Delaware has traditionally been the preeminent and innovative jurisdiction for U.S. businesses to incorporate. In recent years, a concerted effort between the Offices of the Governor, the Secretary of State and the Insurance Commissioner of the State of Delaware, along with a collaboration of industry experts, resulted in the modernization of the Delaware Revised Captive Insurance Company Act. The combination of Delaware’s highly-regarded business and corporate law with the features of the state’s captive insurance provisions offers advantages such as increased flexibility and enhanced certainty. Accordingly, Delaware has become one of the most attractive jurisdictions for captive insurance companies.
Delaware was the first to adopt a provision authorizing the series limited liability company (LLC) entity in 1996. A series LLC is very similar to an ordinary LLC, since it is a separate legal entity. However, unlike an ordinary LLC, a series LLC acts like a sponsor or core LLC under which it has the ability to partition its assets, debts, obligations, liabilities and rights among distinct series business units or SBUs. Each SBU acts as a cell in that it maintains assets and liabilities separate and distinct from those held by other SBUs. Each SBU may have a different business purpose and different rights, powers and duties with respect to the assets held within that unit. The debts, obligations and liabilities incurred by each SBU are enforceable only against that SBU. Each SBU will also be treated as a separate taxpayer for federal income tax purposes.
In early 2010, the Delaware Department of Insurance (Department) licensed the first series LLC captive insurance company. Under Delaware law, it is classified as a “Special Purpose Captive Insurance Company,” and this classification gives the Delaware Commissioner of Insurance the authority to license captives that do not otherwise fit within the definition of any particular type of captive. Further, the Commissioner is granted by statute the authority to exempt a Special Purpose Captive Insurance Company from any of the existing captive insurance laws and regulations, in order to appropriately allow for creativity and mechanisms for implementing new or novel captive insurance programs, including the utilization of the series LLC structure.
The series LLC captive was initially developed as a solution to the premium tax problem associated with a sponsored (or protected cell) captive. Delaware’s protected cell captive statute imposes a premium tax (including an annual minimum premium tax of $5,000) on each cell captive; however, the series LLC captive applies the premium tax at the core LLC level instead of at the individual SBU level, while still maintaining separate assets and liabilities within each SBU like the protected cell companies. In addition to the premium tax efficiencies, the series LLC captive allows for efficiencies from the sharing of other administrative and service provider expenses. A series LLC captive may also be designed for simpler administration than a protected cell captive. For example, one annual meeting of a single board of managers could satisfy the minimum governance requirements of the core LLC, as well as its SBUs.
The following is a highlight of some of the financial requirements (which are aggregated at the core LLC level):
- As a Special Purpose Captive Insurance Company, the core LLC will be required to maintain a minimum capital and surplus of at least $250,000, which could be increased if the core LLC is going to participate in the risk.
- Each SBU will be required to have its own minimum and capital surplus in an amount that is determined by the Department based on the lines of coverage, pro forma financial projections and the recommendation of the Department’s actuaries.
- Application and processing fee of $3,200 and an annual fee of $300.
- Premium tax on direct business in the amount of twotenths of 1 percent subject to an annual maximum of $125,000. Premium tax on assumed reinsurance in the amount of one-tenth of 1 percent subject to an annual maximum of $75,000. The minimum annual aggregate premium tax is $5,000.
We are very excited to see the captive market pushing down from the Fortune 500 to the middle market. The Delaware series LLC captive is uniquely positioned to allow small and mid-size groups the opportunity to come together in one captive in order to enhance alternative risk financing mechanisms, while at the same time protecting their assets from the debts and obligations of others.