QUESTIONS AND ANSWERS – REAL PROPERTY

G. Kristin Delano, Esq.

 

 

Question:       Do you recommend using segregated cells for the insurance written for my real estate?

Answer:          Not unless there are 12 or more insured entities in the segregated cell.  If an ownership group has a number of insured entities, they could put all of their insureds in a segregated cell.  Otherwise, a segregated cell can not be used as there would be no distribution of risk. Each cell is treated pretty much as a separate insurance company.  Please see Rev Rule 2002-89, Rev Rule 2008-08 and Notice 2008-19 on the sidebar to this website.  Also beware of the trap as to single member LLC’s.  Please see Rev Rule 2005-40 on the side bar of this website.

Question:       If my assets aren’t in a segregated cell, how is my capital protected from the claims of other PEO’s?

Question:       Do you recommend using segregated cells for the insurance written for my real estate?

Answer:          Not unless there are 12 or more insured entities in the segregated cell.  If an ownership group has a number of insured entities, they could put all of their insureds in a segregated cell.  Otherwise, a segregated cell can not be used as there would be no distribution of risk. Each cell is treated pretty much as a separate insurance company.  Please see Rev Rule 2002-89, Rev Rule 2008-08 and Notice 2008-19 on the sidebar to this website.  Also beware of the trap as to single member LLC’s.  Please see Rev Rule 2005-40 on the side bar of this website.

Question:       If my assets aren’t in a segregated cell, how is my capital protected from the claims of other PEO’s?

Answer:          If the captive’s entire obligation with respect to each policy written is 100% reserved with a combination of premium paid by the insured plus capital supplied by the group that owns the insured, there is no way that the claims of one insured can exceed the capital supplied either by the insured or its owners.

Question:       What value of real estate must be insured for the captive program to be economical?

Answer           The principal variables to be considered are:

The insured value of the real estate (can be the aggregate of separate buildings at separate locations);

The percentage of the insurance premium that can be passed through to third party tenants; and

The amount of commercially reasonable premium that can be charged for the coverage given the buildings’ location.

Generally speaking, you are going to need to have a total insured value approaching $20,000,000 or more for such a program to be profitable for you.

Question:       Can I use a captive to insure something other than the windstorm deductible?

Answer:          Yes.  In Florida we have a problem with windstorm deductibles, but the structure will work for any number of coverages.  For example it could be used to cover earthquake, hail, structural damage from active soils (in such places as Texas), excess flood insurance, sign damage etc. 

Question:       Does this program work for condo associations or apartments?

Answer:          This is a program for lessors who pass through their operation costs to third party tenants as a common area maintenance expense – such as commercial office buildings or shopping centers.  Generally neither condo associations nor apartments pass through common area maintenance expenses.  Similarly, if the commercial property is owner occupied, there is no reason to use this captive program. 

Copyright © 2008 by Biber O’Toole Delano Fowler and Clarkson P.L., St. Petersburg, Florida.  All rights reserved.