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Captives involved in Delta Re suit rescission.

Delta Holdings Inc. v. National Distillers and Chemical Corp., the court considered a suit for rescission of the sale of Delta Re Insurance Co. in 1983 by National Distillers and Chemical Corp. (NDCC), now Quantum Chemical Corp., to Delta Holdings Inc. (DHI) on grounds that the sale contract warranted the net worth shown on the balance sheet and that Delta Re was insolvent before the sale and concealed the fact from DHI and its agents. In addition, DHI contended that federal securities laws were violated.

The case is interesting to risk managers because captives were involved in forming DHI and, subsequently, in acquiring Delta Re which, before the transaction, was a captive of NDCC, writing its business and unrelated "open market" reinsurance.

In deciding that rescission should be granted, the court found that Delta Re was insolvent before the sale, and the insolvency and actuarial reports, which would have revealed this condition, were concealed at the time of the sale and for more than a year afterward by an NDCC executive hired by Delta Re at the time of the acquisition.

Insurance OK'd for DE Banks Delaware recently passed House bill 193, granting Delaware chartered banks and trust companies the power to act as an insurer and broker or agent for all insurance lines excluding title insurance. This may be done directly or through a subsidiary in Delaware and in other states or foreign countries through affiliated enterprises. However, there are restrictions. For example, a Delaware bank may not count its bank capital and surplus as part of the mandated capital and reserves for its insurance operations, nor may it allocate more than 25 percent of its total capital, surplus and undivided profits in the aggregate to all of its insurance divisions and subsidiaries. Furthermore, the Delaware banking commissioner's approval is required for allocation exceeding 3 percent of the bank's total capital, surplus and undivided profits to its insurance divisions in any year. Under the law a bank can make loans to and transact business with its insurance divisions or subsidiaries. However, bank assets may not be used to satisfy insurance obligations, nor may assets from insurance operations be used to satisfy banking obligations. Other restrictions are intended to prevent anti-competitive activities and to protect consumers. The Delaware insurance commissioner has principal regulatory authority over the banks' insurance activities, and income derived from those activities will be taxed under the insurance code. Many groups oppose the law and could attack it under the U.S. Bank Holding Act, which prohibits nationwide sale of insurance by a bank holding company through a non-banking subsidiary.

Section 6114 Revisited

This column previously reported that because of regulations promulgated under Section 6114 of the Internal Revenue Code of 1986 (IRC), insureds and U.S. and foreign insurance brokers covering U.S. risks, which were placed with foreign insurers and not subject to excise tax because of a treaty exemption, would be required to file documentation regardless of exemptions contained in the final regulations pertaining to excise taxes.

According to the Internal Revenue Service, under Notice 90-40, reporting that a treaty exempts a taxpayer from excise tax imposed under Section 4371 of the code is waived under Section 6114 for an insured as defined in Section 4372(d) and for a U.S. or foreign broker of insurance risks. Thus, because foreign insurers that have entered into closing agreements with the United States need not make the filings, the information would probably have to be provided by insurers in the United Kingdom that have received such premium and do not enter into closing agreements and possibly Bermuda insurers that have not entered into closing agreements regarding refund claims.

Reports relating to insurance payments made from 1988-90 may disclose under Regulation Section 301.6114-1(d) (4) (i), regarding casualty insurance, indemnity bonds, reinsurance and life insurance, the total amount of premiums derived by a foreign insurer or reinsurer in U.S. dollars. The disclosure is permitted even if a portion of the premium was related to non-U.S. situs risks. Reasonable estimates are permitted to satisfy the requirements, and foreign insurers and reinsurers are required to report for calendar years 1988 and 1989 by Aug. 15,1990.
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Title Annotation:Delta Re Insurance Co.
Author:Wright, P. Bruce
Publication:Risk Management
Article Type:column
Date:Jul 1, 1990
Words:701
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