The Role of the Attorney in the Captive Insurance Industry

Transcription

1 The Role of the Attorney in the Captive Insurance Industry Presented by: John P. (Jay) Seibels Seibels Law Firm, P.A. 127 King Street, Suite 100 Charleston, SC

2 Captive Insurance Company Formation I. Entity Considerations A. Corporation B. LLC II. Tax Considerations IRS concepts of Insurance and Tax Deductibility A. Insurance Risk B. Risk Shifting (Transfer) C. Risk Distribution D. Commonly Accepted Insurance Notions Note: All insurance companies must be taxed as a C Corporation 2

3 Captive Insurance Company Formation III. IV. Corporate Document Drafting A. Articles of Incorporation/Organization B. Bylaws/Operating Agreement C. Shareholders Agreement Regulatory Interface A. Type of Captive 1. Pure 2. Special Purpose Captive 3. Risk Retention Group (Industrial Insured Captive) 4. Other B. Legal Opinion re: Compliance 3

4 Captive Insurance Company Formation V. Initial Corporate Actions A. Elect Board B. Board Resolution to Appoint: 1. Captive Manager 2. Attorney 3. Actuary 4. CPA 5. Banker 6. Investment Advisor 7. Others (?) - TPA, MGA C. Adopt Conflict of Interest Policy D. Adopt Investment Strategy 4

5 I. Board of Directors Duties A. All corporate powers must be exercised by or under the authority of, and the business affairs of a Captive organized as a corporation must be managed under the direction of, a Board of Directors. B. Elected by Shareholders, may be removed by Shareholders (or a Judge) C. Have the power and duty to appoint officers D. Should meet regularly, must conduct at least one meeting in South Carolina per year 5

6 II. Board of Directors Standard of Conduct (A Director is a Fiduciary) A. A Director must discharge his or her duties 1. In good faith 2. With the care an ordinarily prudent person is a like position exercise under similar circumstances. 3. In a manner he or she believes to be in the best interest of the Captive and its shareholders. 6

7 II. Board of Directors Standards of Conduct B. Business Judgment Rule - A legal presumption that if the Directors acted on an informed basis, in good faith, and in the honest belief that their actions are in the best interest of the Captive, then the Directors remain free from possible liability for decisions that result in harm to the Captive * This is supposed to mean that the Board does not ensure the success of the Captive - Bad decisions (in hindsight) are not automatically actionable. 7

8 II. Board of Directors Standards of Conduct C. In discharging his or her duties a Director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: 1. One or more officers or employees of the Captive whom the Director reasonably believes to be reliable and competent in the matters presented; 8

9 2. Legal counsel, public accountants, or other persons as to matters the Director reasonably believes are within the person s professional or expert competence; or 3. A committee of the Board of Directors of which he or she is not a member if the Director reasonably believes the committee merits confidence. This allows Directors to rely on advisors in discharging their duties. Even if the advice turns out to be bad advice, the Directors are protected from liability. (If the advice was negligent, the advisor could be held liable.) 9

10 III. Officers and Standards of Conduct A. Officer positions and job duties are established by the Bylaws B. Officers are appointed and removed by the Board (generally) C. Standards of Conduct - Identical to Director Standards 10

11 IV. Director or Officer Conflicts of Interest A. A Captive will adopt a corporate policy requiring disclosure to the captive by Directors and Officers of actual conflict of interest. These might include positions of authority in other insurers, service providers or competitors of to Captive 11

12 IV. Director or Officer Conflicts of Interest B. Conflict of Interest Transactions 1. A conflict of interest transaction is a transaction with the Captive in which a Director or Officer of the Captive has a direct or indirect interest. A conflict of interest transaction is not voidable by the Captive solely because of the Director s or Officer s interest in the transaction if any one of the following is true: 12

13 (a) the material facts of the transaction and the person s interest were disclosed or known to the Board of Directors or a committee of the Board of Directors, and the Board of Directors or a committee authorized, approved or ratified the transaction; (b) the material facts of the transaction and the person s interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or (c) the transaction was fair to the Captive. 13

14 If (a) or (b) has been accomplished, the burden of proving unfairness of any transaction covered by this section is on the party claiming unfairness. If neither (a) nor (b) has been accomplished, the party seeking to uphold the transaction has the burden of proving fairness. Indirect interest: a Director or Officer of the Captive has an indirect interest in a transaction if (1) another entity in which he has a material financial interest or in which he or she is a general party to the transaction or (2) another entity of which he or she is director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the Board of Directors of the Captive. 14

15 V. Audit - Duty to Disclose VI. VII. Examinations by the SCDOI and Duty to Cooperate Troubled Companies A. Directors and Officers Heightened Duties? To Whom? 1. Shareholders 2. Insureds 3. Regulators 4. Public B. Disclosure to SCDOI 15