The News You Need for Sept. 7
What are the different types of captives and what happened in a Kentucky worker's claim for psychological benefits?
Captives 101: Understanding the Different Types of Captives
In previous articles in our Captives 101 series, we explored the basics of captive insurance and why companies choose to implement these structures. Captive insurance offers businesses the flexibility to manage risks and control costs, but not all captives are the same. Understanding the different types of captives is essential for companies looking to optimize their insurance strategy. The right kind of captive depends on the specific needs of the company, its industry, and its risk profile. This article will explain the different types of captives and how each meets different business needs.
Single-Parent Captives
A single-parent captive, called a pure captive, is the most common type of captive insurance company. It is owned and controlled by a parent company and exists solely to ensure that the parent company's risks are. This type of captive is ideal for larger companies with substantial and predictable risk profiles, allowing them to retain the financial benefits of insuring their risks. Single-parent captives are particularly beneficial for manufacturing, energy, and transportation companies, where risk exposure is high and consistent. By forming a single-parent captive, these companies can better control their insurance programs, customize coverage to their specific needs, and potentially reduce insurance costs. However, forming a single-parent captive requires significant capital investment and a solid commitment to risk management. Companies must be prepared to manage the captive's operations and ensure it remains financially viable.
Group Captives
Group captives are insurance companies owned by multiple companies, typically small or mid-sized, that pool their risks. These captives are an excellent option for businesses that may not have the resources to form a single-parent captive but still want the benefits of captive insurance. Group captives allow members to share the cost and risk of insurance, leading to more stable premiums and better risk management. Group captives are commonly used in industries such as construction, health care, and professional services, where companies face similar risks and can benefit from collective purchasing power. By joining a group captive, businesses can access insurance coverage that may be more difficult or costly to obtain individually. However, joining a captive group requires a high level of cooperation and trust among members, as the success of the captive depends on all participants' collective risk management efforts.
Agency Captives
Agency captives are owned by insurance agencies or brokers and are used to insure their clients' risks. This type of captive allows agencies to provide personalized insurance solutions to their clients while retaining a share of the underwriting profits. Agency captives are a way for insurance intermediaries to enhance their service offerings and strengthen client relationships by offering tailored coverage options. For businesses considering using a captive agency, the main benefit is the ability to access specialist insurance products that may not be available from traditional insurers. Agency captives can also provide a competitive advantage in the market by offering unique coverage solutions. However, the success of an agency captive depends on the agency's ability to manage risk and retain a profitable client portfolio effectively.
Rent-a-Captives
Rent-a-Captives are a flexible option for businesses that want the benefits of captive insurance without the need to set up their captive. In a captive leasing system, a company "rents" the infrastructure from an existing captive insurance company, allowing it to participate in the benefits of the captive without owning it. Rental captives are often used by businesses that need a quick or temporary insurance solution or want to test the waters before committing to a full captive structure. Rental captives benefit companies in retail, hospitality, and small-scale manufacturing industries, where risks may be significant. Still, resources to set up a captive are limited. These captives provide a low-cost entry point into captive insurance with a low administrative burden. However, companies must consider the limitations of needing complete control over the captive's operations and the potential impact on their insurance strategy.
Protected Cell Captive (PCC)
Protected cell captive (PCC) is a captive insurance structure that allows companies to isolate risks into different "cells" within the same captive. Each cell operates independently with its assets and liabilities, providing high flexibility and risk management. PCCs are particularly useful for companies that need to isolate different types of risks or want to collaborate with other companies while maintaining separate insurance programs. PCCs are commonly used in financial services, real estate, and multinational companies where different entities or divisions require separate coverage. The main advantage of a PCC is the ability to isolate risks and ensure that the performance of one cell does not impact the others. However, setting up and managing a PCC requires careful planning and a thorough understanding of the regulatory environment, as the structure can be complex.
Understanding the different types of captives is essential for any business considering captive insurance as part of its risk management strategy. Every kind of captive offers unique benefits and challenges, and the right choice depends on the company's specific needs, industry, and goals. Whether it's the control of a single parent captive, the collective power of a group captive, or the flexibility of a leased captive, there is a captive structure that can meet the diverse needs of today's businesses.
