexible domicile for protected cell captive insurers by, among other things, permitting the formation of separately incorporated cells and providing greater flexibility to the scope of authorized transactions involving protected cells. In doing so, the 2006 Amendments make the District an even more appealing location for the formation of new captive insurance companies and help reaffirm the District as one of the most progressive and innovative captive jurisdictions in the nation.
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