In the United States, insurance is largely regulated at the state level. In most cases, property and casualty insurance is provided by “admitted insurers” which are insurance companies licensed to do business in the state in which the policyholder resides or the insured risk is located. The insurer is responsible to remit the premium tax due from the sale of an admitted insurer’s policy.
In some instances, a policyholder may procure insurance from an “unauthorized” insurer though a surplus lines broker. Surplus lines insurers are typically approved (but not licensed) by the state in which the policyholder resides or the insured risk is located. The surplus lines broker is responsible to remit the premium tax due from a sale of a surplus lines policy.
In most states, a third option exists through which a policyholder can directly purchase insurance from an insurer that is neither licensed nor approved in the state in which the policyholder resides or the insured property is located. The policyholder is responsible to remit the premium tax due in the case of direct procurements.
Washington State is one of a handful of U.S. jurisdictions that has not recognized the direct placement of unauthorized insurance. In fact, in Washington the purchase of unauthorized insurance other than through a surplus lines broker is known as “illegal unauthorized insurance.”
Illegal unauthorized insurance creates a basketful of problems for all those involved. First, the insurance company is engaged in the business of insurance in the state without a license – which can be a felony.
Second, neither the policyholder nor the insurer has a means to remit the premium tax due on the sale of policy which can lead to significant penalties. Third, the insurance contract issued by an illegal unauthorized insurer is voidable at the election of the policyholder.
Finally, any person making an insurance contract on behalf of an illegal unauthorized insurer is personally liable for performance of the insurance policy.
Despite these formidable consequences, several well-known Washington-based companies have been caught out purchasing illegal unauthorized insurance from their own captive insurance subsidiaries.
The Washington Insurance Commissioner graciously worked with the state legislature to recently enact a framework allowing captive insurance companies and their corporate owners to pay up to 10 years of back premium taxes and regularize the use of captive insurance companies in the State of Washington going forward.
CBI recently filed comments with the Office of the Insurance Commissioner
on this new captive program that would help prevent captives from leveraging approval to participate in this remedial program into a perception of regulatory supervision by the Office of the Insurance Commissioner. These comments would also help prevent insurance issued by a captive insurer from satisfying financial responsibility requirements.
Specifically, in order to protect the people of the State, WAC 284-2XX-230 should include within paragraph (1) the following limitations:
© Insurance issued by a captive insurer may not be used as proof of financial responsibility or offered to satisfy any financial responsibility requirement set forth in the laws and regulations of the State.
(d) No registered eligible captive insurer, its captive owner, or the captive owner’s affiliates may represent that the registered eligible captive insurer, or any aspect of the registered eligible captive insurer including its financial condition, is regulated, supervised, overseen, or monitored by the Commissioner.
As a part of its captive transparency initiative at www.captiveinfo.org
, CBI is also requesting the Office of the Insurance Commissioner to publish program registrations and premium tax filings of participating captive insurance companies online for public inspection.
RCW § 48.15.020(2)(b).
 Kreidler orders Starbucks, Alaska Air captive insurers to stop insuring risk in Washington state,
OIC (Dec. 31, 2019); Costco captive insurer pays $3.6 million in back taxes, penalties,
OIC (Mar. 11, 2019); Captive insurer for Microsoft pays $876,820 to settle license, taxes
, OIC (Aug. 13, 2018).