Held Captive: The DGCL § 145 Amended
Held Captive: The DGCL § 145 Amended
On February 7, 2022, Delaware Governor John Carney signed Senate Bill No. 203 (“the Bill”), which provided pertinent amendments to Section 145 (“§ 145”) of the Delaware General Corporation Law (“DGCL”). The amendments allow Delaware corporations to purchase and maintain executive liability insurance, encompassing directors’ and officers’ and fiduciary liability, via captive insurance companies, regardless of their domicile. § 145 gives Delaware corporations the right to utilize a captive insurance company to provide coverage for both indemnifiable and non-indemnifiable losses.
What Is Captive Insurance?
Defined by the synopsis supplementing the Bill, a captive insurance company is “an insurer, directly or indirectly owned, controlled and funded by the corporation,” which may, but does not have to be, licensed within the jurisdiction of Delaware. The Bill explains that choosing to establish or maintain a captive insurer does not alone subject the corporation to the Delaware Insurance Code. A captive insurer, a subsidiary funded by the corporation, may provide liability coverage for current and former directors, officers, employees and other indemnifiable individuals.
Senate Bill No. 203 and DGCL § 145
DGCL § 145 as it was:
Preceding the passing of the amendments to § 145, directors and officers could not be indemnified by Delaware corporations for derivative suits pertaining to breaches of fiduciary duties or bankruptcy-related litigation. Many corporations sought to purchase Side A D&O liability insurance to ensure coverage for otherwise non-indemnifiable exposures in response to this dilemma.
DGCL § 145 as amended:
As amended, DGCL § 145 provides that, like third-party commercial insurance, a captive insurance policy may indemnify indemnifiable individuals “whether or not the corporation would have the power to indemnify them under § 145.” In addition, DGCL § 145(g) provides specific authorization for Delaware corporations to utilize a captive for protection from fines, judgments and amounts paid to settle claims brought either by or in the right of the corporation.
Limitations to DGCL § 145 as amended:
The Bill includes a series of limitations imposed upon a Delaware corporation’s utilization of a captive insurance policy. The exclusionary limitations provision within § 145(g)(1) provides that the captive, should it be used, may not allocate payments in connection with losses related to the following:
- Personal profit the indemnifiable individual was not legally entitled to
- Deliberate criminal or fraudulent acts
- Known violations of the law
Notwithstanding these exclusions, a captive insurer can cover certain liabilities otherwise not exculpable under DGCL § 102(b)(7), including liability for Caremark or oversight claims where directors did not knowingly lead the corporation to violate the law. In addition, because oversight claims usually go hand-in-hand with fiduciary claims for ERISA violations, § 145 may implicate a corporation’s fiduciary coverage, not just its D&O coverage.
The Bill also includes procedural requirements. § 145(g)(2) requires any determination to allocate payment by a captive insurer to be made by an independent claims administrator or in accordance with § 145(d). Finally, § 145(g)(3) requires stockholders to be provided with notice before a captive policy allocates any payment in connection with a dismissal or compromise of a suit that has been brought either by or in the right of the corporation. The notice must serve to notify that the captive is to make the proposed, allowing stockholders and a reviewing court the scope to appraise the utilization of the captive insurer’s assets.
These exclusions and limitations are a minimum checklist. They do not address obtaining any independent director or stockholder approval before entering into an insurance transaction with an owned captive, resulting in some potential for circularity of the transaction, which has typically been a stumbling block to captives writing certain types of risk. DGCL § 145 does not prohibit any additional exclusions or limitations a Delaware corporation may impose at its discretion.