Delaware General Corporations Act Amended to Allow Use of Captive Insurance for D&O Coverage | Skadden, Arps, Slate, Meagher & Flom LLP

On February 7, 2022, the Governor of Delaware signed a bill to amend the Delaware General Corporations Act (DGCL) to expressly permit Delaware corporations to purchase and maintain directors and officers (D&O) liability insurance. by or through captive insurance companies. This amendment, described in more detail below, provides coverage for liabilities incurred by directors, officers, employees and agents of a corporation, even in certain situations where the corporation would not be permitted to indemnify for such liability.

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When directors and officers face claims in their capacity or as such, their defense costs will generally be indemnified or advanced by the company. However, there are certain limits on a corporation’s power to indemnify directors, officers and other indemnifiable persons. Under the DGCL, where the claim has been brought by or on behalf of the company (including derivative claims), the company has no power to indemnify its directors, officers, employees or agents for judgments rendered against them or for the amounts paid in settlement. . D&O insurance has traditionally played a vital role in protecting directors and officers (and their personal assets) against exposure to such liability. In recent years, however, companies seeking D&O coverage have faced increasing challenges in the D&O insurance market, including significant increases in premiums and retention amounts, coupled with less favorable. In some cases, policyholders have not been able to obtain from traditional third-party insurers the desired policy limits to meet the company’s risk management objectives, or these limits have proven to be prohibitively expensive. Against this backdrop, companies have explored alternatives to traditional third-party D&D insurance, including through captive insurance, to obtain adequate D&D coverage at affordable costs.

Captive insurance companies

Amendments to Section 145(g) clarify that Delaware corporations are permitted to purchase and maintain insurance on behalf of their directors, officers, employees and other persons indemnifiable by or through a “captive insurance company” – generally, an insurer directly or indirectly owned, controlled and financed by the company. The captive insurance company must be regulated as such, licensed in Delaware or another jurisdiction and, like liability insurance, may provide coverage for liabilities incurred by directors, officers, employees and others, whether or not the company itself can compensate them for these amounts. pursuant to Article 145 of the DGCL. The amendments also allow a company to obtain captive D&O coverage under a ‘fronting’ arrangement, in which a third-party insurance company is the insurer, but funds to pay claims are ‘presented’. to the insurance company by the company.

The Amendments include certain “safeguards” intended to provide reasonable limitations and exceptions to these captive D&D insurance policies. First, they must exclude coverage of any personal profit or financial benefit to which the covered person was not legally entitled, such as insider trading. Similarly, policies should exclude coverage for willful criminal or fraudulent acts, as well as knowing violations of the law by the director, officer or other covered person. In each case, for the exception to apply, the prohibited conduct must have been established by a final and non-appealable decision in the underlying proceedings relating to the claim in question (which does not include a claim for damages). assurance). Subject to these mandates and the other terms and conditions of the policies, cover may be provided both for expenses (such as attorneys’ fees) and for judgments and amounts paid in settlement. These exclusions would not apply to the extent that the company is otherwise permitted to indemnify the director, officer or other covered person under the existing provisions of section 145, and the company is permitted to prescribe exclusions and additional limitations to coverage beyond the scope of the restrictions. described above.

In addition, any decision to make a payment under such a captive insurance policy must be made by a third party administrator or in accordance with the existing requirements of section 145 (for example., by the board or a committee of the board, in each case, by directors not affected by the claims in question, by independent legal counsel if there are no such directors or by shareholders). This restriction is intended to ensure that the persons who make claims under these policies are not the same persons who make the decision whether or not to pay claims under the policy.

Finally, if a payment is to be made under a captive insurance policy in connection with the dismissal or compromise of an action, suit or proceeding in which the company is otherwise required to provide notice to shareholders (such as this would be the case in the settlement of derivative claims), such notice shall state that a payment is proposed to be made under the captive insurance policy in connection with such termination or compromise. Courts and shareholders would therefore have the ability to review the captive insurance company’s use of corporate assets to provide insurance coverage for such a claim in connection with the dismissal or compromise. There is no requirement for a court to make a specific decision regarding payments made by captive insurance companies.

The amendments went into effect immediately after the governor signed the bill.

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