Arizona Passes Captive Insurance Legislation

The Arizona Legislature passed a bill designed to allow captive insurers to cover employment practices liability risk and remove the requirement that at least one incorporator be a resident of the state.

Captive insurance is a form of self-insurance, whereby captive insurance companies can be established by a single business or group of businesses to insure risks associated with their parent or affiliated companies or members. Captive insurers are not authorized to provide insurance to unrelated parties. Coverage may include such risks as property, liability or workers’ compensation and may be for primary or excess layers of risk. In Arizona, captive insurers are prohibited from certain insurance business, including: hospital, medical and dental service corporations; health care service organizations; prepaid dental plan organizations; prepaid legal insurance contracts; mortgage guaranty insurance; and personal motor vehicle or homeowner’s insurance.

According to Arizona law, a branch captive is an out-of-state captive that is licensed to transact insurance business in the state. Branch captives must maintain their principal place of business for operations in the state, and are classified as pure captives with respect to operational and minimum capitalization requirements. Branch captives may only be established for the insurance or reinsurance of employee benefits of its parent company.

However, House Bill 2801, which was sent to Gov. Janet Napolitano on May 14, allows captive insurers to directly insure employment practices liability risk. The bill also removes limitation that a captive insurer can only write insurance or reinsurance of the employee benefit business of its parent and affiliated companies. And, the bill changes from mandatory to discretionary the requirement that a captive insurance corporation be organized by three or more subscribers none of whom shall be required to be a resident of Arizona.