Feldman Law Firm and Foley Gardere have filed the opening brief with the tenth circuit court of appeals on behalf of Reserve Mechanical Corp, a client of Capstone.
The appeals brief challenges the US tax court’s rulings in the Reserve captive insurance case, identifying the specific ways in which the tax court erred in its adverse opinion issued in June 2018, according to Capstone.
In its opinion, the tax court concluded that Reserve’s transactions did not constitute insurance for federal income tax purposes.
The tax court suggested that Reserve’s insurance arrangements did not meet two of the four necessary insurance criteria, concluding that Reserve failed to satisfy adequate risk distribution and that Reserve’s arrangement with its affiliated company, Peak Mechanical and Components was not “insurance in the commonly accepted sense”.
Reserve’s opening brief explained that Reserve satisfied the risk distribution test by receiving more than 30 percent of its gross premiums from reinsuring pooled and blended risks of more than 150 insureds under more than 500 direct-written policies, issued by PoolRe Insurance Corporation.
The brief stated: “Reserve’s direct-written policies provided real insurance: when Peak suffered a covered loss and made a claim, Reserve paid. Reserve’s risk distributing arrangements imposed real contractual rights and obligations. If Peak suffered a large covered loss, a substantial portion of the loss over a predetermined amount would be borne by the fifty-plus insurers participating in the risk pool. By the same token, if one of those insurers responded to a large loss, Reserve would also be called upon to pay its proportionate share of the loss.”
Capstone explained that the tax court employed legal reasoning that was contradictory to decades of existing case law. The tax court also went outside the record in making findings that were not supported by the evidence at trial.
Additionally, the Coalition to Advance Captive Insurance filed an amicus curiae brief with the US Court of Appeals for the Tenth Circuit in support of Reserve.
The 11 organisations supporting the recent appeal by Reserve, include the Alabama Captive Insurance Association, Arizona Captive Insurance Association, Delaware Captive Insurance Association, Georgia Captive Insurance Association, Hawaii Captives Insurance Council, Kentucky Captive Association, Missouri Captive Insurance Association, Montana Captive Insurance Association, North Carolina Captive Insurance Association, Utah Captive Insurance Association, and the Self-Insurance Institute of America.
The amicus brief addresses and informs on three issues of concern in the original Reserve decision: prior loss history, manuscript policies, and risk pooling.
Capstone said that the tenth circuit’s decision in the Reserve appeal is “expected to carry enormous implications” for the captive insurance industry.