Captive Insurance Groups' Brief Supports Delaware Appeal in IRS Case

Small figure of Lady Justice holding scales

March 22, 2022

Small figure of Lady Justice holding scales

A coalition of 10 captive insurance associations filed an amicus brief this month in support of an appeal brought by the Delaware Department of Insurance in the case of United States of America v. State of Delaware Department of Insurance.

Led by the Delaware Captive Insurance Association, other parties to the filing in the US Court of Appeals for the Third Circuit included the Self-Insurance Institute of America, Inc., the Arizona Captive Insurance Association, the Captive Insurance Council of the District of Columbia, the Missouri Captive Insurance Association, the North Carolina Captive Insurance Association, the Oklahoma Captive Insurance Association, the South Carolina Captive Insurance Association, the Tennessee Captive Insurance Association, and the Utah Captive Insurance Association.

The case deals with the Delaware department's efforts to quash a summons served by the US Internal Revenue Service (IRS). The summons compels the department to disclose to the IRS regulatory filings and other information provided to the department by Delaware-domiciled captive insurance companies, which are treated as confidential information under the Delaware Insurance Code.

A lower court denied the Delaware department's motion to quash the summons, leading to the appeal. The brief asks the appeals court to reverse the lower court's ruling.

The amicus brief notes that Section 6920 of Delaware's captive insurance law provides immunity from subpoena and disclosure of confidential documents related to the licensing of captive insurance companies. It also forbids the state's insurance commissioner from disclosing those documents unless agreed to by the relevant captive insurance company.

The section does provide an exception in the case of information requested by a law enforcement official or US agency, so long as the agency requesting the confidential information agrees in writing to maintain the information's confidentiality consistent with Section 6920.

While the Delaware Department of Insurance offered to provide materials to the IRS under that exception, the IRS ultimately refused the request, creating a situation in which the Delaware commissioner would have to violate state law to comply with the IRS request, the associations' brief said.

The brief also suggests that the district court's ruling affects the insurance industry on a nationwide scale.

"State regulators, such as the Delaware Department of Insurance, protect the public interest and promote the solvency of insurance companies. In order to accomplish these goals, state regulators require certain confidential and proprietary information of insurers," the brief said. "To encourage full and complete disclosure of information in the license application process, states across the nation have adopted confidentiality laws (applying to both the traditional insurance and captive insurance industries) to ensure that certain items will be held and remain confidential when in the possession of a state insurance regulator."

The brief further notes that laws such as Delaware's Section 6920 are part of the regulation of insurance, a power given to the states by Congress under the McCarran-Ferguson Act.

March 22, 2022