Background - Insurance has been around, as a concept, ever since the Egyptians and Phoenicians began trading across the eastern Mediterranean.
However, it was a small coffee house known as Lloyds that may be credited with the creation of “modern” insurance. Yet, despite such a rich history, the US Internal Revenue Service (“IRS”) often raises the question, “What is Insurance?” whenever it seeks to expand its sources of revenue. Thus, although it was issued in the context of captive insurance when it released Written Determination 201613016, the IRS recently brought the whole question of what is “insurance” to the forefront of many businesses’ minds. If the IRS can deem a contract that covers a specific risk (for example, employment practices or pollution) between a captive insurance company and its policyholder not to be “insurance,” then does not that pronouncement establish a precedent for any insurance company policy covering the same risk? To the layperson, the answer would seem to be, “Yes.”
The IRS itself acknowledges in this Written Determination, “There is … no universally accepted definition … of ‘insurance’ …” but recognizes that courts have held that “insurance” for federal tax purposes includes “insurance in its commonly accepted sense.” What, then, is “insurance?”
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