March 22, 2021

SPACs: The Captive Insurance Alternative

With SPACs & their directors increasingly being targeted for litigation and the D&O insurance market tightening, this Morgan Lewis memo says that captive insurance may help provide a solution:

Captive insurance is a solution to fill coverage gaps or a means to control insurance terms and conditions. A captive insurer is a wholly owned subsidiary that is licensed to insure the risks of its affiliated companies through the issuance of insurance policies in exchange for the payment of a premium. A specialized actuary retained by the captive typically sets the premium, which is composed of a loss reserve and a risk margin. Captive insurance can be utilized flexibly at any “level” of the insurance tower, or at varying levels dependent on the risk insured.

The memo details some of the economic advantages of captive insurance, including the ability to invest the risk premium and tailor coverage, access to reinsurance markets, and tax benefits.  In addition, if properly structured, the coverage provided by a captive will be “insurance” under Delaware law and not subject to statutory restrictions applicable to rights to indemnification.

John Jenkins