The energy industry in the U.S. is often categorized into several sectors, including oil and gas, wind, solar, and coal and they collectively generate about $400 million in annual revenue. Energy, without a doubt, is big business, but it’s not all good news. Mid-market energy businesses and contractors contend with major risks which may be excluded from commercial insurance coverages. If coverages do exist, they’re often expensive, which can affect a business’s bottom line. If a loss occurs, owners may be on the hook for high out-of-pocket costs.
Enter captive insurance—insurance companies that businesses can form to insure their specific risks. Common exposures such as seepage and contamination, regulatory changes, cyber attacks, and many others can be covered under a captive arrangement. This short, animated video explains.
Have questions? Call Capstone at 1.800.500.3190, or submit your information via the form. One of our experts will be in touch. We’ll discuss how we can help you or your client form a captive insurance company to insure the risks of your energy business.
Long term pollution hazards, such as seepage of liquid or gas into groundwater can adversely affect energy companies in a variety of ways. Onshore and offshore pipelines, underground pipes, and more can lead to seepage and contamination, have the potential for long-term legal court battles, costly reputation management tactics, and costs related to clean-up. Seepage and contamination, along with other pollution-related risks, plague many businesses working in energy.
Additionally, mid-market energy organizations, their contractors, and their vendors are often on the receiving end of impactful regulatory changes – new legislation continues to dictate standards on pollution and environmental safety.
At the federal level, the U.S. Department of Energy (DOE) has the broadest responsibilities in regulating power generation and electric transmission, distribution, and retailing across the country. Adhering to the DOE’s changing standards on environmental impact, efficiency, and security of key infrastructure undoubtedly means increased risk.
Forming a captive insurance company ensures that these risks and more are funded with broader, tailored coverages, even when excluded by a commercially-available policy.
Fund Losses, Fight Energy Risks
In the conventional insurance market, energy insurance coverages are available, but they can be extremely limited. The fact is, the inconsistencies in coverage and policy triggers from insurer to insurer put business owners in a precarious situation: they often pay more to obtain full, comprehensive coverage.
One type of coverage readily seen in the conventional market is the standard Insurance Services Organization (ISO) Commercial General Liability (CGL) policy. Its form has a list of 17 specific coverage exclusions listed in the policy. Of course, separate coverages are available but they come at an extra cost to the insured. The moving parts of energy projects and the industry in general, require a risk management solution that can be customized to fit a company’s unique needs.
With captive insurance, energy business owners can insure their risks, utilize more comprehensive coverages, and mitigate the potential for serious financial and operational losses.
Sample coverages include:
- Seepage and Contamination
- Regulatory Changes
- Cyber Attacks
- Physical Damage to Equipment
- Property Damage
- General Liability
- Supply Chain Breakdown
- Legal Defense
- Employment Practices Liability
The benefits of forming a captive insurance company can be fully realized when business owners partner with an expert captive management team, like Capstone Associated Services. Keep reading to learn more.
So here’s how it works:
Energy companies pay premiums to the captive insurance company, just as they would to a commercial insurance company. Funds accumulate inside the captive and can fund losses in the case of a loss event. IRC 831(b) captives offer a 0% Federal income tax paid on the captive’s underwriting profits.
Moreover, if there is undistributed earned surplus, i.e. there are no claims made in a given year, the funds can be distributed as a dividend or as a secured loan back to the operating company. Premium costs are lower, because in the commercial markets, “special” coverages tend to be more expensive. These coverages may not be available at all commercially. Business owners have better control over their risk management efforts, more comprehensive coverages, and a more advantageous planning solution.
Bottom line: Captive insurance for energy companies is a powerful alternative to commercial insurance alone. Savvy business owners in energy who form their own captive insurance company can count on a new level of risk management, as they combat risk in such a competitive industry.
Attorney-led Captive Planning for Energy Businesses
Capstone is the most integrated and largest outsourced provider of captive insurance services for the U.S. middle market. In association with The Feldman Law Firm LLP, Capstone offers platinum level attorney-led captive planning and administers property & casualty captive insurance companies that provide alternative risk financing services throughout the U.S.
Now in its CAP_YEARS_SUPER year, Capstone provides turnkey services usually under a joint engagement with The Feldman Law Firm LLP, to businesses in the energy industry, and many others.
Unlike most other captive management companies, Capstone’s turnkey service providers do not disclaim tax and legal support. The company has an award-winning track record for standing with clients in the design, implementation, ongoing management, and defense of their property & casualty captive insurance programs. Capstone has successfully administered and successfully managed over CAPTIVE_FORMATIONS captives since 1998. The Feldman Law Firm LLP has experience in more than TAX_CONTROVERSIES tax controversies, all to successful conclusions.
Capstone's staff of insurance professionals includes Chartered Property & Casualty Underwriters, Associates in Risk Management, accountants and administrators, in addition to the affiliated The Feldman Law Firm LLP's tax, corporate, financing and regulatory lawyers, and outside CPAs, risk managers, property & casualty professionals, and actuaries.
Together, this team offers middle market companies the most comprehensive risk planning solution available.
Learn More About Captive Insurance
- Get the basics. "Captive Insurance Explained in Plain English" provides a simple overview of how captives work without the industry jargon.
- Want a little more depth on captives? Check out our Captive Insurance page for more information.
- See captives in action with "7 Ways Businesses are Using Captive Insurance."