Lawrence Fine is the Management Liability Coverage Leader for Willis Towers Watson’s FINEX North America division, with prior experience at law firms and an insurance carrier. He has more than 30 years’ legal and insurance industry experience, particularly in relation to Directors and Officers Liability, Professional Liability, Employment Practices Liability, and Fiduciary Liability.
PART ONE: THE INVITATION TO THE SHOW:
It was a couple of weeks before the triumphant return of the PLUS D&O Symposium to a live stage in Manhattan. As I labored with a full plate of RFPs, policy reviews, technical questions, endorsement drafting and claims trouble-shooting, I couldn’t help but be distracted by the steady stream of LinkedIn postings from insurance industry professional whom I respect, promoting cutting edge topics to be analyzed by superstars in the field. A feeling which “the kids” label FOMO was steadily growing in my gut.
That all changed when my cell phone “rang”. It was PLUS co-chairperson Janet Dreifuss. Not having seen or spoken with Janet for a while, I was happy enough to get the call even before she explained the main motivation for the contact.
Janet informed me that the subject of the recent Delaware law change and its effect on the possibility of captive insurance for Side A exposures was very hot. (“How hot?” I wondered to myself. “Can any other subject really hope to rival SPACs and ESG for LinkedIn and legal conference dominance?”) Janet explained that due to popular demand, PLUS was planning to add a last minute extra session on this hot topic. “So how would you like to come and talk about captive insurance for directors and officers while some of the attendees eat chicken?”
How could I resist?
PART TWO: THE PREPARATION:
Now all I had to do was learn about captive insurance. And Delaware law. And the Delaware law change. And then put them all together and think hard.
Luckily I wasn’t going to be alone. PLUS had selected the best co-panelists one could ever dream of: co-panelist Paul Brophy, co-founder and Executive Vice President of Berkley Professional Liability, and moderator Kim Melvin, partner and co-chair of Wiley Rein LLP’s insurance practice (also a member of the PLUS Board of Trustees). We immediately scheduled several video-meet-ups so that Kim and Paul could explain captive insurance and Delaware law to me.
PART THREE: DELAWARE STRIKES OUT:
The day before our presentation, PLUS was contacted by Steve Kinion, the Director of the Bureau of Captive and Financial Insurance Products from the Delaware Insurance Department. This pretty much verified our suspicion that a major purpose for the Delaware law change was to encourage more Delaware companies to set up Delaware captives (although the law does not require that any captives be established in Delaware, it does helpfully point out that “any captive insurance company licensed under Chapter 69 of Title 18 of the Delaware Code” would qualify). It was too late to add Mr. Kinion to our panel, but evidently since then Mr. Kinion has spoken at other conferences.
PART FOUR: THE SHOW! (actually a big room near the Show, with food):
Our session was cleverly titled “For Our Captive Audience”. Unfortunately the title was not accurate; we were not provided with sufficient duct tape. Friends advised me not to expect anyone to attend. “It’s PLUS; everyone has scheduled lunch meetings”.
For better or worse, we didn’t start speaking until most people in the room had finished eating. I feared a sudden mass exodus when the crowd realized that their lunch break was about to be interrupted by a barrage of cutting edge insurance content.
We were pleasantly surprised that almost everyone in the room (a respectable fraction of the total attendees) stayed and seemed engaged, even asking questions and even staying a few minutes beyond the originally scheduled time. A few people told me that they rescheduled their lunch plans in order to attend the session; hopefully they didn’t regret that decision!
PART FIVE: WHAT WE ACTUALLY TALKED ABOUT:
Kim asked several questions of Paul and me, and we attempted answers. The following is the gist of what we said:
What was the Delaware law change?
