The directors and officers liability insurance market has seen some of the highest rate increases since the commercial market began hardening about four years ago, which has generated more interest in trying to use captive insurers to fund the risk.

Recent changes to Delaware’s corporate law are expected to intensify that interest as it explicitly states that captives can be used to cover Side A D&O risks.

Prior to SB 203 being signed into law last month, Delaware and most other states did not allow companies to indemnify directors and officers for certain types of lawsuits, including derivative lawsuits filed by shareholders alleging misconduct by company officials. Instead, corporations bought Side A D&O coverage from commercial insurers to protect their directors and officers from such suits.

The revised law allows captives in any domicile to provide Side A D&O coverage for Delaware corporations. More than 50% of publicly traded companies are incorporated in Delaware.

A handful of other states have language in their corporate laws that imply that Side A can be offered via a captive, but none specifically state that captives can be used, said Steve Kinion, director of Delaware’s Bureau of Captive & Financial Insurance Products.

Captive managers say the Delaware law needs to be examined and compared with corporate laws in other states, but it is potentially helpful. 

Some corporations may still have bylaws that bar Side A risks being covered in a captive, but the change in Delaware is a good development, said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont. “It’s certainly an area that has been of significant concern to companies.”

“If all it does is cause a little bit more competition in the D&O market, then that’s a good thing,” said Ellen Charnley, president of Marsh Captive Solutions in Las Vegas. “We’ll see how it plays out.”

Already, some companies facing difficulty securing coverage have used cell captives to cover D&O risks, she said. 

“There’s a little bit more arm’s length than with simply forming a single-parent captive, ” Ms. Charnley said. But the use of cells to cover D&O risks has not been tested in court, she said.

Side A was a challenging risk to put in captives and there was often insufficient premium in other D&O coverages to prompt much interest, said Peter A. Kranz, Burlington, Vermont-based executive managing director and captive practice leader at Brown & Brown Inc.

The Delaware legislation is helpful for the captive sector, but questions remain, he said.

“One is, are your independent directors going to be OK with purchasing the insurance from a captive?” he said. Directors may have concerns over the long-term stability of a captive compared with a commercial insurer. “You have to get them comfortable,” Mr. Kranz said.

In addition, companies incorporated in Delaware but headquartered elsewhere will have to determine which state’s corporate law governs their D&O insurance purchasing. “I don’t think we know that yet,” Mr. Kranz said.