Captive insurance companies and the management of environmental risks

Abstract

Recent publicity has focused on the crisis in the market for commercial liability insurance. Industries and professionals concerned with air pollution are among those facing an acute shortage of insurance coverage. Captive insurance companies are gaining popularity as a means of securing comprehensive pollution liability coverage. Captives are separate corporations established by companies with similar risk management problems to write policies covering pollution emissions. Federal tax law requires that captives be set up properly, with transfer and distribution of risk, before premiums paid by the member companies are deductible. Financial responsibility requirements of the EPA are being redesigned, and may be favorable to the use of captives. Six states and several off-shore countries have statutes allowing captive insurance companies. Attention to practical details can lead to success in using captives to secure business advantages as well as protection from the risk of environmental impairment. Several of such considerations are discussed in light of the tax, environmental, and state regulatory issues relevant to the question, with an eye toward giving practical legal advice for structuring captives.