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approximately eight operating subsidiaries provided goods and
services required by their independent retail grocery store owner
customers. During 1977, Malone & Hyde incorporated Eastland
Insurance, Ltd. (Eastland) as a wholly owned Bermuda captive
insurance company to provide insurance for itself and its
subsidiaries at less cost than was available from third-party
insurers. Eastland was capitalized at $120,000, the minimum
statutory requirement pursuant to Bermuda's insurance law.
Malone & Hyde, Inc. v. Commissioner, 62 F.3d at 836. Malone &
Hyde decided that initially Eastland only would reinsure selected
risks of the parent and the subsidiaries. Accordingly, Eastland
agreed to reinsure the first $150,000 of each workers'
compensation, auto liability, and general liability claim
primarily insured by Northwestern National Insurance Co.
(Northwestern). Eastland provided Northwestern with an
irrevocable letter of credit, initially in the amount of $250,000
but subsequently increased to $600,000, to cover amounts unpaid
under the reinsurance agreement. Additionally, Malone & Hyde
executed hold harmless agreements wherein it agreed to indemnify
Northwestern against any liability in the event that Eastland
defaulted on its reinsurance obligations. Malone & Hyde paid
insurance premiums to Northwestern and Northwestern in turn paid
Eastland reinsurance premiums for the insurance risks assumed by
Eastland. Malone & Hyde allocated to the operating subsidiaries
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