An individual, Fred Lennon, wholly owned Crawford Fitting, a manufacturer of valves and fittings, in Crawford Fitting Company v. United States. He also owned at least 50 percent of four regional warehouses and held varying interests in other companies that provided services and/or parts to the manufacturers. Crawford, other manufacturers of valves and fittings, various companies that provided parts and services for the manufacturers and the regional warehouses obtained coverage from Constance, which was created under the Colorado Captive Insurance Company Act. Constance retained a specified portion of the covered risk and reinsured the remaining coverage with an unrelated reinsurer.
The warehouses owned 80 percent of Constance. Crawford employees and lawyers owned the remaining 20 percent. Members of Lennon’s family held the interests in the warehouses that Lennon did not directly hold. Consequently, Lennon had a significant economic stake in both Crawford
Fitting and Constance.
The government argued that the portion of Crawford’s premium that was attributable to the retained coverage was a “reserve for self-insurance.” It asserted that the risk of loss remained in Crawford’s economic group. The District Court for the Northern District of Ohio, however, held that Crawford’s premiums were deductible reasoning that Constance was “legitimately organized to enable Crawford to secure insurance at a reasonable price, without substantial limitations on the types and amounts of risk in return for the payment of legitimate premiums.” Constance was adequately capitalized.
Further, Crawford did not own stock in Constance or any of the warehouses that owned stock in Constance. The premiums were “actuarially based” and proportional to the risks covered. Risk distribution was present because the insureds included numerous entities that were not affiliated with Crawford. Crawford therefore shifted the risk of loss from its economic family to Constance and Constance distributed the risks of the insureds.
