Would a Captive Insurance Company Have Made the Difference?
For decades, tourists and native New Yorkers alike flocked to Dean & Deluca maintaining a type of reverence for the upscale grocery store. It was arguably the go-to NYC grocery destination for foodies, worthy of oohs, aahs, and of course, the act of spending big money on edible delights. Little did we all know, Dean’s crippling debt smoldered in the background, biding its time to bubble over and rob Dean & Deluca of its seemingly untouchable reputation.
By and by, the grocer’s future is irrevocably bleak. But the state of things for Dean & Deluca begs the question, could something have been done to prevent it all? Or at the very least, softened the blow? Government bailouts, private equity investments funds, and other proverbial lifeboats were out of the question as the grocer continued to spiral downward. There was no real plan to boost sales either. But what of insurance coverage; a concerted effort to transfer risk to a third party before its financial stability waned?
Commercial insurance coverage for private businesses doesn’t cover for business interruption when bad business dealings are in play. But a captive insurance company may have been the key to thwarting the financial pangs Dean and Deluca is experiencing now.
A “captive” is an insurance company that a business forms to insure risks which aren’t covered in the commercial market or might be too expensive for a mid-sized company to insure with commercial insurance. The utilitarian nature of a captive is clear: coverages can be tailored to the specific risks of an operating business.
In Dean & Deluca’s case, coverage for the loss of a major supplier via a captive insurance company may have mitigated (to a certain degree) the severe and irreparable damage done by its missteps.
Captive Insurance: Loss of a Major Supplier
In 1977, Giorgio DeLuca and Joel Dean joined forces to open the first Dean & Deluca location in SoHo, a trendy, progressive area in Manhattan. It wasn’t long before word of this up-and-coming resource for great food caught fire. The grocer offered uncommon foods, much of which came from other countries, and were not found in your average supermarket. It was luxury food, accessible to the masses.
Though the store’s produce, meats, drinks, and spices came at a high premium, their patrons came anyway, excited to indulge in “fancy food.” It became a kind of pilgrimage for many, where customers came with open minds…and open wallets.
By 2003, Dean & Deluca went global, serving customers in Asia and in the Middle East. At its peak, the grocer boasted 60 locations worldwide. The grocer’s suppliers sold them in-demand bakery items, breads, produce—you name it—aligning with growing demand. At this point, Dean & Deluca seemed unstoppable…until it wasn’t.
Its woes were a direct result of perpetual bad decision-making, which included pulling out of lease agreements, withholding payment from vendors, and reneging on pledged sponsorships. The aftermath has been brutal. Vendors and other creditors are making headway in the press, giving Dean & Deluca the kind of negative attention (we assume) it did not want.
Small vendors in New York City alone said they are owed hundreds of thousands of dollars. Bien Cuit, a bakery in Brooklyn known for its burnished croissants: $56,000. Colson Patisserie, purveyor of French macarons and other sweets: $24,000. Amy’s Bread, which allowed the company to stock its famous layer cakes: $51,000 (Source: The New York Times). Ceci Cela Patisserie, a French-style bakery claims it’s owed more than $70,000. Lawsuits are in full swing.
Now owned by Thai real estate magnate, Pace Development, Dean & Deluca has been furiously closing locations. For the 18 locations that remain, customers are feeling the tension; customers have reported bare shelves and an heir of uncertainty among Dean’s remaining workers.
It isn't pretty and there isn’t much the company can do. Commercial insurance can’t withstand the headwinds of this kind of loss. Many commercial insurance policies have serious gaps in coverage, leaving companies like Dean & Deluca on the hook for lost contracts, business interruption, and legal defense costs.
The loss of a major supplier coverage written under a captive insurance company is limited as well – after all, Dean & Deluca’s losses were not fortuitous (unpredictable, sudden). The company’s undoing emanated from its own, intentional actions.
But a claim under the loss of a major supplier coverage under a captive does have the potential to be approved under a negotiated settlement; if some of the facts are unclear; an arm’s length deal.
It is entirely possible that Dean & Deluca would still be liable for many of its debts and the costs associated with business interruption. We can’t say with 100% certainty that Dean & Deluca does not have a captive insurance company in place. What we can say definitively, is that captive coverages, if available, have the ability to keep the company afloat; perhaps covering half of what they owned to suppliers. For now, it’s unclear how Dean & Deluca is going to manage its debt, restock shelves, and restore good faith. It hired restructuring firm Emerald Capital Advisors to see what could be salvaged. Whether or not the grocer stays in business is yet to be seen.
It’s absolutely clear that companies like Dean & Deluca should pay close attention to what not to do. Broken promises and the inability to recover from bad decision-making is what’s contributing to the grocer’s undoing. As part of a broader risk management strategy, incorporating a captive can help mitigate the risk exposures that come along with a retail establishment—especially one that has expanded to include multiple locations.
Captive insurance coverages written under 831(b) of the Internal Revenue Code (including that of loss of a major supplier) fills gaps in coverage, plus allows for ancillary financial benefits, such as a 0% tax rate on the captive’s underwriting profits, secured loans, and dividends.
Mid-market, closely-held (private) businesses can now take advantage of captive planning, where it was, once upon a time, only available to large businesses. Outside-the-box thinking in the way of risk coverage is critical to financial resilience, no matter who’ll be at fault for the potential loss.
Captive Insurance: Legal Expense Reimbursement
If ‘loss of a major supplier’ through a negotiated settlement isn’t in the cards, a captive insurance company may still be able to cover expenses related to legal defense and reputation management. Legal Expense Reimbursement coverage provides monetary reimbursement for the legal expenses incurred when 1) there’s no underlying commercial insurance to provide defense, 2) defense expenses have been exhausted, or if 3) the insured challenges the primary insurer’s failure to defend a claim or cover a judgment.
We probably haven’t seen the last of Dean’s lawsuits – but other companies that are liquid, with a good loss history, should consider how legal expense reimbursement through a captive could help them when/if things go awry.
As we all know, legal proceedings can sometimes play out over a period of years if a plea or some other agreement cannot be reached. In the meantime, law firms expect to be paid; retention fees are not to be taken lightly.
“Self-insuring,” aka “putting money aside for a rainy day,” provides an insufficient safety net for many mid-market companies, but most times, these reserves can’t support companies that have been embroiled in complicated court cases. A captive provides next-level risk coverage + financial benefits to support businesses experiencing various losses. To form a captive and hence, have a kind of risk mitigation foresight ensures that the opportunity for justice prevails.
Captive planning isn’t for everyone or every company. But as we’ve seen in the case of Dean and Deluca, risk is complicated and can foil all good efforts to run a successful business. As we watch the company’s future unfold, let’s understand that the formation of a captive insurance company could have a unique and profound effect on those providing in-demand products or services.