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Galanda and Robenalt: Holding big insurance captive

Part 2

We recently advocated that capable tribal governments form single parent captive insurance companies to insure their own risk of losses, rather than continue to purchase expensive insurance from outside private insurers.

Building tribal captive/self-insurance companies can save tribes tens or hundreds of thousands of dollars in annual insurance costs and harness that revenue for reinvestment. At the same time, self-insurance allows tribes to avoid hidden state private insurance taxes; create new tribal jobs and insurance coverage tailored to life on the reservation, and control the defense of their sovereignty.

The enthusiastic response from tribes, tribal business and the insurance industry has confirmed that the time is right for Indian country to self-insure. Your thoughtful responses revealed the need for more discussion and explanation.

Question: “Are tribes really ready to run captive insurance companies?” Answer: Yes, some tribes are ready. In fact, some tribes are already self-insuring through their own captives. Since 2004, the Mashantucket Pequot Tribe has owned and operated a captive insurance company on its reservation. Pequot began the due diligence on forming its own insurer in 1997. The insurance company now insures the tribe’s property and casualty risk, including Foxwoods Casino Resort, as well as several of the tribe’s off-reservation ventures.

One of its lines of self-insurance is workers’ compensation, under which the tribe self-insures the workplace safety of thousands of workers rather than paying premiums to the State of Connecticut. Pequot manuscripts all of its policies; all claims arising from policies are adjudicated in the tribe’s justice system, including arbitration. Pequot invites other tribes to insure through its captive.

The Navajo Nation reportedly also self-insures its property and casualty risk through its own captive insurance company. Typically and wisely, a tribal self-insurer like Pequot or Navajo will obtain reinsurance to protect from catastrophic losses. Pequot insists that reinsurance policies they purchase be written to fit its particular needs for catastrophic loss protection, and refuses to pay state insurance taxes on its reinsurance premiums for the tribe’s on-reservation activities. Pequot reports significant direct and indirect insurance cost savings, which they have reinvested in the company and tribe.

Other tribes self-insure only some of their risk; the Blackfeet Nation has developed its self-insurance program to insure against workers’ compensation claims rather than paying costly premiums to the State of Montana. For the time being, Blackfeet purchases private property and casualty insurance. So, not only can tribes run captive insurance companies, many already are. Many more should do the same.

Question: “Are you saying that several or all tribes should band together to form a multi-tribe insurance company?” Answer: Yes and no. A multi-tribe insurer would be what is known as a group captive. As we explained in our first piece, a single parent captive is wholly owned by its “parent company,” or tribe. The tribe’s captive can write property, home, auto, liability, health and workers’ compensation policies, and thereby provide the tribe and its members insurance against loss and litigation arising under such coverage. A group captive would serve the same function, except that it would join multiple “parent companies,” or tribes, to provide their affiliates insurance coverage.

Not all 560-plus tribes are ready to band together, pool their risk and resources, and leverage the nearly $300 million in private insurance premiums they are losing each year. As we have a hard enough time walking the “buy Indian” walk – be it for beef, fish, fruit or juice harvested by other Indians – Indian country is not ready to collectively save and leverage $300 million annually.

When we are ready, as Lance Morgan of Ho-Chunk, Inc., commented, Indian country will have “the best insurance company in history.” (Lance cited the tribes’ general federal and state tax and sovereign immunity as a couple reasons why).

Still, Indian country boasts at least one increasingly successful multi-tribe/group captive: AMERIND Risk Management Corporation, a federally-chartered corporation owned by more than 200 tribal housing authorities for nearly 25 years.

According to the company’s Web site, “Tribes united to create AMERIND in 1986 to protect themselves, their treasuries and their enrolled members from unforeseen or catastrophic financial loss. AMERIND is owned by a vast majority of federally recognized tribes – keeping their money working in Indian country (more than $300 million since 1986) rather than profiting non-Indian organizations.” Amen. AMERIND insures more than 275 tribal housing authorities, primarily with property insurance. For the 200 tribal housing authorities who co-own AMERIND, they have pooled their risk and profits to create a group captive; they have self-insured together. In time, all tribes could unite to create a formidable grassroots insurance company.

Question: “Can tribes buy insurance from other tribes that have formed captive insurance companies?” Answer: Yes. As with the Pequot and AMERIND captives, tribes can, in the spirit of “buy Indian,” purchase insurance from group captives owned by other tribes, rather than from private insurance companies.

Question: “Did you know that First Americans, your example of untrustworthy ‘big insurance’ malfeasance, is actually a tribally chartered captive?” Answer: First Americans’ situation is complicated, especially since the company declared bankruptcy in January. The company does business as First Americans, First Nations Compensation Plan and First Americans Insurance Service. First Americans is a state-chartered insurance brokerage company. “First Nations Compensation Plan” and “First Americans Insurance Service” are insurance companies chartered under the laws of two Oklahoma tribes. Unlike the tribal captive insurers we recommend, however, First Americans’ two tribal insurance divisions are non-Indian owned.

First Americans is in hot legal water for conducting what is reported to be a Ponzi scheme – one that generates returns for existing investors by acquiring new investors until there is not enough money to go around and the scheme unravels. First Americans’ scheme revolved around selling “promissory notes,” or investments in debt, with the promise of high returns to its investors. It was the sale of debt that reportedly led to First Americans’ $100 million in liabilities, countless creditors and ultimately, its bankruptcy.

As a result, First Americans Insurance Service, which sold insurance to a number of tribes and Indian casinos in the Midwest, is reportedly not liquid enough to cover the tribes’ claims and losses. Those tribes with no coverage to show for the premiums they paid First Americans are looking for insurance (and hopefully evaluating claims against their brokers).

While the First Americans scam provides yet more reason for tribes to insure themselves through their own captives, it is also a tell-tale warning for any tribe contemplating formation of a captive insurance company: Any tribally owned insurance company must be carefully regulated by its tribal “parent” government(s), and there must be sufficient tribal regulatory safeguards in place to ensure governmental oversight and above-board business practices. The safety of Indian country depends on it.

Gabriel S. Galanda and James L. Robenalt are lawyers in Seattle with Williams Kastner’s Tribal Practice Group. Galanda, a firm partner, is an enrolled member of the Round Valley Indian Tribes.