How a Captive Program Can Help Construction Firms

By rbc_adm | | Captive Insurance, Captive Insurance Policy

Your business can prevent adverse outcomes by implementing alternative risk management strategies, such as establishing a captive program. At the onset of any signed contract, businesses should consider several moving parts—including risks. For construction firms, these include unpredictable weather that disrupts operations, equipment damage, and regulatory changes that may result in significant out-of-pocket expenses.

What Is a Captive Insurance Company?

Captive insurance companies are a type of insurance company wholly owned and operated by a parent company or a group of affiliated companies. The concept behind a captive program is that instead of relying on a third-party insurer, the parent company creates its own insurance company to cover its unique risks.

The beauty of a captive insurance company lies in its flexibility. They can provide coverage for risks that traditional insurers do not typically cover. Depending on the parent company’s preference and the regulatory environment, they can be located in various locations, whether onshore or offshore.

Why Do Construction Firms Need a Captive Insurance Company?

Regarding construction insurance coverage in the conventional market, options are available but often need to provide complete, comprehensive coverage. Inconsistencies in coverage across different insurers can leave business owners feeling vulnerable and often result in higher costs.

Take the standard Insurance Services Organization (ISO) Commercial General Liability (CGL) policy, for example. While it is a typical coverage in the conventional market, it has a list of 17 specific coverage exclusions in its policy form. Separate coverages are available, but they come at an extra cost. It leaves construction business owners with the difficult task of finding an affordable risk management solution simultaneously tailored to their unique needs.

By utilizing captive insurance, construction businesses can insure their own risks, take advantage of more comprehensive coverage, and better mitigate the potential for severe operational and financial losses.

Sample coverages include:

  • Workers’ Compensation
  • Product Warranty
  • General Liability
  • Product Liability
  • Owner-Controlled Insurance programs (OCIPs)
  • Construction Defect and Rework
  • Contractor-Controlled Insurance programs (CCIPs)
  • Environmental
  • Property
  • Terrorism
  • Cyber

How Does a Captive Program Work?

Similar to commercial insurance companies, construction companies pay premiums to captive insurance companies, which accumulate funds to cover any losses in the event of a loss event. Captive insurance companies operating under IRC 831(b) benefit from 0% Federal income tax on their underwriting profits.

When no one makes a claim in a year, the undistributed earned surpluses will be distributed as a dividend or secured loan back to the operating company.

Premium costs also tend to be lower in captives, as “special” coverages that are often more expensive in the commercial markets may not be available.

About RBC Insurance Associates

As an independent insurance agency, our clients’ interests come first at RBC Insurance Associates. Our goal is to provide a comprehensive, tailored insurance program that addresses your needs. We accomplish this by working with some of the finest insurance companies in the industry with the highest ratings. We will negotiate on your behalf to get the best policy terms and pricing for your program. Here is just a sample of our leading insurance carriers.

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