On June 19, 2015, Governor Pat McCrory signed new legislation amending the North Carolina Captive Insurance Act. Former House Bill 163 was described as making various clarifying and technical changes to the Act. Of particular interest are a number of changes to that portion of the Act regulating Protected Cell Companies.
Protected Cell Companies are a relatively new invention in the captive world, though they have been likened to Series LLCs used in other captive jurisdictions. Potentially, an interested owner, instead of creating a pure captive insurer could instead be a participant in a Protected Cell Company by creating a cell within the Protected Cell Company. That cell would hold only the risks of the particular participant, and its risks could only be satisfied out of the assets of that particular cell. Conversely, the assets of that cell would not be at risk from the liabilities of any other cell.
Anecdotally speaking, based solely on the correspondence I’ve had with out of state captive managers and potential clients, there is a lot of interest in being a part of, or even creating, a Protected Cell Company in North Carolina, so it will be interesting to see if the new legislation has any effect on that out of state interest.
At a brief glance, the legislation appears to attempt to clarify and provide answers for some of the questions that arose when Protected Cell Companies were first seeking approval from the North Carolina Department of Insurance. However, there are also some new substantive provisions that have been added in.
The new legislation now explicitly recognizes that a protected cell company may issue shares in cells:
“§ 58-10-513. Cell shares and cell dividends.
(a) A protected cell captive insurance company may create and issue shares from any of its protected cells, the proceeds of which shall be included in the assets attributable to the cell from which the cell shares were issued.
(b) The proceeds of the issue of shares other than cell shares created and issued by a protected cell captive insurance company shall be included in the protected cell captive insurance company’s general account.
(c) A protected cell captive insurance company may pay dividends to cell shareholders from assets attributable to such cell in accordance with the provisions of G.S. 58-10-375.”
A new statutory provision has been added to require certain disclaimers to be made by the Protected Cell Company:
“§ 58-10-517. Company to inform persons they are dealing with protected cell captive insurance company.
A protected cell captive insurance company shall inform any person with whom it transacts business that it is a protected cell captive insurance company, and for the purposes of that transaction, identify or specify the protected cell with which that person is transacting, unless that transaction is not a transaction with a particular protected cell, in which case it shall specify that the transaction is with the protected cell captive insurance company’s core.”
Finally, the legislation provides more clarification regarding the differences between protected cells and incorporated cells.
Protected cells are explicitly given the authority to disassociate from the Protected Cell Company with Departmental approval, and further are given the authority to contract with other cells within their Protected Cell Company as well as with the Protected Cell Company itself.
“(q) A protected cell of a protected cell captive insurance company may be transferred to another protected cell captive insurance company or may be converted into another captive insurance company upon the approval of a transfer agreement or conversion plan by the Commissioner. All assets and liabilities of the protected cell immediately before the transfer or conversion shall remain the assets and liabilities after the transfer or conversion. All actions and other legal proceedings which were pending by or against the protected cell immediately prior to the transfer or conversion may be continued by or against the protected cell or the captive into which the protected cell converts.
(r) A protected cell of a protected cell captive insurance company may enter into a contract with its protected cell captive insurance company or with another protected cell of the protected cell captive insurance company that shall be enforceable as if each protected cell of the protected cell captive insurance company were a separate legal entity, even if the protected cell is not organized as an incorporated protected cell.” (N.C.G.S. §58-10-510).
The power of incorporated cells to act as their own very separate and distinct entities is also further expounded:
“(e) It is the intent of the General Assembly under this section to provide protected cell captive insurance companies with the option to establish one or more protected cells as a separate corporation or other legal entity. This section shall not be construed to limit any rights or protections applicable to protected cells that are not incorporated protected cells.
(f) Subject to the prior written approval of the protected cell captive insurance company and of the Commissioner, an incorporated protected cell shall be entitled to enter into contracts and undertake obligations in its own name and for its own account. In the case of a contract or obligation to which the protected cell captive insurance company is not a party, either in its own name and for its own account or on behalf of a protected cell, the counterparty to the contract or obligation shall have no right or recourse against the protected cell captive insurance company and its assets other than against assets properly attributable to the incorporated protected cell that is a party to the contract or obligation.” (N.C.G.S. §58-10-512).
If you would like to discuss the formation of a captive insurance company, please contact me at 704-489-2491 or at email@example.com.