Section 145(g) of the Delaware General Corporations Law was modified to specify that captive insurance is included in the types of insurance which corporations can purchase to indemnify directors, officers and employees in relation to matters for which the corporation itself would not be allowed to indemnify. It was always clear that insurance could be purchased to indemnify individuals more broadly than the corporation itself could, but it had previously been assumed that captive insurance didn’t count as “insurance” for such purposes (due to perceived concerns that a lack of arms-length decision making could result in circularity issues). As a result, the small number of companies which insured D&O risks through captives generally only included B and C coverage in such policies (not attempting to address Side A non-indemnifiable by the company loss in that way).
In order to ensure that captive insurance won’t indemnify in situations which violate Delaware public policy, the amendment includes three safeguards :
- Such captive policies need to include a deliberate fraud and personal profit exclusion in a relatively typically format (including a requirement that the exclusion is only triggered by “a final, non-appealable adjudication in the underlying proceeding in respect of such claim (which shall not include an action or proceeding initiated by the insurer or the insured to determine coverage under the policy)”).
- Any payments made “in respect of a claim against a current director or officer” “shall be made by a [sic] independent claims administrator”
- Prior to any payment to dismiss a derivative claim, any payment to stockholders “shall include in such notice that a payment is proposed to be made under such insurance in connection with such dismissal or compromise”
Does the Delaware law change eliminate all the barriers to putting D&O coverage in a captive insurer?
The change seems to eliminate any Delaware law issues relating to indemnifiability. However, it doesn’t address the practical and legal issues which can arise when a corporation is insolvent/bankrupt.
Are there ways to make sure that captive insurance fully protects directors and officers if there is a bankruptcy?
There are structures which should be considered more safe from asset seizure or freezing in a bankruptcy situation, but they are largely untried and can’t be fully guaranteed. That being said, it is believed that structures such as “rent-a-captives” or “segregated cells” provide greater separation from the corporation and so should provide greater certainty of performance in the case of insolvency (while trading off some of the tax and other benefits of wholly owned captive insurance subsidiaries).
What are some potential pros of putting D&O insurance into a captive?
Potentially broader manuscripted coverage (although, as discussed above, section 145(g) precludes manuscripting of the Conduct exclusions)
Stability in pricing and availability (not subject to the changing whims of the market)
Direct access to reinsurance (including receipt of commissions for same)
Potentially improved cash flow (can have substantial underwriting profit and investment income)
Increased control over the program
What are some cons?
Administrative and transactional costs (including initial feasibility studies and annual costs)
Reinsurance costs (if reinsured)
Claims handling costs (must be paid on an a la carte basis or incorporated into a fronting arrangement)
CAPITALIZATION REQUIREMENTS- the biggest issue for most companies (hence the CAPITALIZATION); need to consider the opportunity costs, comparing the likely ROI in the captive versus outside the captive (segregated cells require a capitalization of 100%-105% of the limits, while captive subsidiaries are subject to the somewhat lower capital requirements of their domiciles)
The predicted effect- Are the floodgates opened? Has the Kraken been released? What is the appropriate cliché?
The Delaware law change has opened the floodgates of questions about captive D&O insurance. For now, the Kraken seems safely contained. Most companies upon learning more about their captive insurance options wind up deciding that their conventional risk transfer options aren’t so bad after all. But some companies will find captive D&O insurance to be a viable option, especially for lowest or highest layers whose pricing might be sufficiently out of line.
Who might be the best candidates for considering D&O insurance in a captive?
Companies that already have captives in place are more likely to be in a position to make the move. In particular, well funded captives can benefit from having additional severity lines added as a way of removing surplus other than as taxable dividends.
Should Side A coverage from third party insurers still be considered as part of a total program?
Yes, definitely. Side A DIC policies designed specifically to sit above captive insurance are being actively discussed and fashioned.
And that’s the gist of what we talked about. But I regret that I haven’t captured the witty banter and insightful insurance jokes, especially from Paul Brophy. PLUS has posted an audio recording for those who want more (but mercifully you will not be able to watch the participants eat).
PART SIX: I AM ASKED TO WRITE A BLOG ABOUT THE EXPERIENCE:
And now you’re fully up to date…
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).