Captives and Insurance Policies/Contracts

In my opinion, the ability to draft your own insurance policies is one of the largest advantages of a captive insurance company.  However, it's very difficult to explain to the non-lawyer why this is such a great benefit.  To the uninitiated, this is at best an advantage that barely gets past a "ho-hum."  Words are words, phrases are phrases, and the placement thereof is not important.  But as attorneys who draft documents on a regular basis,the choice of words, the nature of a phrase and all other manners of writing English is our milieu; the placement of a word of phrase can make or break a document.  Let me provide two examples, one from the captive world and one from the non-captive world. 

The parties in "Frigaliment Importing, Co, v. B.N.S. International Sales Corp. (190 F. Supp. 116, SDNY 1960) were engaged in the poultry business.   The defendant agreed to sell "chickens" to the plaintiff.  Simple transaction, right?  The problem arose when the plaintiff and the defendant disagreed on exactly what a "chicken" was.  Because both parties defined chicken differently, the product supplied by the defendant to the plaintiff was considered sub-standard by the plaintiff, leading to very expensive litigation.  This entire situation could have been avoided if both parties had agreed to define "chicken" in the contract.  In fact, a well-written contract will have an entire section devoted to definitions to avoid this very type of misunderstanding. 

In the captive world, consider the case of Beech Aircraft (Beech Aircraft v. U.S., 1984 WL 988 at 1) who had an insurance policy which gave the insurance company complete control of insurance counsel throughout the entire litigation process.  The company did not like insurance appointed counsel during a very expensive product liability case, and went so far as to file a motion to have the court remove counsel.  The court denied the motion and Beech eventually lost the case, facing an adverse judgment of over $17 million dollars.  Beech formed a captive to gain complete control of counsel in the event of a lawsuit.

Because an insurance transaction is viewed more as a sale then a contract negotiation, the parties pay remarkably little attention to the contents of the policy, nor do they consider how beneficial it would be to re-draft the document to their liking.  For example, suppose we define the terms of a cyber liability policy very broadly, so that a breach would occur in a wider variety of circumstances.  This would allow the parent company to have far broader coverage for its cyber exposures.  Or consider the addition of a clause in the claims section of a policy that stated minor mistakes in the claims submission process would not jeopardize the claim itself.  Both of these additions are very beneficial to the insured -- and would therefore not be included in the average policy.

Let me leave you with a most egregious example.  Over the last year, I reviewed a policy for a client.  I wrote a basic legal summation of the policy and returned it to him.  During the call where we reviewed the analysis, he asked for the "quick down and dirty."  I told him that there was literally no way the insurance company would ever pay on the policy -- the language was that restrictive.  And while the company might argue that the policy was an adhesion contract and would therefore be interpreted against them by a court, the reality is the adhesion contract concept is a great law school exam answer that has little effective application in the real world.  

As the examples above illustrate, writing your own policy gives you complete control of the transaction -- a benefit no third-party insurance company would ever allow you to have.