An experienced bench (Delaware)
Constitution is a newly formed company located in Wilmington, Delaware. It is owned and operated by M.R. Mead & Company, Inc., a licensed agency in Chicago and the principal of Caitlin-Morgan Insurance Services of Carmel, Indiana, a licensed wholesaler and managing general agency. As such, it accepts business from approved retail agencies.
The structure of Constitution is that of a series LLC with independent entities beneath it, called series business units (SBUs). These entities can take any form, such as a C corporation, an S corporation, a limited liability company, a partnership, a trust, a department of a company or any other legally recognised structure. Under Delaware law, each unit and its assets and liabilities are separate from the actions of the other entities. There exists a legal ring fence to protect the assets of one SBU from creditors of another SBU.
Statutorily, the entity is formed under Delaware’s alternate corporate laws and then licensed by the Department of Insurance. This is a complex process requiring knowledgeable professionals, but the Delaware regulators are prepared for the effort, and each new entity is formed quickly.
In Delaware, it pays no state premium tax. The capital and surplus are computed for each unit with no statutory minimum. The SBU would be subject to federal tax however. The state tax is computed on the core company and all of the premiums of its SBUs.
The advantages offered to Constitution’s clients include ease of entry and exit, flexibility in cost and regulation in a jurisdiction recognised globally for its business acumen.
"There is a time commitment, which can be frustrating. Captives per sea do not make money for the owner. Committed owners use their captive to make money. This commitment demands time-- time taken from the client's core business."
M.R. Mead and Company, Inc. is a firm well known for its innovation, credibility and reliability in the world of alternative risk finance. Caitlin- Morgan is well known as a successful operator of programmes for various professions. The president of Constitution is Michael Mead, CPCU, and Chris Murray, CPA, is executive vice president. Together, they complete a solid management team with years of experience and are engaged with a network of strong resources.
Currently, Constitution is working with several private firms to establish structures to help them manage their risk in a more costefficient manner. By financing their own risk to a larger or smaller degree, the clients have the ability to integrate a more cost-efficient tool into their overall balance sheet.
Many of these same efficiencies are available to the owner of a stand-alone captive, but increasingly, Mead and Caitlin-Morgan have learned that many firms do not want to be in the insurance business. The day-to-day requirements of owning a captive, even when managed by others, can be a significant distraction from the client’s core business focus.
Beyond the financial commitment, which can persuade smaller firms to not set up a captive, there is the fiduciary responsibility of owning an insurance company when you are not familiar with their proper use and operation. By owning such a company and serving on the board and committees, the owner has now greatly expanded its exposure to fiduciary issues that may not be clearly understood.
There is a time commitment, which can be frustrating. Captives per se do not make money for the owner. Committed owners use their captive to make money. This commitment demands time—time taken from the client’s core business.
By choosing to own a cell, the client may avoid the cost in time and money of learning about insurance company protocols and customs. Constitution’s board, which includes two former captive domicile regulators, serves as the board for the client’s interests. Essentially, the client receives the benefits of owning a captive while eliminating many of the liabilities.
An agency could establish an entity to act as an agency captive, ceding risk from one of its traditional carriers into Constitution and the specific unit beneath Constitution. The unit could be further subdivided to offer an individual entity to each customer. This reinsurance transaction is also free of Delaware tax.
A group or association could have an entity with a sub-entity for each member. The group cell could function as a risk pool for the separate units.
A wealthy individual or family could establish an SBU owned by a trust, with the beneficiaries as third parties or even a charity or charitable foundation. Multiple exposures could have their own SBU.
By using Constitution, the SBUs use their money more efficiently. This is because the SBUs only cover their actual exposure, and do not fund for a regulatory minimum, thereby eliminating having capital that is not producing a return. By not paying Delaware insurance taxes, the costs of the structure are less than comparable structures in other domiciles. Constitution offers greater efficiency in the use of your risk dollars.
The structure, a series limited liability company, has until now been used in the world of financial planning for high net worth individuals and family offices, and for investment vehicles. Not all states have enacted legislation to permit their formation. Delaware has been a leader in these structures as it has for many other types of corporate and business regulation. Working with outside legal counsel, the Department of Insurance put enabling legislation in place and licensed the first captive under this law in 2010. More than three dozen such captives were formed as a result and now other domiciles are drafting similar legislation.
Now more than ever, it makes sense for the successful business owner or association of businesses or high net worth individuals to look more closely at a captive, especially Constitution Insurance Company. We can help you choose the right structure to address your coverage and risk-financing challenges, and turn a dead balance sheet item into a profit-making entity.
Mike Mead is president of Constitution. He can be contacted at: firstname.lastname@example.org