In the next installment of our Captives 101 series, we'll guide you in evaluating the suitability of captives for your business and how to decide which type of captive may be the best fit. Whether you're looking to stabilize costs, improve risk management, or gain more control over your insurance program, understanding the different captive structures will help you make the most informed decision.
Ky. Top Court Upholds ALJ’s Psychological Impairment Conclusion
Case File
A contingent MMI finding regarding a worker's psychological injury was a reasonable basis for an ALJ to set a 20% impairment rating despite other evidence showing a conflicting possibility. Simply Research subscribers have access to the full text of the decision.
Case
Smith v. Laboratory Corp of America, 2024 WL 3929871 (Ky. 08/22/24).
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What Happened?
A Labcorp phlebotomist was injured at work when a shelving unit fell onto his head and knocked him to the ground. The phlebotomist sustained acute injuries to his lower back and underwent surgery. Surgery did not alleviate the phlebotomist's symptoms, and he experienced burning pains in his legs, mechanical back pain, urinary urgency, urinary leakage, back stiffness, and inability to sleep. The doctor who performed surgery assessed a 24% permanent impairment rating relative to the back injury, apportioning 5% to preexisting injuries and 19% to the work-related injury.
Later, another doctor agreed with that rating, but a third physician disagreed, finding that the phlebotomist was uncooperative, confrontational, and displayed "significant" magnification of his symptoms. This physician found that the phlebotomist had a Lumbar diagnosis-related estimate Category III 10% impairment, which he attributed to a pre-existing active condition.
The phlebotomist had psychological complaints as well, and the doctor who evaluated him for these diagnosed him with adjustment disorder with mixed anxiety and depressed mood, moderate to severe. This doctor assessed a 20% impairment rating for the phlebotomist's psychological condition and concluded that he had reached maximum medical improvement as he was unable to obtain payment from Labcorp for mental health treatment.
A later evaluation concluded that the phlebotomist did not have a psychological impairment relative to his work injury and assessed him a 0% impairment rating.
An administrative law judge issued an award and determined that:
(1) 5% of the phlebotomist's impairment was attributable to a preexisting condition.
(2) The phlebotomist had a 5% impairment rating for the work-related back injury.
(3) The phlebotomist suffered a work-related psychological impairment with a 20% impairment rating.
On appeal, the Board affirmed and so did the Court of Appeals, prompting Labcorp to take the case to the Kentucky Supreme Court, arguing that the ALJ's reliance on the impairment rating for the phlebotomist's psychological injury was misplaced and not based on the AMA Guides and the Board and Court of Appeals erred in affirming that reliance.
Rule of Law
As announced in Plumley v. Kroger, Inc., 557 S.W. 3d 905 (Ky. 2018), for an impairment rating to be properly based on, or "grounded in the Guides is not a strict adherence to the Guides, but rather a general conformity with them."
What the Kentucky Supreme Court Said
The Kentucky Supreme Court affirmed the lower bodies' decisions, noting that the contingent finding of MMI was premised on the phlebotomist not receiving mental health treatment, for which Labcorp refused and the phlebotomist was unable to pay.
The court also noted that while evidence could have supported a different decision, "the ALJ weighed conflicting medical testimony, determined the quality, character, and substance of the evidence, and assessed what it believed to be an appropriate impairment."
Just because it wasn't the only possible outcome, the ALJ's decision wasn't unplausible in the court's analysis.
"The ALJ's decision was supported by substantial evidence, was not clearly erroneous, and therefore should not be disturbed," the court wrote.
Thus, the ALJ's findings stood and the phlebotomist was entitled to medical expenses and a permanent partial disability benefits of:
(1) 5% impairment for work-related back injury.
(2) 20% impairment for work-related psychological injury.
The Takeaway
An ALJ is free to draw reasonable inferences and choose which parts of the evidence are more credible than others in making a decision regarding impairment ratings.