North Carolina designed its North Carolina Captive Insurance Act (Captive Insurance Act) to be user-friendly for captive insurers, captive management companies, and clients who desire to set up their own captive insurance regime. As part of this regime, the State has allowed the creation of a Protected Cell Captive structure, and has further allowed for the innovation of incorporated cells within the Protected Cell Captive structure. For the right client, an incorporated cell can provide increased structural flexibility.
A Protected Cell Captive (PCC) is a creation that allows a number of insureds who have agreed to participate in the PCC (the participants) to take part in a captive insurance company while at the same time having each participant’s particular assets segregated into a separate cell (the protected cell). Each protected cell’s assets are statutorily protected from the claims arising from each other protected cell. The PCC creates cells for the participants and manages the day to day insurance operations of each cell. A traditional protected cell has some attributes of a corporate entity: for example, each cell is accounted for separately, its assets are protected from the claims and liabilities of other cells, and, absent an agreement to the contrary, the protected cell can be migrated from one PCC to another PCC. However, a traditional protected cell is not a legal entity.
North Carolina is one of a few jurisdictions that have revised the Protected Cell Captive by allowing the creation of fully incorporated cells within the PCC. Unlike the traditional protected cells, an incorporated cell is by definition a separate and distinct legal entity. The incorporated cell must meet all other requirements of a captive insurance company, and shall have its own directors and registered office. Though the incorporated cell, like a protected cell, participates within the PCC structure, it has its own separate and distinct legal existence and is somewhat akin to being a pure captive company under the control of the PCC.
The incorporated cell may give captive clients additional flexibility when entering into a captive regime. As with a protected cell, a client may create an incorporated cell and take part in the managed structure of a PCC, and thus benefit from economies of scale. In addition, however, an incorporated cell can offer a client additional protection, control and end-use freedom.
The North Carolina Captive Insurance Act specifically provides that:
No asset of a protected cell shall be chargeable with liabilities arising out of any other insurance business the protected cell captive insurance company may conduct. N.C.G.S. 58-10-510(g).
Though this provision creates a liabilities firewall between the different cells, many clients would be more comfortable with a cell that has its own corporate entity. This incorporated structure then provides the cell not only with the statutory protection of the Captive Insurance Act, but the longstanding protection traditionally accorded corporations in North Carolina’s statutory and common law.
An incorporated cell also gives the client potentially more control over the day to day operations of the cell. A traditional protected cell is a creature of both the statute and the participation agreement entered into between the PCC and the client. As such, the PCC will traditionally maintain most of the control over any protected cell within its structure. The incorporated cell, however, may have its own separate board of directors and officers , allowing for potentially greater day to day management control by the client, if the client so desires.
The most important flexibility that an incorporated cell may potentially offer a client is the potential for that cell to more cleanly disassociate from the PCC and either migrate to a different PCC or even become its own captive insurer. By statutory definition, an incorporated cell has to meet all of the other requirements of a captive insurer, including, but not limited to, organizational and financial requirements. Unless otherwise prohibited by the PCC’s participation agreement with the incorporated cell, that cell has three ongoing options:
- It may continue in a participation agreement with its current PCC.
- It may migrate to and participate with a different PCC.
- It may spin off into its own captive insurance company.
Also, because an incorporated cell is its own separate entity, it has far greater freedom and ability to contract with other entities (including other cells) than would a traditional protected cell.
Therefore, an incorporated cell regime of PCC can potentially let a client have its cake and eat it too: the client may reap the benefits of economies of scale and management experience by participating within a PCC structure. But the client can, if it later decides to assert more control over the process, move its cell or even disassociate from the PCC in order to become its own, fully-functioning captive insurer. Using an incorporated cell, a client may start out small as part of a PCC, and grow, if it decides to, into a full-fledged captive insurer. The choice is with the client.
Of course, an incorporated cell is not a one-size-fits-all solution for clients. For one thing, the heightened regulatory requirements will require additional cost, maintenance and expense over that which a traditional protected cell would cost. Furthermore, not all clients want to deal with the added responsibility of maintaining corporate formalities, and having to take additional responsibility for the decisions of the cell after all, for some of them, that’s why they wanted to be part of a PCC structure to begin with: ease of use and less daily responsibility.
Finally, an incorporated cell’s inherent flexibility could be limited by the relationship entered into with the PCC. If the PCC’s bylaws or operating agreement do not provide for a separate board of directors, then the cell is by default going to have the same directors as the PCC. Though all cells have the right to migrate from a PCC, and though an incorporated cell further has the right to disassociate and become a standalone captive, those rights can be waived in the applicable participation agreement with a PCC. Therefore, if a client is considering entering into a PCC and creating an incorporated cell, it should understand whether its participation agreement with the PCC limits the rights the incorporated cell would otherwise have to migrate and/or disassociate from the PCC.
North Carolina’s Captive Insurance Act has, within its Protected Cell Captive provisions, provided for the use of incorporated cells. Though this innovation is new, and currently limited to a handful of jurisdictions, it offers a number of benefits to the right client. The client can take part in the benefits of a Protected Cell Captive, while at the same time maintaining control as well as the right to become its own standalone company in the future.