New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on December 5, 2003, representing the position of the New York State Insurance Department.

Re: Definition of "Industrial Insured" Under the New York Captive Insurers Law

Questions

1. What constitutes an "industrial insured" under the New Yorkcaptive insurers law (the "Captives Statute")?

2. What types of legal entities may be used to qualify as an industrial insured under the Captives Statute; i.e., may a co-op, LLC or other type of entity qualify as a captive parent?

Conclusions

1. To be an industrial insured under the Captives Statute, an entity must itself have a net worth of at least $100 million or be a member of a holding company system whose net worth is at least $100 million.

2. The Captives Statute does not specify the types of entities that may or may not qualify as "industrial insureds". Thus, a corporation, partnership or Limited Liability Company ("LLC") could qualify. However, any form of organization that consisted of a loose amalgam of unrelated entities not subject to centralized control would not qualify as an "industrial insured".

Facts

This inquiry is on behalf of several New York automobile dealers interested in using a captive insurer for gap insurance as defined under N. Y. Ins. Law § 1113(a)(26)(A) (McKinney Supp. 2003). The net worth of each dealer averages approximately $15 million.

Analysis

Under the Captives Statute, only an "industrial insured" may form a "pure" captive insurer, and only a group of industrial insureds may form a group captive insurer. The applicable statute provides, in pertinent part, as follows:

§ 7002. Definitions. In this article:

* * * *

(c) "Captive insurance company" means any pure captive insurance company or any group captive insurance company licensed to do a captive insurance business under the provisions of this article.

* * * *

(e) "Industrial insured" means an insured:

(1) whose net worth exceeds one hundred million dollars; [or]

(2) who is a member of a holding company system whose net worth exceeds one hundred million dollars;

* * * *

(f) "Group captive insurance company" means any domestic insurance company licensed under the provisions of this article for the primary purpose of providing insurance or reinsurance covering the risks of the industrial insureds that comprise the industrial insured group.

(g) "Industrial insured group" means any group of unaffiliated industrial insureds that are engaged in similar or related businesses or activities, however, the metropolitan transportation authority shall not be a member of an industrial insured group, and that collectively:

(1) own, control or hold with power to vote all of the outstanding voting shares of stock of a group captive insurance company incorporated as a stock insurer; or

(2) represent one hundred percent of the voting members of a group captive insurance company organized as a mutual insurer.

(h) "Pure captive insurance company" means any company that:

(1) is a subsidiary of an industrial insured which is one hundred percent owned by or is a statutory subsidiary of the industrial insured; and

(2) is licensed under the provisions of this article for the primary purpose of providing insurance or reinsurance covering the risks of its parent and affiliated companies.

N. Y. Ins. Law § 7002 (McKinney 2000).

As indicated by the above-quoted section, an "industrial insured" must meet the $100 million threshold, and only an "industrial insured" may form a "pure captive". Similarly, each member/owner of a "group captive" must also qualify as an "industrial insured". Thus, the $100 million net worth threshold applies not only to the owner of a "pure captive" but also to each individual member of a group captive. Therefore, entities with smaller net worths may not aggregate their respective net worths to form a group captive.

An exception to this anti-aggregation concept contained in the Captives Statute minimum net worth requirement is the fact that the "industrial insured" threshold may also be met by all the members of a "holding company system". That is, each of the members of a "holding company system" need not have a net worth of $100 million if the holding company system as a whole meets the requirement. The terms "holding company" and "holding company system" are not defined in the Captives Statute, but are defined under Article 15 of the New York Insurance Law as follows:

"Holding company" means any person who directly or indirectly controls any authorized insurer.

"Holding company system" means a holding company together with its controlled insurers and controlled persons.

N. Y. Ins. Law § 1501(a)(3) & (6) (McKinney 2000).

It should be noted that the definitions contained in Article 15 are specifically stated to apply only "for purposes of Article 15", i.e., in the context of insurance holding companies. The relevance of that Article in the captive insurance context is questionable in that a prospective "industrial insured" would not be an insurance company. Nevertheless, the term "holding company" is also generally used in corporate law to mean a company formed to control other companies, usually through the ownership of the stock of its subsidiaries. See Black’s Law Dictionary, p.275 (7th ed. 1999). This latter concept of a holding company system1 appears to be the type intended in the Captives Statute context.

Accordingly, under the Captives Statute, a corporate holding company system may form a pure captive where the aggregate net worth of all the members of the "family" (i.e., parent and subsidiaries) totals at least $100 million. With respect to this specific inquiry, the Captives Statute would allow a holding company system comprised of affiliated dealerships to form a pure captive provided that the total net worth of the corporations in the system met the $100 million threshold. This structure would necessarily require the merger/acquisition of the independent dealers.

Similarly, a partnership or LLC made up of such dealerships who joined as partners/members pursuant to a bona fide partnership/membership agreement could form a captive in that the partnership or LLC, viewed as an entity, would meet the net worth threshold.

Finally, a "co-op" structure would not appear to suffice in that, under such a structure, the individual members remain discrete entities, are not subject to centralized control and the co-op itself does not have its own identity as an entity but is rather an association of its individual members. Furthermore, a co-op arrangement itself has no assets and thus no net worth for purposes of complying with the threshold.

For further information one may contact Supervising Attorney Michael Campanelli at the New York City Office.


1 Which, but for the fact that Article 15 is limited in application to insurance company parent/subsidiary structures, is nevertheless quite similar in that it contemplates a structure in which a corporate parent controls subsidiary entities.