Introduction
Captive insurance companies have been used for risk management
purposes since the 1960s, when industrial corporations found
insurance for their risks either challenging to find in the
marketplace, or expensive. One solution was to form wholly-owned
and controlled insurance companies (hence the term
"captive") for risk management purposes. The primary
benefits to captive owners are the ability to customize their risk
management programs and to eliminate some of the overhead built
into premiums charged by commercial insurers. Tax issues have also
been a key consideration in the formation of captives, and they led
to a long and tortured history of litigation between owners of
captives and the Internal Revenue Service (the "IRS"). At
this point, most of the contentious issues, primarily the
deductibility of premiums paid to captives, and the tax treatment
of the captives themselves, are largely settled. (Issues relating
to captives have also been a matter of
