What is directors and officers (D&O) liability insurance?
The directors and officers of a company lead and carry out an organization’s business. They have a responsibility, among other things, to avoid conflicts of interest and exercise care and diligence in managing the corporation’s affairs. Failure to fulfill their corporate obligations can expose them to liability. Claims against directors and officers can be expensive to defend, and they may be personally liable if they are found to have acted disloyally or failed to exercise care that causes a loss to the corporation, shareholders, or others.
If directors and officers are sued, the company will likely provide indemnification in the form of the advancement of defense costs and payment of settlements and judgments so they are not paying out-of-pocket. However, when the company is unable or refuses to indemnify its directors and officers, D&O insurance becomes critical.
The coverage will protect the company, reimburse it for its obligations to indemnify directors and officers, and protect the directors and officers if the company can’t, or won’t, indemnify, leaving them personally exposed. The coverage is generally made up of three main insuring clauses:
- Side A: Insures wrongful acts of directors and officers when the company is not permitted to indemnify due to the broader of applicable laws or by-laws, bankruptcy, or otherwise refuses to indemnify.
- Side B: Reimburses the company for the indemnification it provides to the directors and officers for claims against them alleging covered wrongful acts.
- Side C: Insures the company itself for its own liability and, in the public company context, is usually limited to securities claims.
Captives are a natural option when companies face capacity and pricing challenges, especially when commercial pricing is viewed to be higher than the perceived risk. Traditionally, captives have been involved in Side B and Side C coverages, however, with the recent change in Delaware law, we’re seeing increased interest in using captive insurance to cover Side A, with inquiries coming from both clients with a captive and those without.
Side A D&O captive comparison
Since the law passed in February 2022, Delaware incorporated entities are now able to use captive insurance for Side A D&O. Based on client and market demand, Marsh Captive Solutions created a facility in Delaware for the express purpose of providing a captive insurance option that has a superior fact pattern over other captive options. The majority of D&O captive activity occurs in cell captives, not single owner captives.
The table below illustrates the major differences from the various options available to clients: