11 April 2021ArticleAnalysis

A plague on 831(b)s

“A benefit of an ICC over a pure captive is that cells share in the cell companies’ operating expenses.”

Les Boughner, Advantage Insurance

Segregated account entities such as protected cells, incorporated cells and series limited liability companies (LLCs) are frequently referred to generically without acknowledging that there are differences between them. The inference is that while they are part of one legal entity, their assets are isolated, segregated and bankruptcy-remote from other cells. Furthermore, in many cases they are marketed as rent-a-captives. In fact there are differences, some subtle but significant, among the different structures. They have evolved from the traditional rent-a-captive but have developed their own distinctive features.Historically in a traditional rent-a-captive structure all participants were part of a single captive and shared in collective losses proportionate to their relative premiums. This would have limited attraction and marketability if the liabilities were uncontrolled.In order to isolate and manage each participant’s liability, individual stop loss insurance was required for each account. This allowed a diverse portfolio of different risks to effectively “rent” a portion of the captive and not be exposed to the risks of the other participants. If properly structured, this was effectively a matched portfolio where each account was fully isolated and protected by its surplus and stop loss protection. This was very effective provided each participant maintained its stop loss. In the event that the stop loss coverage expired or was non-renewed, or unavailable, all the remaining participants’ surpluses were then exposed to losses from the “un-matched” account.This would occur during constricted insurance cycles when responsive stop loss protection was unavailable, or the participant would non-renew for economic reasons.


In order to achieve separate asset segregation in a captive insurance structure, segregated protected cell company (PCC) legislation was enacted in Bermuda in the early 1980s, followed by Guernsey in 1997. A PCC consisted of a core or general company which is owned by the sponsor and a number of individual cells which could have separate ownership.A unique and potentially vulnerable characteristic is that the individual cells are not separate legal entities. The core contracts on behalf of each individual cell which is a segregated account within the PCC. Individual cells do not have a separate governance structure and do not appoint the board of directors.Typically, the board of directors is controlled by the sponsor of the PCC. It follows the governance of the core and its board of directors, who contract on their behalf. Each cell is controlled by a Participation Agreement with the core detailing its segregation from the core and other cells. Ownership and separate cell profit distributions are achieved through each cell issuing “redeemable preferred shares” to its sponsor. The overall cell company sponsor owns the common or voting shares, establishes the board of directors, and issues Participation Agreements to the individual cells.The proceeds of the redeemable preferred shares form the separate accounts assets of each individual cell which is the capital supporting the insurance underwriting of each individual cell. The preference shares establish the vehicle for profit distributions in the form of dividends.While segregation of individual cell assets from each other and the core are protected by statute, it has yet to be conclusively established whether courts and arbitration panels will respect the statutory segregation.


There are a number of issues with a PCC that could be challenged. Each cell is not a separate entity. The core contracts on its behalf. Domiciles evaluate the PCC’s solvency by the total capital and overall premium. Consequently, the core capital can be used to support an individual cell’s underwriting, while segregated and isolated from cells’ profits and losses. This allows the sponsor to withdraw capital as cells are capitalised by issuing redeemable preferred shares or “rent” core capital to the individual cells.In order to strengthen the segregation of cells, legislation was expanded to allow each cell to be “incorporated” as a separate legal entity. In this case each cell becomes a separate legal entity with its own board of directors and independent governance. Each cell has its own articles and bylaws. Jurisdictions regulate each cell in much the same way they do for a standalone pure captive. As well as strengthening asset segregation there are a number of additional benefits.As cells within a PCC are not separate legal entities, they cannot contract with one another. Pooling and reinsurance structures would require an additional totally separate entity. As incorporated cell companies (ICCs) are separate entities, they have the ability to contract with one another.A benefit of an ICC over a pure captive is that cells share in the cell companies’ operating expenses. The annual audit of each cell is typically conducted by the same audit firm. The audit report is of the overall cell company supported by individual cell detail. Each ICC will have its own actuarial report and while not necessarily required it will often be conducted by the same firm. Since cells within an ICC structure can contract with one another the ability to share expenses offers cost-effective reinsurance and pooling structures.A similar segregated asset structure to the ICC is the series LLC pioneered by Delaware in 1996. It actually predated Guernsey’s PCC legislation. While originally used in the real estate industry it was adapted for captives with the first series LLC captive licensed in December 2010. It became a very successful and popular structure resulting in Delaware updating its legislation in 2015 making it specific to captive insurance companies. Similar to ICCs, each series is an independent corporate entity, an LLC contracting on its behalf and allocating shared expenses among the cells. Each cell has its own separate board of directors.Cell structures have become very common in the captive insurance industry but there have been ongoing concerns that they will not withstand legal challenges to the segregation of assets within cell structure. The most vulnerable structure is that of the PCC where the cell does not have a legal standing as the core contracts on behalf of the individual cell.

Case studies

In 2015 an interesting case provided insight into the legal separation of a PCC. PacRe 5-AT v Amtrust North America was a demand for arbitration based upon alleged breaches of a captive reinsurance agreement. PacRe 5-AT was a protected cell established by Pacific Re, a PCC domiciled in Montana. An insurance company AmTrust North America issued a reinsurance contract to Pacific Re on behalf of PacRe 5-AT.AmTrust North America filed a motion for arbitration against the core cell of Pacific Re as well as the protected cell PacRe 5-AT. Pacific Re then requested a judicial declaration that the defendant’s Demand for Arbitration would apply only to PacRe 5-AT and not the core cell Pacific Re. This is the specific issue concerning PCCs. Can there be segregation when the core contracts on behalf of individual cells?The principle is that as a PCC, PacRe 5-AT is not a separate legal entity. It is a “non-existent” legal entity and, as Pacific Re contracts on behalf of PacRe 5-AT, it is party to arbitration. As a result, the assets of Pacific Re could be exposed to arbitration. Furthermore, in Montana there is a statutory distinction between incorporated and unincorporated protected cells. The defence is that regardless of the legal structure, by statute, each cell owns its individual assets and liabilities.The court declared that Pacific Re was properly a party to be named in the arbitration. It reached this conclusion as PacRe 5-AT was not a separate legal entity. In spite of assets and liabilities being clearly segregated from the core and other cells the fact that the protected cell, unlike an incorporated cell or series LLC, did not have any separate legal status was the determining factor.The issue has still not been conclusively determined as the case was resolved before arbitration. However, as a result of the suit, Montana amended its legislation eliminating PCCs, but allowing for ICCs and series LLCs. However, the issue is becoming an increasingly moot point. Most jurisdictions have adopted series LLC and ICC legislation under which the legal segregation of assets and liabilities is clearly delineated.While the segregation of assets within the PCC framework may be challenged, there are applications due to the fundamental principle that the cell is not a separate entity. This can be a particularly effective structure for entities such as a public entity which cannot own a pure captive. The entity is a participant, but not the owner of a cell.