Washington State Collects $3.6 Million from Costco's Captive Insurer

Arizona-domiciled NW Re Limited, a captive insurance company owned by Costco Wholesale Corp., will pay $3.6 million in premium taxes, penalties, interest, and a fine in a settlement it reached with Washington State Insurance Commissioner Mike Kreidler, according to a statement from Washington State.

The captive insurer paid $2.4 million in unpaid premium taxes and $1.2 million in fines, tax penalties, and interest on March 8.

NW Re's sole insured and parent company is Costco Wholesale Corp.

Costco's captive insurer provided deductible reimbursement for the organization's liability and workers compensation from 2000 until 2019 without authorization, according to the statement. 

NW Re self-reported its unauthorized activity in December 2018 as part of the commissioner's push to identify all captives that insure assets in Washington state.

To date, Mr. Kreidler's office has collected about $4.4 million in agreements with captive insurers.

In August 2018, Microsoft's Arizona captive paid more than $876,000 for unpaid premium taxes and interest and penalties to Washington State, and, at the time, Mr. Kreidler said, "Captives are a gray area in state law, and this is the first case where we've tested them."

As a follow-up, in December 2018, Mr. Kreidler offered all captive insurance companies that have "unlawfully" insured any risk in Washington State in the past 15 years the chance to pay a substantially reduced fine and premium tax penalty for self-reporting this activity.

Some captive tax experts have said that since the state of Washington does not have a mechanism to tax placements from nonadmitted companies, this issue is not applicable in most other states, which have other statutes that they apply.

Similarly, other captive tax experts have said the impact of the case and settlement will be limited because Washington State does not—unlike about three dozen other US states—have a captive statute and "it never has really appreciated captives."

According to the Commissioner's office, Washington State law requires that when risk is insured in the state, it should be done through an admitted insurer or through an unauthorized insurer placed through a licensed surplus line broker.

State law also requires insurance companies to pay a 2 percent tax based on their written premiums. The tax revenue is sent to the state general fund to pay for government operations.  

John Talley, captive program manager with the Missouri Department of Insurance, said in an interview, "The concern with the Microsoft case is that other non–captive domicile states may begin to use their laws to levy taxes or fees on captives insuring owner facilities or employees within borders. Whether this will happen remains to be seen."