Department of Insurance Provides Guidance for Side A D&O Captives

October 16, 2023

Publication| Insurance| Corporate Transactions| Corporate Governance

Section 145(g) of the Delaware General Corporation Law was amended in 2022 to authorize Delaware corporations to use captive insurance, subject to a limited set of minimum exclusions, to protect directors, officers and certain other covered persons against liability, even if the corporations would not be empowered to indemnify them.  Such insurance for non-indemnifiable claims is commonly referred to as Side A D&O insurance.  In response to the amendment to Section 145(g), the Delaware Department of Insurance (the “Department”) recently issued Captive Bulletin No. 14 (the “Bulletin”).  The Bulletin provides initial guidance to corporations intending to form and operate a Delaware captive for the purpose of providing Side A D&O insurance coverage to a Delaware corporation.  This Bulletin provides helpful guidance on the formation and operation of these new captives and signals that the Department welcomes their formation in Delaware.

Some of the guidance in the Bulletin relates to requirements that already exist under Section 145(g).  For example, policy forms will need to be reviewed by the Department to confirm that the required minimum exclusions are incorporated, which may be done by referencing Section 145(g).  These exclusions will also be required in reinsurance agreements when a Delaware captive insurance company is acting as a reinsurer to a commercial insurer that fronts Side A D&O insurance of a Delaware corporation, if such exclusions are not contained in the direct policy. 

Additionally, the Bulletin notes that these captives will be required to retain either a Department-approved independent third-party claims administrator or a Department-approved independent director.  While Section 145(g) does not make reference to independent directors, it does provide that any determination to make a payment under a captive insurance policy must be made either by an independent claims administrator or in accordance with the procedures set forth in subsections (d)(1) through (4) of Section 145 (i.e., by (i) a majority of the directors not party to the proceeding even if less than a quorum, (ii) a committee of such directors if such directors so direct, (iii) independent counsel, or (iv) the stockholders).

Due to the unique nature of these captives, the Bulletin states that applications for conditional certificates of authority pursuant to Section 6903(g) of the Delaware Insurance Code will not be accepted for Delaware captive insurance companies intending to write Side A D&O insurance.  In addition, new Delaware captive insurance companies (or separate protected cells of Delaware captives) intending to write Side A D&O insurance will only be organized and authorized to write D&O insurance exclusively.  This insurance coverage will not be authorized for multi-line Delaware captives. Lastly, the Bulletin reiterates that these captives, as is generally applicable to other Delaware captives, must remain fully capitalized to cover full limit losses and must submit an investment plan, consistent with the applicable provisions of the Delaware Insurance Code, to the Department for approval.

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