The Massachusetts Appeals Court recently ruled that the state’s statute governing insurance companies’ claims settlement practices applies to captive insurers.  See Lemos v. Electrolux North America, Inc., et al., No. 09-P-943 (Mass. App. Dec. 2, 2010).

In Lemos, the plaintiff obtained a jury verdict against a lawnmower manufacturer arising out of injuries caused by a defective mower.  The plaintiff then sued the Vermont manufacturer (Eletrolux) and the manufacturer’s wholly owned captive insurer (Equinox) for violation of G.L. c. 176D, § 3.  That statute sets forth the standards for claims settlement practices by insurance companies.  (The court “assumed,” only because no party argued otherwise, that c. 176D applies to insurance companies no matter where they are incorporated.)

Even though the captive insurer had no employees, only a board of directors, and its role was “purely that of a funding vehicle” for claims against the manufacturer, the court held that the insurer was “engaged in the business of insurance.”  The court noted that the insurer was registered as a captive insurance company in Vermont, calculated premiums based on loss experience and administrative costs, called itself an insurance company, and issued a policy that stated that it provided CGL coverage.  The court further cited the “bedrock principle” that “corporations – notwithstanding relationships between or among them – ordinarily are regarded as separate and distinct entities.”  The court distinguished cases involving self-insurance, noting that the manufacturer specifically decided to set up a distinct captive insurer, rather than simply “self-insure,” because of the financial benefits of that set-up.

Finally, the court invited the Massachusetts legislature to address the situation, noting that many states have special provisions governing the practices of captive insurers, but Massachusetts does not.

A copy of the decision is available here, by following the “Opinions” link under “Appeals Court.”