On February 7, 2022, Delaware’s governor signed Senate Bill 203, which amended Sec. 145(g) of the General Corporation Law (GCL) to expressly authorize a Delaware corporation to purchase and maintain insurance on behalf of its directors, officers, employees, and agents (D&O insurance) by or through a captive insurance company. This includes providing D&O insurance coverage in situations in which the corporation would not have the power to provide the covered person with indemnification.
Indemnification under the GCL
Sec. 145 of the GCL requires a Delaware corporation to provide indemnification in certain situations, permits indemnification in others, and prohibits it in certain other situations. For example, a corporation cannot indemnify covered persons against amounts paid to satisfy judgments and settlements of claims brought by or in the right of the corporation.
However, Sec. 145(g) provides that a corporation can purchase D&O insurance coverage for acts in which indemnification would be prohibited.
Before the amendment enacted by S.B. 203, which went into effect February 7, it was not certain whether the insurance referred to in Sec. 145(g) included insurance provided by a captive insurance company. A captive insurance company is an insurer that is directly or indirectly owned, controlled, and funded by the corporation. It is now clear that insurance provided by a captive insurance company is included in Sec. 145(g).
Restrictions on the use of captive insurance policies
The amendment does place some restrictions on the terms of captive insurance policies. Sec. 145(g)(1) requires that a captive insurance policy must exclude from coverage, and must provide that the insurer may not make payment in respect of, any loss that arises out of, is based upon, or is attributable to any personal profit or financial advantage to which the covered person was not legally entitled, any deliberate criminal or deliberate fraudulent act, or any knowing violation of law.
However, the coverage exclusions only apply if the proscribed conduct has been established in a final, non-appealable adjudication in the underlying proceeding in respect of the claim.
In addition, Sec. 145(g)(2) provides that any determination to make a payment under a captive insurance policy in respect of a claim against a current director or officer must be made either by a third-party administrator or in accordance with the procedures set forth in paragraphs (d)(1) through (4) of Sec. 145. The legislative summary states that this is to ensure that the persons claiming entitlement to payment under the captive insurance policy are not the same persons making the decision whether to pay claims under the policy.
Furthermore, Sec. 145(g)(3) provides that if any payment is to be made under the captive insurance policy in connection with the dismissal or compromise of any action, suit or proceeding by or in the right of the corporation as to which notice is required to be given to stockholders, the corporation must include in the notice that a payment is proposed to be made under the captive insurance policy.
Implications of S.B. 203
Many corporations believe providing D&O insurance is important to attract and retain qualified directors and officers.
However, corporations have recently found it difficult to obtain D&O insurance from third-party commercial insurance companies that covers acts for which the corporation cannot provide indemnification.
Captive insurance companies may or may not be the solution. It is now clear that they are an option for Delaware corporations to consider.
For additional information on services that CT Corporation provides to Delaware's business entities, see our Delaware Registered Agent services.
