It’s not very often that those of us who work in the captive
insurance industry can state that the main reason a captive is being formed is
to directly improve the lives of individuals. After all, captives are commercial
entities typically formed with the intent to improve a company’s risk
management processes and reduce its cost of risk.
But we here in Connecticut are still revolutionary, as our
state’s advertising campaign indicates, and our state government officials have
developed a potentially revolutionary solution to an unexpected problem that
has recently beset thousands of Connecticut residents. In June 2017, the state legislature
passed SB 1502, which authorized the future formation of a nonprofit captive
insurance company to manage the “crumbling foundations” exposure to many Connecticut
residents’ homes.
The damage to these homes’ foundations was caused by the use
in concrete of a stone aggregate mined from a quarry that contained the
chemical pyrrhotite. The ugly cracks that are forming manifested decades after
the foundation was poured. Homeowners insurance companies have generally (i.e.,
with some exceptions) denied coverage, stating that this type of event does not
fall within their “sudden and accidental collapse” coverage provision. And the home
builders also were not required to carry a home warranty policy that could have
provided coverage for such a latent exposure.
The extent of the frequency of damage is still unclear—the
Connecticut Mirror reports that nearly
600 homeowners in over 35 towns in eastern Connecticut have seen damage. Estimates
of the potential number of homes affected are very difficult to make and have
varied widely, but the same Connecticut Mirror report puts it around 5,000. With
the cost of raising a home and re-pouring a complete foundation frequently running
from $150,000 to $200,000, the total exposure to loss could be in the
billions.
Upon licensure by the Connecticut Insurance Department, the
proposed not-for-profit captive will be funded by the newly created Crumbling
Foundations Assistance Fund. The main contribution to this Fund comes from the
state’s authority to issue bonds. The total authorization will not exceed $100
million in aggregate, with a maximum of $20 million authorized for each of the
next five fiscal years. The captive funds will allow affected residents to
repair or replace their foundations, and will also fund various other programs
designed to provide relief to affected homeowners.
A captive structure has a number of advantages over a general
state fund: 1) a board of directors will be established, 2) homeowner eligibility
guidelines will be developed, 3) the expected payouts will be estimated by an
actuary, 4) the claims payments to eligible contractors will be managed closely
to ensure a fair distribution, 5) overhead expenses of the captive will be
capped, and 6) the captive will provide regular claims and financial reporting
to the legislature.
At this pre-formation stage, it appears that the proposed and
likely non-profit captive will not be a risk-taking vehicle; it will operate
with a maximum payout, likely established by the actuarial estimate. The
captive is essentially providing retroactive insurance coverage. Bottom line,
it will operate as an insurance company and have multiple layers of oversight,
not the least of which is the strong regulatory framework in place at the Connecticut
Insurance Department.
We at the Connecticut Captive Insurance Association wholeheartedly support this innovative use of a captive insurance company, and we will support the insurance department’s efforts to get this captive formed and operational. But, more importantly, we hope that it provides true relief for the many homeowners impacted by this very unfortunate set of circumstances.
Stephen R. DiCenso, President, CCIA
Stephen R. DiCenso, President, CCIA
