Watch Out for this Captive Insurance Claims Handling Pitfall

Lynn Sheils of EWI Reinsurance warns that the most obvious pitfall a captive management team can run into is paying claims that are not covered under the captive policy. Why is avoiding this pitfall difficult for captive insurers? First, there is often an overlap of staff and directors and officers responsibilities between the captive owner (parent) and the captive itself. Second, the captive insurer exists at the discretion of the parent, and it is often difficult for the captive to tell the parent that a claim is not covered.

Issues may also arise with conflicting fiduciary duties of the directors and officers to the captive and to the parent. If a captive does not address the coverage issue and decides to pay the claim regardless, it may run into trouble when it tries to present the claim for reinsurance. A reinsurer may decide not to pay the loss.