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Late last month, the Delaware legislature amended Section 145(g) of the Delaware General Corporation Law to clarify that the definition of insurance includes captives, which are licensed insurance companies that provide insurance for certain risks to their corporate parent companies. As this Woodruff Sawyer blog notes, this change will open the way for captives to become a viable alternative to traditional D&O insurance (even Side A D&O insurance) for claims that are not directly indemnifiable by a Delaware corporation. This legislation sought to address a persistent concern that using a parent company’s captive instead of purchasing traditional D&O insurance looks like the corporation is attempting to fund non-indemnifiable losses, because the corporation itself funds the captive insurance company.

As Kevin LaCroix notes in The D&O Diary, the legislation also includes several limitations on the use of captive insurance. Section 145(g)(1) specifies that the captive insurance must contain several exclusions mirroring equivalent provisions in third-party D&O insurance policies:

Thus, the policies must provide that the insurer may not make any payment in respect of loss arising out of, based upon or attributable: (1) any personal profit to which the covered person was not legally entitled; (2) any deliberate criminal or deliberate fraudulent act; and (3) any knowing violation of law.

It seems that opinions are mixed as to whether large well-capitalized companies will be rushing out to set up their own captive D&O insurers, but rising costs and more difficulty obtaining D&O insurance could make this alternative more attractive.

We’ve also posted several memos about this development in our “D&O Insurance” Practice Area.

– Dave Lynn