On June 4, 2013, Texas Governor Rick Perry signed a law making Texas the latest state to allow the formation of captive insurers, or "captives." The Government Affairs team at Gardere Wynne Sewell LLP drafted the language for and led negotiations with the Texas Department of Insurance that paved the way for the new law that allows parent companies to form "captive" subsidiaries in Texas to self-insure their affiliates' insurance risks.
The new captive law will give Texas companies (or out-of-state companies operating in Texas) a cutting edge alternative risk management option that has risen in popularity as companies seek to maintain greater autonomy insuring risks that are either expensive or difficult to procure. Captive formation has not previously been an attractive option in Texas because companies have had to domicile their captive in other jurisdictions with a captive law. As a result, those companies have faced multiple state compliance hurdles, uncertain tax consequences, and a host of other administrative and expense burdens inherent in operating an insurance company affiliate outside of a parent's home state.
Scheduled to take effect on Sept. 1, 2013, the TDI will begin authorizing "pure captive" insurers in Texas. The law allows for a parent company that underwrites the insurance needs of its operating subsidiaries in lieu of outsourcing the risk to traditional insurers. Other state laws have expanded upon the "pure captive" model to allow for multiple types of captive formations. Such variations — including association, outside, industry group or branch captives — allow either non-traditional or alien corporate structures to form captives within the given state. Some states also authorize "protected cell" captives in which multiple participants contract for a "sponsored" captive that maintains the assets and funds the liabilities of participants according to the terms of their contracts.
While Texas adopted only a "pure captive" model, the Legislature may set up other forms of captives in future legislative sessions if businesses advocate for them. But for the time being, the Texas captive law affords many attractive options for businesses seeking to form or re-domesticate captives in Texas. Highlights of the new law include:
Captives have traditionally been formed by large Fortune 500 companies whose affiliates' national insurance exposure is quite large. But as many small companies become better versed in alternative risk management measures, they find that forming a captive affords greater autonomy when commercial insurance markets are particularly hard. This most often occurs when property/casualty availability stretches thin during times of natural disaster or when costs of specialized coverage for hard-to-insure risks soar. An energy company may form a captive, for example, to guard against environmental claims related to infrequent but potentially high-cost events such as oil spills. Or, health care providers may form a captive to control their own fate with professional liability coverage (i.e., medical malpractice claims).
The new captive law will take effect on Sept. 1, 2013, but many companies are already exploring options to form their captives early so that they can provide input while TDI promulgates its administrative captive formation rules. Given the extensive role the Gardere Government Affairs team played in negotiating the law with TDI, Gardere can assist companies interested in taking advantage of this new pro-business law. We will keep you up-to-date on further developments.
If you have any questions about these or other legislative issues, please contact Kimberly A. Yelkin, executive partner of Gardere Wynne Sewell LLP's Austin Office and chair of the Firm's Government Affairs Practice Group, (firstname.lastname@example.org or 512.542.7001).
The Gardere Captive Team includes Ms. Yelkin, along with Val J. Albright, Partner in the Tax Practice Group, Marco Nájera, Attorney in the Mexico City office, Nanette K. Beaird, Senior Attorney in the Government Affairs Practice Group, and Leslie Ritchie Robnett, Associate in the Government Affairs Practice Group.