The plan may be considered abusive. For example, a catering business in Wyoming with hurricane risk insured through an 831(b) plan would meet the unnecessary and implausible risk threshold. 

Insurance contracts should be written to clearly define the insured risk and terms of insurance. If the coverage provided in   microcaptive  the insurance contract is vague, ambiguous or illusory, consider this a red flag. The policies should also be issued with written effective and expiration dates and provided to you promptly following the insured’s initial premium payment. 

Additionally, the plan should not duplicate coverage. Your 831(b) plan should provide coverage for gaps in traditional insurance and not replicate coverages already insured through a traditional commercial insurer. 

3. Premiums are expensive, inconsistently paid and set to meet specified results.

Insurance premiums should be reasonable and determined by an independent third-party underwriter or actuary — the premiums shouldn't be arbitrary or set to meet a specific requirement. For example, plan premiums should not exceed the premiums charged by commercial insurers for similar coverage. If you’re not sure, ask if there is a defined methodology to determine premiums and coverage; if there isn’t one, ask how premiums were calculated. 

Similar to commercial policies, premium payments should have a set schedule, perhaps monthly or quarterly. The following would be causes for concern: no payment schedule, no required regular payments and/or lack of follow-up on missed payments.

4. A claims procedure does not exist.

As we discussed earlier, the purpose of insurance is to shift and distribute financial risk. That includes paying claims when a covered loss occurs. For example, if your business is damaged from a tornado, you would submit a claim to your insurer following their claim procedures. 

When an 831(b) plan fails to outline clearly defined written procedures for how to submit claims, this may indicate that it does not intend to pay out many claims. Simply put, there would appear to be no intent to transfer the risk away from the insured to the insurance company. 

Furthermore, if the insured has a potential claim under their 831(b) plan and does not submit the claim, that may be further evidence of no intent to transfer the risk away from the insured to the insurance company.