Delaware Governor John Carney recently signed into law a bill to amend Section 145 of the Delaware General Corporation Law (“DGCL”) to allow Delaware corporations to use captive insurance for their directors and officers (“D&O”) liability insurance. Captive insurance is insurance provided by a wholly-owned subsidiary funded by the corporation, as explained by the synopsis accompanying Senate Bill No. 203. Like traditional D&O insurance from a third party insurance company, captive insurance can provide coverage for liabilities incurred by current and former directors, officers, and other indemnifiable persons (“covered persons”).
Section 145 of the DGCL governs a Delaware corporation’s indemnification of covered persons. Under Section 145(a), a corporation may indemnify covered persons in connection with third party claims. Section 145(b) authorizes a corporation to indemnify against claims brought by or in the right of the corporation; however, the corporation cannot indemnify against judgments, fines, or amounts paid in settlement in such cases. The procedures and limitations for indemnification are set forth in Sections 145(a) and (b).
Section 145(g) authorizes a Delaware corporation to purchase liability insurance on behalf of its covered persons, This liability insurance may insure against potential liability whether or not the corporation is empowered to indemnify. Thus, D&O insurance may provide protection for covered persons in connection with judgments, fines, and amounts paid in settlement of claims brought by or in the right of the corporation. Until the amendment to Section 145(g), it was not clear to what extent this section applied to captive insurance.
The amendments to Section 145(g) specifically authorize a Delaware corporation to use captive insurance for its D&O insurance. Like traditional D&O insurance, captive insurance may provide coverage for liabilities incurred by covered persons for, among other things, judgments, fines, and settlement amounts paid for claims brought by or in the right of the corporation.
The amendments include narrow limitations on the use of captive insurance. Under Section 145(g)(1), a captive policy must exclude from coverage, and must provide that the insurer may not make a payment in connection with losses attributable to personal profit or financial advantage to which the covered person was not entitled, deliberate criminal or fraudulent acts, or any knowing violation of law. The synopsis to the bill notes that coverage may apply to duty of oversight (i.e., Caremark violations), so long as the director did not knowingly cause the corporation to violate the law.