Richard, Layton & Finger reports:
The Delaware General Assembly has approved legislation amending Section 145 of the Delaware General Corporation Law (the “DGCL”) to authorize a Delaware corporation to use captive insurance, which is generally defined as insurance provided by or through a wholly-owned subsidiary funded by the corporation, to protect its current and former directors, officers and other indemnifiable persons (“covered persons”). The captive insurance may be used to protect covered persons against liability even if the corporation would not be empowered to indemnify them, subject to a limited set of minimum exclusions. The amendments, which are expected to be enacted in the near term, will afford Delaware corporations the opportunity to take advantage of captive insurance arrangements when designing their D&O insurance programs. ...
RLF views this development as a reaction to the growing cost and reduced availability of D&O insurance. This is a problem because DGCL Section 145(g) allows companies to buy D&O insurance to provide directors and officers with coverage for non-indemnifiable expenses. With traditional D&O insurance drying up, Section 145(g) became less useful. The new legislation will restore 145(g)'s utility by clarifying that policies written by captive insurance companies will qualify.
Under new Section 145(g)(1), a captive insurance policy must exclude from coverage, and must provide that the insurer may not make payment in respect of any loss arising out of, based upon or attributable to a final adjudication with respect to: (i) any personal profit or financial advantage to which the covered person was not legally entitled, (ii) any deliberate criminal or deliberate fraudulent acts, or (iii) any knowing violation of law.
An interesting wrinkle to all of this, however, is that Delaware is seeking to become the dominant domicile for captive insurance entities of all types. Christopher Bruner explains:
Naturally, Delaware would prefer to be the Delaware of insurance. So, it is unsurprising that Delaware, once again, followed another state's lead and expanded into this new field by building upon its preexisting advantage in corporate law and business organizations generally. In this area, Delaware was a relative latecomer, having begun to pursue captive insurance business only in 2005 when the General Assembly “moderniz[ed] Delaware law regarding the formation of these companies” with the aim of “positioning Delaware to become a home to the growing number of captive insurance companies being created by companies worldwide.” The legislative policy could not have been clearer, as the statute itself expressly states that “It is determined and declared as a matter of legislative finding that captive insurance companies can serve a valuable risk management function, and that their responsible utilization and the growth of the captive insurance industry in the State of Delaware are in the best interests of this State.” The provision adds that “the purpose and policy of this chapter” includes regulation of captive insurance entities, “provid[ing] flexibility and opportunity” to the market, and “foster[ing] economic development in this State through the growth of the captive insurance industry.”