Opinion ID: 6340618
Heading Depth: 2
Heading Rank: 1

Heading: Formation of Reserve

Text: Zumbaum and Weikel formed Peak in the mid-nineties to operate near deep underground mines in Idaho’s Silver Valley. Peak continues to do business in Idaho, primarily on the Bunker Hill Superfund Site, but also in other locations in Idaho and Nevada. It manufactures and sells equipment that supports underground mining operations. This equipment includes ventilation fans that control the temperature of the mines, submersible pumps that remove the groundwater from the mines, and vehicles that transport workers, explosives, and fuel to, from, and within the mines. Peak also repairs and cleans mining equipment that is often contaminated with hazardous waste like lead or zinc. Because the cleaning operations risk creating hazardous-waste runoff, Peak employs various measures, such as the use of cleaning bays, sumps, and containment areas, to prevent spreading the contaminants. In 2008 and 2009 Peak had 17 employees, including two shop managers, ten shop staff, and two outside salespersons. By 2010 it was down to 13 employees. Zumbaum and Weikel also owned two other business entities: RocQuest holds the real estate that Peak leases for its operations, and ZW was created by Zumbaum and Weikel to lend money to Zumbaum’s secretary when she wanted to buy a bar in Silver Valley. At trial Zumbaum described the operations of RocQuest and ZW as insignificant. 11 Appellate Case: 18-9011 Document: 010110683986 Date Filed: 05/13/2022 Page: 12 Before obtaining insurance from Reserve, Peak relied on several commercial policies for its insurance needs: Most recently it had paid premiums of $95,828 for 2007, and $57,300 for the first half of 2008. The coverage limits for the policies ranged from $5,000 to $2 million. Peak filed few claims under these policies—some claims under its auto-insurance policies and a claim under its commercial-property policy for snowstorm damage to the roof of one of Peak’s buildings (Peak spent $25,000 to replace the roof but recovered only $2,000 from the insurer). Although Peak claimed that it was unhappy with its insurers’ handling of these claims, Peak continued its policies with them, even after procuring the additional coverage from Reserve. Zumbaum and Weikel reached out to Capstone after a mentor recommended taking a look at forming a captive insurance company. Stuart Feldman, chief executive officer of Capstone’s general partner, Capstone Holdings Corp., and Lance McNeel, Capstone’s director of insurance operation, conducted an on-site visit of Peak in August 2008. Before the visit Peak provided Capstone with background documents on Peak’s finances, taxes, and current insurance. The visit lasted six to eight hours. McNeel and Feldman toured Peak’s facilities and discussed Peak’s business operations and insurance risks. After the visit Capstone began preparing a “Captive Insurance Company Feasibility Study” to “evaluate[] Peak’s desire to explore the option of forming a captive insurer for the purpose of writing coverages that are generally unavailable or impractical to obtain in the conventional insurance marketplace.” Aplt. App., Vol. 7 at 2027, 2030 (emphasis added). For reasons not explained in the record, Capstone did not produce the 12 Appellate Case: 18-9011 Document: 010110683986 Date Filed: 05/13/2022 Page: 13 final version of the study until August 2009. The study outlined advantages of captives, such as “lower risk costs,” investment income, tailored policies, coverage prices that “track closely with the risks inherent in an insured’s own exposures,” access to reinsurance, and “complete control over the operation of [the] captive[].” Id. at 2040–42. It said that “[c]overage lines that address reasonably predictable, non-catastrophic exposures are good candidates for coverage by a captive,” and that other “unpredictable exposures may also be good candidates,” but that those exposures would likely require “pooling or reinsurance.” Id. at 2040. As for Peak specifically, the study noted that Peak’s “current conventional policies . . . offer broad and comprehensive coverage that is appropriately designed and priced,” id. at 2047, and it acknowledged that Peak “had no losses of any significance” on its current policies, id. at 2061. But it stated that a captive could insure against additional risks, and it mentioned 13 categories of such risks, describing each in one to four sentences. There was no discussion of the likelihood of any risk. The study did not mention either ZW or RocQuest. Zumbaum and Weikel did not wait for the final feasibility study before beginning their insurance project. On December 3, 2008, about four months after the site visit, they incorporated Reserve (as a subsidiary of their holding company named Peak Casualty) in Anguilla, British West Indies, with an initial capital investment of $100,000. Reserve had no employees and was managed by Capstone. Also in December, Reserve issued its first set of policies. 13 Appellate Case: 18-9011 Document: 010110683986 Date Filed: 05/13/2022 Page: 14