Cotney Blogs

Is a Warranty Captive Right for You? featured image

Is a Warranty Captive Right for You?

If you are a business owner, you are likely familiar with various insurance policies and warranty provisions. But you may not know that much about captives.

A captive is a licensed insurance company that, as the insured party, you can own and control. A warranty captive is a type of captive insurance. By having one, you would be self-insuring your extended warranties.

Understanding the Benefits

When you own the company that insures your warranties, your premium payments are no longer sunk into the profits of another company. Instead, you have more control over your capital. In addition, customers will more easily trust and respect your business because you are selling your services and products, as well as insuring their quality. By utilizing this self-insurance method for your warranties, you will likely increase your profits and strengthen customer loyalty.

In addition, captive owners can see tax benefits. Many are allowed to deduct the premiums they pay to their self-owned captive against their taxable income. While captives do recognize premium income, it can be offset with currently deductible loss reserves, which reduces or eliminates federal income tax liabilities. Plus, many states do not tax qualified captive insurance companies’ net income.

How Captives Serve Construction

As we all undoubtedly know, the construction industry can be risky. Every day, workers face hazards related to using heavy equipment, moving raw materials, climbing ladders, and lifting supplies. In addition, every project involves dangers surrounding weather, engineering, suppliers, human safety, and other concerns. So, managing risk in construction can be challenging.

Most companies try to find ways to minimize risk, but when they use commercial insurance, they often must pay higher premiums to help offset the insurance costs for less careful companies. Keep in mind, insurance companies want to make a profit from their entire portfolio of clients, so if they have pricey claims to pay for some companies, all their clients must pay high premiums.

As a result, many construction companies with strong performance and safety records turn to captive insurance companies as a strategy for self-funding appropriate levels of risk. Such companies understand that by combining robust risk control with assuming some of the risk, they often can “capture” underwriting profits that otherwise would go to commercial insurers. When companies self-fund for potential losses based on their actual individual performance, they can enjoy lower insurance expenses overall.

In addition to warranty captives, other construction risks can be covered by captive insurance. These include construction defects, general liability, and cybersecurity.

Setting Up a Captive

If you are considering setting up a captive, keep in mind that it is a long-term commitment. You must be willing to be in the insurance industry, knowing that you will take on and share insurance risk. Also, captives are most effective when they are part of an overall risk-reducing plan.

Depending on where your company is located, captives can be highly regulated. In addition, regulations vary based on if your captive is off-shore (outside the United States) or on-shore (inside the United States).

As you make plan to set up a warranty captive, be sure to seek legal counsel. There are many risk-management issues to consider, so an experienced construction attorney can review your situation and help you determine how a captive can best serve your company.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.