G. Kristin Delano, Esq.
Lenders customarily require mortgagors to maintain windstorm coverage on their properties. There are a number commercial property owners, however, who would prefer not to purchase the insurance, but instead would like to take their chances. The captive insurance solution is a way for both parties to have their way.
The captive structure otherwise described on this site, while it qualifies as insurance, is for all practical purposes, self insurance. The ownership of the property is typically in a special purpose entity (SPE) - frequently a limited liability company. The premium paid by the SPE is reasonable in relation to the risk and transfers a risk where it is distributed inside the insurance company. It will qualify as insurance.
The people who own the special purpose entity, however, provide the rest of the financial backing for the policy – cash and letters of credit. From their point of view, it is self insurance.
The coverage doesn’t need to be limited to a self insured retention. Instead it can cover 100% of the wind risk.
The policy and the reserves held with respect to the policy can be assigned to the mortgage holder. The mortgage holder doesn’t need to be concerned with the identity of the captive, because it will hold letters of credit and cash reserves equal to the policy limits. The mortgage holder will be delighted. It not only has full coverage for the wind exposure, but it now has a source of significant additional deposits.
Both parties win.
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