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Land Trust Review of Defense Insurance Structure

December 15, 2010 | Washington, D.C.

The next phase of creating the Defense Insurance Program includes land trust review of the proposed program’s tax, legal and governance structure. The Alliance invites those land trusts that have already committed to participate. If your land trust hasn’t committed yet, please consider discussing it at an upcoming board meeting and join the 454 land trusts already signed on.

Design Process

The Alliance and a work team of nationally respected attorneys are working on a design for the tax and legal structure for the proposed Program that would allow foundations to give capital directly to the Program and insulate land trust members and the Alliance from legal or financial liability. The attorney work team will recommend its design to the Alliance staff and board.

Land trusts formally committed to the proposed Program will also have two opportunities for public review and comment on national conference calls in March and May 2011. Details will follow closer to the calls. From February through May, the Alliance will also accept any written comments or phone comments to Leslie Ratley-Beach at lrbeach@lta.org or 802-262-6051. The Alliance will release the draft recommendations in the February eNews Bulletin. The Alliance board will vote on structure at its June 2011 meeting.


Preliminary Structure Outline

We propose a legal structure for insurance called a Risk Retention Group (RRG) which would be owned by the land trusts participants and would shield both the Alliance and its members from liability. The RRG would use a special section of the Internal Revenue Code (Section 501(n)) to gain tax exempt status. The Alliance would form and wholly own a limited liability corporation specifically for non-profit organizations (LLC) to serve as the day to day operator of the Program.   

The LLC formed by the Alliance would be responsible for managing the claims committee, providing loss prevention services and other duties. The Program would contract with an insurance management company to manage the collection of premiums, payment of claims, accounting and reporting to regulators.  

The proposed Program owners (the land trusts) are shielded from pass through liability by the RRG structure and by a separate LLC to house the proposed insurance program.  The Program is non-assessable meaning that excess losses are not billed to the land trust members but must be absorbed by retained earnings and capital if necessary.  

The attorney work team is still formulating recommendations on specific governance structure and addressing issues of roles, responsibilities and job descriptions. The Alliance will post more information on governance recommendations in the February eNews Bulletin. The Alliance board will vote on structure at its June 2011 meeting.  After the Alliance board vote, the insurance regulators in the state that will regulate the proposed program must also approve the entire structure.


Domicile

Thirty states now have captive enabling acts and could be the corporate home for the Risk Retention Group. The Alliance considered only those that its outside advisors felt were most experienced and stable. After comparing several common domiciles for captive insurance entities and RRGs, Vermont was selected as the domicile for ACI. The Vermont program is superior in almost all respects. A few states have a slightly lower premium tax or a slightly lower application fee. Vermont is the leading onshore captive insurance domicile with nearly 30 years of experience working with the captive insurance industry. With over 900 captives, Vermont has licensed more than 4 times the number of captives than any other domestic competitor. 42 of the Fortune 100 and 19 of the companies that make up the Dow 30 have their captive insurance companies located in Vermont.

While Vermont has some of the largest captive companies in the world, more than half of Vermont’s captive insurance industry writes less than $5 million annually in premiums. This makes Vermont one of the best places for smaller and mid-sized businesses to form captive insurance companies.

Vermont is fortunate to have unparalleled government support for the ongoing formation and future needs of captive operations. Vermont has a nearly 30-year track record of broad political support for the captive insurance industry, which is considered a strategic priority for the State. Vermont makes annual enhancements to its laws to keep Vermont as the jurisdiction of choice.

Vermont also has the largest group of experienced and knowledgeable captive insurance regulators of any domicile with a 30 year track record of firm and friendly oversight. Vermont enacted its captive law in 1981 to regulate members, a capable in-house veteran staff of 30+ with a 23 member examination staff. Captives have an assigned financial analyst and all audits are done internally. Vermont domicile approval generally facilitates the certifications for the RRG in other states. Vermont regulators have a powerful voice nationally in setting insurance accreditation rules through the National Association of Insurance Commissioners. Vermont also has a strong conservation reputation and depth of support in public and private sectors for land trusts.

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Support from land trusts

Christian Freitag, attorney-at-law and executive director at Sycamore Land Trust (IN), says "I view Conservation Defense Insurance as another step the land trust community is taking to keep our promises. We claim that we will help people protect their land in perpetuity. With this program, the public can be more confident than ever that we take that commitment seriously."

 

Greg Gamble, executive director at Ojai Valley Land Conservancy (CA), says that "this is one of the most helpful things that the Land Trust Alliance could attempt for its members, and I have greatly appreciated the professional, thoughtful, fair and inclusive process that you have led."

 

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