Fresh from the first successful home being repaired using the crumbling foundations funds, doubt clouds over the CFSIC as funding falls far from what is needed to renovate all remaining homes facing the crisis
Earlier this year, renovations on the first home in Connecticut affected by the ‘crumbling foundations’ issue were completed using funds from the non-profit captive insurance company set up to deal with the issue.
Many homes in Connecticut were built using concrete made from stone aggregate mined from a quarry containing pyrrhotite. This results in cracks forming in the foundations of many of these structures, decades after they were constructed.
The Connecticut Foundations Solutions Indemnity Company (CFSIC), a non-profit captive insurance company, was set up in 2017 to distribute funding to fix the crumbling foundations in homes in the northeast side of the State of Connecticut.
Currently, there is $31 million worth of construction underway as 97 homes are under repair, some taking longer than 12 weeks due to a backlog of the construction. Even though the application process didn’t start until January and the construction work didn’t begin until March, the first home has been fully repaired.
Kevin and Aisling McCloskeys are the first homeowners to have the crumbling foundations of their home fixed using this captive. The repairs on the McCloskeys’ basement took about six weeks. They received a grant of $175,000 from the captive.
Between now and 2024, around 1,300 homes will be replaced and another 1,700 between 2024 and 2029. However, the crumbling foundations of homes that are affected by this crisis have a cost value that is below $1 billion in value, somewhere between $450 million and $600 million.
According to Michael Maglaras, the superintendent of CFSIC, the captive does not have enough funding for all the homes that have been affected by this crisis.
So far, it can account for $125.5 million from two sources: the State of Connecticut has provided $100 million into the captive, in allotments of $20 million, however, due to a budgeting crisis currently taking place in the state, much needed additional funding is lacking. CFSIC is looking to get more funding for the captive by lobbying the state and federal governments.
Maglaras says: “We are using all the means at our disposal to access potential US federal funding from the Department of Housing and Urban Development through the Federal Emergency Management Agency and other sources. My board is very active in lobbying governor Lamont to see if we can secure additional funding at a state level.”
In 2018, the Connecticut State Senate passed a bill that places a $12 surcharge on a homeowner’s insurance policy upon their issuance or renewal beginning in 2019, with the resulting funds to be placed into the ‘crumbling foundations’ captive.
This will generate approximately $8.5 million per year into the fund. However, this funding will not be added into the captive until June 2020. These annual surcharge installments will continue in June of 2021 and 2022.
Despite the social benefit goals of the captive, Maglaras says there is a significant amount of opposition from people who are not happy with this extra charge on their insurance policies. The crumbling foundations only exist in the poorer northeast corner of the wealthy state.
The crumbling foundations’ crisis affects this section of the state in more ways than one. Some people’s homes are not as safe as they should be, but also the value of their homes will drop, leading to a general drop in house prices in the area. Maglaras says that the 41 towns in the affected area are small towns not part of the urban reach of the lower parts of Connecticut and it has become a very much “out of sight, out of mind problem”.
Steve DiCenso, president of Connecticut Captive Insurance Association (CCIA), adds: “It’s a process, securing the funds; it is definitely an ongoing process. At this point, it will likely not be fully funded over time. There is more work being done to try and secure additional funding.”
Captives v traditional insurance
Maglaras says the crumbling foundations captive is the “single best example of a captive being used to support a private-public partnership”.
He explains: “As an independent captive insurance company (not owned by the State of Connecticut or a branch of state government) which is funded by taxpayer dollars (we know of no other example like this in the history of the captive movement), it is a hybrid public-private partnership.”
“The quality of our underwriting, claims management, and outreach efforts as a captive insurance company has met the close scrutiny of the Internal Revenue Service, which has judged us to be tax-exempt.”
He adds: “Here we have a captive insurance company formed and supervised under the jurisdiction of the Connecticut Insurance Department, that is still a private company in receipt of public funds.”
“This story is an important one for the captive industry for that purpose alone—not to mention, of course, the work we are doing to restore the tax base in Connecticut, to keep people in their homes, and to do our part in improving Connecticut’s economy.”
Speaking about how this captive has helped affected homeowners, DiCenso said: “The value of people’s homes have been restored so it has had a direct and very beneficial outcome for homeowners.”
DiCenso commented: “Traditional insurers in this particular situation have not provided coverage. Generally speaking, the foundation cracks at the core of this issue are not particularly covered by traditional policies, so the captive has stepped in.”
He continues: “Creating that separate captive has allowed for better governance and control of those funds. It stepped in to replace or to literally fill a hole where traditional insurers have not provided cover.”
While the ‘crumbling foundations’ captive is facing funding woes, it is clear the social benefit aspect of it is both good for the state and for captives, so much so that Connecticut is now working on a second captive with a social benefit goal—this one to address special education student costs for municipalities.
Maglaras adds: “This is an almost textbook example of a captive success story. In this industry we continue to wrestle with and debate issues like deductibility of premium as a business expense for taxation of captives, and the effect of Brexit on captives.”
“But here is a superb example of a captive at the service of people. The message I would send is that the captive industry is mature enough, robust enough, and successful enough to now turn its attention to a larger question: when a natural catastrophe strikes and affects the lives of thousands of people, such as has happened with the crumbling foundations crisis, we can all learn something from the idea that the vehicle purposely chosen to address this crisis was a captive insurance company.”
