Businesses Now Taking Advantage of Texas Captive Insurance Law

14 April 2014 Publication
Authors: Kimberly A. Yelkin

Seven months after legislation was passed allowing the formation of captives in the state, the Texas Department of Insurance has approved the formation of its first captive insurer. In April 2014, Delek U.S. Holdings Inc., a diversified downstream energy company, was granted approval for formation of its captive Commerce Way Insurance Company Inc. Kimberly A. Yelkin, the executive partner of Gardere’s Austin office and chair of the Government Affairs Practice and Insurance Regulatory Practice groups, along with Gardere Insurance Regulatory Paralegal Lea Ann Schnarr assisted Delek with the captive formation process.

On Sept. 1, 2013, Texas joined 31 other states in passing legislation allowing the state to license and oversee captive insurance companies. Under this new business-friendly law, Texas companies or companies with operations in Texas can form a Texas captive to insure certain risks that they may currently self-insure, insure through a non-Texas captive, or otherwise insure commercially.

The state’s captive legislation, Senate Bill 734, was sponsored by Sen. John Carona and Rep. John Smithee. “This legislation will reduce the cost to businesses relying on out-of-state captive insurance companies,” Sen. Carona has been quoted as saying. “It will also provide incentives for companies to form or redomesticate pure captive insurance companies in Texas.”

A captive is defined as an insurance company formed by another company to cover its own risks. SB 734 requires that affiliated companies have significant operations in Texas in order to form or move a captive here. Captives licensed in Texas can only insure operational risks of affiliated companies and controlled unaffiliated business; the statute prohibits captives from accepting insurance policy risks of an insurance affiliate.

With the formation of the state’s first captive, Commissioner of Insurance Julia Rathgeber announced that the state is “now open for business for captive insurers” and stated, “The statute has provided for a safe and stable entry of a new type of risk transfer mechanism into the state.”

The TDI also approved two other redomestications and announced that “several more” captive applications are nearing approval.

The Commissioner of Insurance has adopted 28 Texas Administrative Code §§6.1, 6.2, 6.101 - 6.105, 6.201 - 6.203, 6.301 - 6.307, 6.401 - 6.410, 6.501, 6.601, and 6.701, concerning the licensing and administration of captive insurances companies. Additional information and forms may be obtained here.

For assistance or more information about forming or redomesticating captives in Texas, contact Ms. Yelkin (kyelkin@gardere.com or 512.542.7001).