Microsoft's captive insurer settles license, tax issues for $877K

Washington State insurance commissioner plans to look into other captive insurers after this ‘test case.’

As a result of its settlement agreement, Cypress Insurance Co. is paying back taxes and penalties as well as license fees, but no fines. (Photo: iStock)

Many large businesses look beyond traditional insurance companies to help them manage their risks, and some set up “captive” insurers as an alternative to self-insurance. Generally, a captive is an insurance company established with the objective of insuring or reinsuring the risks of its owner (a single-parent captive) or owners (a group captive). The captive — like other insurance carriers — is regulated by and subject to the laws of the place where it’s incorporated. Problems arise when the captive fails to meet the licensing requirements of the state, which is the situation facing Cypress Insurance Co. of Phoenix.

Related: Is using a captive the right move for your organization/?

Cypress only has one insured: Microsoft Corp. and its subsidiaries, headquartered in Redmond, Wa. According to Washington State Insurance Commissioner Mike Kreidler, from 2008 through 2018, Cypress collected more than $91 million in written premium from Microsoft and its companies. State law requires insurance companies to pay a 2% tax based on their written premiums. The tax revenue is sent to the state general fund to pay for a variety of programs. But Cypress did not hold a certificate of authority or place insurance through a surplus line broker that was licensed by the Washington Office of the Insurance Commissioner.

To rectify the situation, Cypress recently settled with Washington State. Cypress must pay $573,905 in unpaid premium taxes and $302,915 in interest and penalties after Kreidler ordered the company in May to stop transacting insurance without a license and to pay tax on its written premiums.

Captive now in compliance

“I am pleased with the outcome of this settlement,” Kreidler said in a statement. “Cypress is now complying with Washington state law, and the state will receive some of the money owed. Captives are a gray area in state law, and this is the first case where we’ve tested them.”

Before 2008, Microsoft’s purchasing practices complied with state insurance laws, Kreidler’s statement noted. As of July 1, Cypress obtained new policies through a surplus line broker. Surplus line brokers are licensed and pay premium tax. Surplus line insurance typically covers risks that other insurers do not.

Going forward, Kreidler said his office will look at other captives that do business in Washington State.

“I encourage captives insuring risks in Washington — and that want to be proactive in the interest of fairness — to contact my office to start conversations about their portfolios,” Kreidler said. “I want to make sure that all insurers pay their fair share as part of doing business here.”

Related: Should SMBs use captive insurers to manage risk?