CLIPs vs Captives: When to Use Each - and How They Work Together
- Steven Barge-Siever, Esq.
- Sep 7
- 4 min read
By Steven Barge-Siever, Esq.
Upward Risk Management LLC
Introduction - Why This Comparison Matters
Across industries, companies are asked to make bigger promises than ever before:
SaaS vendors commit to multi-year minimums.
Manufacturers guarantee delivery timelines and uptime.
Retailers extend credit with cancellation or forgiveness provisions.
Construction firms sign performance guarantees.
Financial institutions provide payment protection programs.
Each of these creates contractual obligations that may exceed what a balance sheet can comfortably support.
Two tools have emerged to solve this:
The Contractual Liability Insurance Policy (CLIP)
The captive insurance company
And increasingly, companies are combining the two.
This article explains the differences, tradeoffs, and when to consider a CLIP, a captive, or a hybrid structure.
1. What a CLIP Is - The Basics
A CLIP (Contractual Liability Insurance Policy) is a standalone insurance policy issued by a licensed carrier to cover defined contractual obligations.
Purpose: Transfers contractual promises - refunds, credits, minimums, cancellations - to an insurer.
Use Cases:
A SaaS provider insuring minimum-spend obligations.
A manufacturer guaranteeing uptime for supplied parts.
A lender offering debt cancellation/suspension protections.
A construction firm protecting against subcontractor default penalties.
Advantages:
Speed - CLIPs can be placed in weeks, not months.
Recognition - insurer-backed, legally regulated coverage.
No structural setup - unlike captives, a CLIP requires no new entity.
Limitations:
Pricing depends on carrier appetite.
Coverage terms may be less flexible than a bespoke captive.
2. What a Captive Is - The Basics
A captive is an insurance company owned by the insured business. Instead of transferring risk to the commercial market, the company forms its own licensed insurer to retain risk.
Purpose: Provide insurance capacity for risks not easily covered in the commercial market, while keeping underwriting profits.
Use Cases:
A Fortune 500 retaining product warranty risk.
A healthcare group insuring medical liability or service obligations.
A global manufacturer retaining supply-chain disruption exposures.
A financial institution managing credit and loan-related risks.
Advantages:
Customization - policy terms can be written to the company’s exact needs.
Control - greater influence over claims handling and coverage design.
Economics - long-term potential to save money and capture underwriting profits.
Limitations:
High capitalization and startup costs.
Requires regulatory approvals and compliance infrastructure.
Not cost-effective for smaller or early-stage companies.
3. CLIP vs Captive - Key Tradeoffs
When choosing between a CLIP and a captive, the differences come down to cost, speed, flexibility, and regulation.
Cost
CLIP: Annual premium, no upfront capital.
Captive: Requires significant capitalization plus ongoing management.
Speed
CLIP: Available immediately through a carrier.
Captive: Often 6–12 months to design, domicile, and approve.
Flexibility
CLIP: Bound by carrier appetite and standard underwriting.
Captive: Coverage tailored to unique contractual needs.
Regulation
CLIP: Relies on admitted carrier licenses; widely recognized.
Captive: Must be domiciled in a jurisdiction (e.g., Vermont, Bermuda, Cayman) and comply with local captive laws.
Summary: CLIPs offer speed and credibility, while captives offer customization and control — but at a cost.
4. CLIPs with Captives - The Hybrid Model
For many companies, the most effective solution is using CLIPs and captives together.
How it works:
A carrier issues a CLIP, providing admitted insurance that counterparties, auditors, and regulators recognize.
The company’s captive reinsures part of that risk, retaining profit and control.
Reinsurers may provide additional capacity for large or unusual exposures.
Why it matters:
Hybrid structures combine the credibility of a carrier-issued CLIP with the customization and economics of a captive.
This approach works whether you’re an AI vendor guaranteeing algorithm performance or a manufacturer guaranteeing supply chain uptime.
5. When to Use CLIPs, Captives, or Both
When to Use a CLIP Alone
Best when speed, credibility, and recognition are most important.
Works for companies offering contractual guarantees (performance, minimum spend, service levels).
Ideal if you want insurance-backed credibility without tying up capital.
When to Use a Captive Alone
Best when risks are predictable and recurring, such as warranties, credit programs, or long-term service obligations.
Suitable for companies with the capital and infrastructure to run their own insurer.
Captives deliver control and long-term cost efficiency.
When to Use a CLIP + Captive Hybrid
Best when obligations are large, novel, or negotiated - too much for a CLIP alone.
Combines admitted carrier paper (CLIP) with captive retention for flexibility and profit retention.
Attractive for industries including tech, manufacturing, finance, healthcare, and construction.
6. A Broader Lens: Beyond Tech
It’s easy to see CLIPs as a niche tool for SaaS or AI, but their relevance is far broader:
Manufacturing - Guaranteeing delivery timelines or component uptime.
Healthcare - Insuring contractual service levels with hospital systems.
Retail finance - Supporting installment credit and payment protection programs.
Construction - Backstopping subcontractor performance guarantees.
Financial services - Managing contractual obligations tied to loan forgiveness or credit waivers.
In all of these contexts, the question remains the same: do you transfer the obligation externally with a CLIP, retain it through a captive, or structure a hybrid?
Conclusion - Picking the Right Tool for Growth
Both CLIPs and captives are proven solutions, but they serve different purposes:
CLIPs provide speed, simplicity, and credibility, especially for companies that need immediate coverage to close deals.
Captives provide control, customization, and long-term economics for larger organizations with capital to deploy.
Hybrids deliver the best of both, allowing companies to retain profit while still presenting insurer-backed guarantees.
Learn more about structuring CLIPs in our CLIP Insurance Guide.
The future of risk transfer isn’t just about protecting against accidents or lawsuits. It’s about insuring the promises that drive modern commerce - whether through a CLIP, a captive, or both.
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