On February 7, 2022, Delaware Governor John Carney signed into regulation a invoice that amends the Delaware General Corporation Law (DGCL) to expressly permit the use of captive insurance coverage corporations to fund a Delaware company’s administrators and officers insurance coverage protection. The insurance coverage enterprise is traditionally cyclical in nature, and we’re at present experiencing a very “hard” D&O insurance coverage market, during which corporations searching for D&O protection face capability and pricing challenges. This hardening of the market is particularly pronounced for corporations engaged in new and modern sectors akin to know-how, crypto and the sharing economic system.
Although many corporations, in response to a tough market, flip to the use of captives to self-insure their very own dangers, sure ambiguities within the regulation have traditionally discouraged the use of captives within the D&O house, significantly for “Side A” protection for “non-indemnifiable” loss.
This regulation intends to mitigate these authorized impediments and opens the door for the elevated use of captives to fund corporations’ D&O protection.
A main – although not the one – authorized obstacle to self-funding D&O protection by a captive involved whether or not Delaware firms may or ought to use captives to fund “Side A” D&O protection, which insures towards the wrongful acts of administrators and officers when an organization is just not permitted, as a matter of a regulation or pursuant to an organization’s governing paperwork, to indemnify these people.
Background
Section 145(a) of the DGCL permits a Delaware company to indemnify a director or officer “if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.” Separately, Section 145(g) of the DGCL permits Delaware firms to buy insurance coverage defending administrators, officers and different indemnified individuals “against any liability asserted against such person … whether or not the corporation would have the power to indemnify such person against such liability.” Accordingly, to hedge its danger with respect to any non-indemnifiable acts (e.g., acts not taken “in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation”), a company may buy insurance coverage protection. However, till this new laws, there was uncertainty whether or not or not danger captured by a captive ought to be handled, for functions of the DGCL, as insurance coverage or as indemnification. If captive insurance coverage is handled because the latter, then it might be suspect to supply “Side A” protection by this mechanism.
This regulation amends Section 145 of the DGCL to expressly allow Delaware firms to make the most of captives to supply protection for D&O legal responsibility, so long as this system meets sure statutory protected harbors – together with, most notably, requiring the exclusion of protection related to sure dangerous acts and the involvement of a third-party administrator in sure conditions.
Looking ahead
In gentle of this modification to the DGCL, we anticipate extra Delaware firms will think about using captives to fund protection of D&O danger. With a quantity of jurisdictions to select from, corporations might want to consider which jurisdiction is acceptable for his or her specific danger profile. Captive insurance coverage will be provided by an entirely owned captive insurance coverage subsidiary of the insured firm or by a segregated cell captive the place the insured will “rent” a separate cell of a standalone captive to self-insure their danger.
Although there are regulatory necessities and prices related to forming and sustaining these sorts of entities, captives can usually be an important danger administration instrument for well-capitalized corporations which have the capability to assume strategically over the long run about their danger profile and danger administration. For instance, captives might present corporations with better flexibility in how they construction their insurance coverage program and handle danger, permitting them to acquire broader protection for extra bespoke dangers, and typically at decrease premiums, by having the ability to entry the reinsurance markets.
Furthermore, if losses are lower than anticipated, then captives – topic to relevant legal guidelines – might dividend extra premium again to the sponsor corporations. Companies have lengthy used captives to self-insure all kinds of danger with low-value, high-frequency claims. However, with the hardening of the D&O market, corporations have began to contemplate learn how to successfully and effectively use captives to guard towards their potential D&O legal responsibility. We anticipate the brand new regulation to speed up this pattern out there.
[View source.]