Appeals Court holds that ch. 176D applies to captive insurer

Lemos was injured in 2001 as a result of defects in a lawnmower manufactured by Electrolux. He obtained a jury award of $550,500. He then brought an action against Electrolux's captive insurer, Equinox, alleging that it engaged in unfair claim settlement practices in breach of Mass. Gen. Laws chs. 176D and 93A.

As explained by the court in Lemos v. Electrolux North Am., Inc., 78 Mass. App. Ct. 376 (2010), a captive insurance company is formed to bear the risks of the parent company. Premiums paid to a captive may be tax-deductible, and a captive has the potential to produce lower insurance costs.

Electrolux was the parent and sole shareholder of of Equinox. The director of risk management at Electrolux, who was also the president of Equinox, stated that Equinox had no employees, only a board of directors. Its role was purely that of a funding vehicle for the reimbursement of Electrolux for claims that are paid by Electrolux.

Equinox argued that because it is a captive company, Electrolux is in effect a self-insurer, and that Equinox is therefore not engaged in the business of insurance so that the requirements of ch. 176D to not apply to to it.

The Superior Court agreed and granted summary judgment to Equinox.

The Appeals Court reversed. It noted that Equinox is a separate, for-profit entity that calculates the premiums it charges based on loss experience and costs, calls itself an insurance company, and issued a policy that states it provides commercial general liability and other coverage. It also noted that Electrolux receives a financial benefit from using a captive insurer rather than being self-insured.