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11 December 2018
Washington
Reporter Ned Holmes

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Washington state offers reduced penalties for ‘unlawful’ self-reporting captives

Washington Insurance Commissioner Mike Kreidler is offering captive insurance companies that have unlawfully insured risk in the state in the past 15 years the chance to pay a substantially reduced fine and premium tax penalty if they self-report the activity.

In August, Microsoft’s captive insurer, Cypress Insurance, paid the Office of the Commissioner $876,820 as part of a settlement agreement after the state had issued a cease and desist order, as it felt Cypress, which is domiciled in Arizona but insures risk in Washington, was unlawfully insuring risk in the state.

Following the settlement, Kreidler suggested his office would turn their attention to other captive insurance companies in the state and this scheme appears to be the first steps of that plan.

Captives who have unlawfully insured risk in Washington can pay a reduced fine and premium tax penalty if they self-report during the 18 month grace period between 1 January 2019 and 30 June 2020.

From 1 July 2019 onwards the fine amount and tax penalty will increase for every six months that the captive insurer waits to self-report, up until the 30 June 2020 closing date.

Following the closing date, the Insurance Commissioner will pursue maximum fines and tax penalties.

The Office of the Insurance Commissioner is also encouraging captives who insured risk in the state more than 15 years ago to self-report those policies within the 18 month grace period.

If said captives report these policies within that period they will not face fines or premium taxes, however, if they do not Kreidler will pursue the maximum fines and tax penalties.

The Microsoft case and the issue of ‘unlawfully insured risk’ it focused on was met with much concern from various parts of the captive industry.

While Cypress itself is domiciled in Arizona, its sole insureds, Microsoft and its subsidiaries are based in Redmond, Washington.

Insurance companies in the state are required by law to pay a two percent tax based on their premiums, a revenue which is sent to the state general fund to pay for a variety of programmes.

According to the Office of the Insurance Commissioner, Cypress did not hold a certificate to transact insurance in Washington State, did not hold a Washington state surplus line broker’s licence to place non-admitted insurance in the state, nor is insurance coverage provided by the captive placed through a surplus line broker licensed in the state.

Additionally, it claims that Cypress did not pay premium tax on the $71,194,935 it collected between 2013 and 2018, representing $1,423,898.70 in unpaid premium tax.

Matthew Queen, general counsel & chief compliance officer at Venture Captive Management, commented thatsome of the state’s arguments “appeared weak” and the decision to settle reflects a reality about the American justice system.

In August, John Dies suggested that other states are considering taking similar action.

The captive industry recently suffered a similar defeat in New Jersey, where the New Jersey Tax Court upheld the denial of Johnson and Johnson’s request for a $55 million refund on self-procurement tax.

At the 2018 European Captive Forum, Captive Insurance Companies Association president Dan Towle identified home states unlawfully taxing captives as the greatest threat facing the captive industry.

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