Writing D&O through a captive could cause problems: Willis Towers Watson
An increasing number of companies are considering writing directors and officers insurance through their captive, but they should be aware of some challenges this arrangement can present, according to Willis Towers Watson.
An article by Angus Duncan, executive director and coverage specialist for FINEX, and Adrien Collovray, director of global captive advisory at Willis Towers Watson, highlighted three traditional forms of D&O liability coverage: cover for liabilities incurred by an individual in their capacity as a director or officer; cover for corporate reimbursement of liabilities to a director or officer by the company for which they serve as a director or officer; and cover for securities claims against the company.
While the latter two forms of coverage are well suited to captive participation, Willis suggested there are complications with offering the first form of cover through a captive.
Cover for liabilities incurred by an individual in their capacity as a director or officer is meant to indemnify directors when the company is unable or, in some cases, unwilling to do so, such as when the company is insolvent. In such a case the assets of the captive may be vulnerable to attack by creditors of the parent company, Willis said.
In some cases companies may not indemnify directors because they are legally prohibited from doing so. A captive insurance subsidiary may be prohibited from indemnifying directors by the same rules as its parent, Willis said.
In addition, directors and officers also may prefer that decisions about whether their insurance should pay out be made by a company that is independent of their employer, Willis noted. “This is particularly a concern where the company is the one bringing the claim against the directors,” it said. “It could also be a concern simply where a new regime is in place and the company no longer has the same relationship with the director.”
Willis noted that the issue of independence of claims handling may be resolved by appointing an independent claims handling company or lawyer to manage claims. Alternatively, the insurance can be fronted by an independent insurance company and then reinsured into the captive, it said.
The first two problems are harder to resolve, Willis admitted, but the use of a protected cell company may offer a solution if it is structured in a way that maximises the independence of the cell from the parent company.
Willis admitted the use of a cell structure to provide cover for liabilities incurred by an individual in their capacity as a director or officer remains relatively untested. Other issues, such as the high degree of funding and capitalisation required, could prove problematic, it said.
Another option is a trust structure, which would also “divorce ownership of the premiums used to pay the captive from the company seeking to insure its directors’ and officers’ liabilities.” However, this solution is also untested, Willis said.