By Celia R. Clark, Esq.
A brief comment is offered here about the Motion for Reconsideration, denied by the Order issued on November 14, 2017. (Both the Motion and the Order relate to Avrahami v. Commissioner, 149 T.C. No. 7, August 21, 2017, Docket Nos. 17594-13, 18274-13). Two grounds for reconsideration were argued in the Motion. The first one was that Feedback Insurance Company, Ltd. (“Feedback”) operated like an insurance company because it relied upon qualified advisors, even if they may have made errors. The Tax Court pointed out that there is no law supporting this argument.
The second ground raised in the Motion is that the policies at issue were claims-made policies, not occurrence policies. The Court engages in a change of direction in responding to this point, referring to a particular policy that “was so ill-drafted that it was both a claims made and an occurrence policy.” The comment is followed by a reference to the slip opinion at 82, which, in turn, references an Administrative Actions policy. The Administrative Actions policy is criticized for requiring that both the loss event and the claim occur during the policy period (or an extended reporting period), which the Court states is a contradiction. But insurance managers and actuaries know that, unless there is a retroactive date, this is the definition of a standard first-year claims-made policy.
The Court then generalizes that this one policy exemplifies the “sloppy drafting” of Feedback’s policies. The case record, however, shows that a template of the Administrative Actions policy, as well as other policies at issue in Avrahami, were offered at trial but not accepted into evidence. These templates, with drafting virtually identical to those criticized in the Avrahami opinion and Order (and including the event occurrence and claim requirements), have been often reviewed and approved by the IRS for use by small captive insurance companies. Determination letters and actual policies used by companies operating under I.R.C. Sec. 501(c)(15) were obtained from the IRS and offered into evidence in Avrahami as information on which Avrahami’s advisors relied.
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