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Delaware captive D&O law opens options for policyholders: Official


A provision in Delaware’s corporate law allowing captives to cover Side A directors and officers liability risks will open more options for policyholders and was crafted with recent D&O court rulings in mind, the state’s top captive regulator said.

The law will help captive owners to secure D&O in coverage in a tough market in which rates have increased significantly over the past two years, said Steve Kinion, director of Delaware’s Bureau of Captive & Financial Insurance Products.

He was speaking at Business Insurance’s World Captive Forum, held in Miami last week.

“There are some exclusions in the bill, which is one of the first cases that I know of where corporate law dictates what a captive insurance policy can and cannot say,” he said.

Delaware SB 203, which was signed into law last week, allows captive insurers in any domicile to provide Side A D&O coverage for Delaware corporations. More than 50% of publicly traded companies are incorporated in Delaware.

Prior to the measure, 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.

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, Mr. Kinion said.

The Delaware law specifically covers so-called Caremark claims, which relate to a 2019 Delaware Supreme Court ruling that determined that company directors at an ice cream maker at the center of a fatal listeria outbreak were liable in a D&O suit, he said.

The law excludes coverage for situations such as the Dole Foods case, in which the Delaware Supreme Court ruled last year that a D&O policy should cover a loss related to an underlying case where fraud was alleged.

“There’s more restrictive language in SB 203 that applies to captive insurers than compared to the commercial market,” Mr. Kinion said. “That was a public policy decision that was made.”

The statute also bars coverage for personal fraud by directors and officers, but the exclusion only applies after a non-appealable decision has been reached in a case, he said, noting that more than 95% of D&O cases settle prior to such decisions.

The law also includes provisions to ensure an arm’s length relationship between a captive and a policyholder, such as the requirement for an independent claims administrator, Mr. Kinion said.

While captives providing Side A coverage for Delaware corporations do not have to be domiciled in the state, there may be some advantages to domiciling the captive in Delaware to avoid potential conflicts with laws in other states, he said.

Delaware, though, allows the formation of branches of captives formed in other states, Mr. Kinion said. In addition, captive owners can tailor their own coverage by using a fronting arrangement and then reinsuring the risk in a captive.