US class action accuses companies of ‘massive’ conspiracy over captives targeted at individuals

A federal class action lawsuit in the US is alleging a “massive captive insurance strategy conspiracy” for those mainly targeted at individuals, and is seeking damages from captive consultants that “conspired to design, promote, sell, implement and manage illegal tax-advantaged captive insurance strategies”. The defendants in the lawsuit, which is based in Arizona, include Artex Risk Solutions, Arthur J Gallagher, TSA Holdings, TBS – doing business as PRS Insurance, Epsilon Actuarial Solutions, AmeRisk Consulting, and Provincial Insurance, PCC. The lawsuit relates to 831(b) captive insurance companies, marketed largely to individuals. Media reports suggest this may not be the last of such class action lawsuits, given the attention focused on 831(b) captives by the US Internal Revenue Service (IRS). Loewinsohn Flegle Deary Simon, the law firm representing the plaintiffs with attorneys David Deary and Ralph Canada, said that according to the defendants, the captive insurance strategies provided highly rated insurance and at the same time, legally reduced taxes. “The defendants promoted and sold these captive insurance strategies for the purpose of receiving and splitting substantial fees. Instead of providing highly rated insurance and decreasing the plaintiffs' tax burdens – as promised by the defendants – the captive insurance strategies that the defendants designed, implemented and managed were nothing more than illegal and abusive tax shelters,” said Loewinsohn Flegle Deary Simon. The federal US Inland Revenue Service (IRS) ultimately determined that the captive insurance strategies were illegal and abusive tax shelters, disallowed the tax benefits, and assessed the plaintiffs with substantial back taxes, interest and penalties. As a result, the plaintiffs are seeking recovery of damages associated with their participation in the captive insurance strategies, according to the lawsuit. “The particulars of captive insurance strategies are complicated, but the defendants' motivation is quite ordinary,” said Mr Deary, attorney for the plaintiffs. “Greed. Plain and simple. The defendants sold products and services they knew were illegal and would be disallowed as abusive and illegal tax shelters, resulting in their client sustaining substantial damages, for the sole purpose of earning significant fees and commissions. And they did all this while they were supposed to be acting as loyal fiduciaries.” The suit also accuses the defendants of entering into undisclosed business arrangements with each other and a nationwide referral network of investment, accounting and legal advisers to funnel clients to them. “Through these arrangements, the defendants systematically identified potential or existing clients who had substantial income in a particular tax year. The defendants then unlawfully abused their positions of trust, confidence and prestige by fraudulently inducing those clients to pay substantial fees for insurance, legal, accounting, tax and actuarial advice and services in connection with the captive insurance strategies,” said the law firm. It added that even after the defendants learned of tax court decisions that disallowed deductions claimed through other captive insurance strategies, they continued to advise, promote and encourage the plaintiffs to use captive insurance strategies and to defend any IRS audit or tax court proceeding, assuring plaintiffs that the captive insurance strategies complied with all applicable tax and insurance laws. “The predatory behaviour of the defendants has gone on for too long,” said Mr Deary. “We're asking the court to give these plaintiffs – and the potentially hundreds or thousands of other class members around the country – justice, and send a clear message to the industry: these practices will not stand.”

US class action accuses companies of ‘massive’ conspiracy over captives targeted at individuals

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