Captive Insurance and the CFM Decision: Operational Discipline Matters

In a recent issue of Captive Insurance Company Reports, Kristen Lawler, tax partner at Crowe LLP, analyzes the US Tax Court's decision in CFM Ins., Inc. v. Commissioner and what it signals for captive insurance companies navigating federal tax scrutiny.

The court applied the familiar four-part insurance test. While it accepted a broad view of exposure units for purposes of risk distribution, the captive ultimately failed on the fourth prong—whether it operated in a manner "commonly accepted as insurance."

That distinction is critical.

Risk Distribution Wasn't Enough

In CFM, the court credited aggregated transactions, products, and other exposure metrics in finding risk distribution satisfied. For some, that portion of the opinion may appear constructive.

But the case did not turn on distribution.

The Real Issue: Operational Discipline

The court focused on how the captive actually functioned. Among the concerns:

• Premium levels that appeared to track a preset target rather than contemporaneous actuarial analysis
• Timing irregularities in premium payments and policy issuance
• Claims practices that departed from ordinary commercial insurance standards

Licensure and regulatory oversight were not enough to overcome those operational deficiencies.

Why It Matters

The fourth prong remains fact-intensive and unforgiving. Courts continue to examine whether a captive behaves like a real insurer in practice—not merely in structure.

The full article in the January 2026 issue of Captive Insurance Company Reports provides a detailed analysis of the court's reasoning and what this decision signals for captive owners and advisers.

🎙 Coming Soon: Live at CICA

We will also record a podcast at the upcoming Captive Insurance Companies Association (CICA) conference with Ms. Lawler to explore the following:

• Why the "commonly accepted notions" test remains the most fact-intensive element of the four-part insurance analysis
• How operational discipline—pricing, documentation, and claims handling—is evaluated in today's tax environment
• Practical questions captive owners should be asking their advisers in light of the CFM decision

The episode will extend the discussion beyond the case summary and focus on governance and execution in today's captive insurance landscape.

Subscribers can access the article on Vertafore ReferenceConnect or IRMI Online at the links below.

Vertafore ReferenceConnect Subscribers

• When Insurance Isn't Insurance—The CFM Insurance Lesson on the Commonly Accepted Notions Test

IRMI Online Subscribers

• When Insurance Isn't Insurance—The CFM Insurance Lesson on the Commonly Accepted Notions Test