![]() ![]() The Supreme Court disagreed, holding that the obligation of a monetary bond is an assurance of performance. ![]() Since surety bonds are insurance, the bail bond company took the position that it was also insurance. The matter of Allied Fidelity v Commissioner explored whether a bail bond company could classify its expenses and reserves as tax deductible, as an insurance company. This definition, developed entirely by the Supreme Court, was revisited in another case questioning what constituted insurance. The Supreme Court opined that risk shifting and risk distribution were essential to an insurance contract and that the life insurance payments constituted insurance in its commonly accepted sense (however the annuity payments were not held to constitute premiums). The Supreme Court noted that the Internal Revenue Code does not define what constitutes “insurance”, so it made up a definition for the case. The IRS challenged this structure as a tax shelter. This unusual structure was designed to escape the estate tax, which was a more significant tax in the mid-20 th century. The case, Helvering v Le Gierse, involved an annuity where, upon the death of the insured, the residual premiums would be paid as a life insurance payment. Each of these prongs arise out of a case from the 1940s dealing with life insurance and an annuity. The IRS leverages the following definition of insurance: 1) there must be an insurable interest 2) there must be risk shifting 3) there must be risk distribution and 4) there must be insurance in the commonly accepted sense. Consequently, the definition of what constitutes insurance is critical for the capital markets. ![]() This resulted in many states defining insurance differently, several treatises taking different positions on what constitutes insurance, and the federal government struggling to keep up with when insurance manifests within a contract.Īs an example, there is considerable debate in federal courts as to when a warranty product constitutes the unlicensed sale of insurance. With the passage of the 1945 McCarran-Ferguson Act, Congress delegated to the states the exclusive authority to govern the business of insurance. In addition, defining insurance is a larger issue for the whole industry. ![]()
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