Captive Insurance and D&O Coverage for Executive Liability Risks

In an increasingly litigious business environment, the need for robust insurance protection against executive liability claims has become more important than ever, particularly for senior management teams and corporate boards.

That is where directors and officers (D&O) liability coverage plays a critical role.

When a director or officer is sued, a company will often provide indemnification through the advancement of defense costs and payment of settlements or judgments. However, if the company is unable or unwilling to indemnify its executives, D&O insurance becomes essential protection. In addition to protecting the organization itself, D&O coverage can reimburse the company for its indemnification obligations and protect directors and officers directly when corporate indemnification is unavailable.

D&O coverage is generally divided into three primary insuring agreements: Side A, Side B, and Side C. Side A provides coverage for directors and officers when the company cannot legally indemnify them, such as in bankruptcy scenarios, or declines to do so. Side B reimburses the organization for indemnification payments made on behalf of directors and officers facing covered claims. Side C, often referred to as entity coverage, protects the company itself and, for public companies, is typically limited to securities-related claims.

Obtaining D&O insurance in the traditional market, however, has become increasingly challenging. Market volatility, constrained capacity, and narrowing policy terms have created difficulties for many organizations seeking comprehensive protection. Entity-related risks under Side B and Side C are particularly complex because they tend to be long-tailed, closely tied to the parent organization's financial strength, and heavily influenced by broader factors such as securities litigation trends, regulatory scrutiny, and merger and acquisition activity.

As a result, commercial insurers can face challenges in accurately pricing these exposures and allocating capital efficiently.

For some organizations, captive insurance has emerged as an alternative risk financing solution. A captive can allow companies to align D&O limits, retentions, and pricing more closely with their own governance practices and risk profiles rather than relying solely on broader commercial market conditions. Captives may also provide direct access to reinsurance markets, allowing organizations to manage volatility over time more effectively.

Flexibility is another advantage. Captives can issue manuscripted policies designed to address gaps created by tightening commercial terms, exclusions, or sublimits, particularly for emerging risks. In doing so, organizations may also retain underwriting profit and investment income that would otherwise remain in the traditional insurance market.

Andrew Kurt, president, financial lines at Hylant, said that using a captive to provide D&O insurance is a good option for companies facing challenges around capacity, pricing, and/or certain coverages, such as antitrust and regulatory.

Greg Fears, director and consulting actuary at Pinnacle Actuarial Services, said captives are often well-suited for ABC D&O risks. "Captive ABC coverage can be modified with coverage extensions to cover risks that could be excluded on a commercial policy. A captive writing Side A policy may extend coverage for liability associated with misrepresentation during a merger or acquisition, for example."

D&O Risks and Emerging Exposures

In addition to traditional Side A, B, and C exposures, directors and officers may face a range of specialized or emerging risks, according to Mr. Fears. Those niche exposures, he noted, are often well-suited for captive structures.

Tara Miller, principal and consulting actuary at Milliman, said captives can be used to address D&O risks in several different ways. For example, both onshore and offshore captives may fund D&O defense and indemnity obligations above specified retentions or within higher excess layers.

"In addition, in situations involving an international parent company, I've seen captives fund home country legal costs only," said Ms. Miller. "The primary challenge for captives is maintaining enough capital to cover rare but large losses, particularly in the current environment of increasing claim severities. Captives also need to confirm their policy terms to avoid gaps in coverage as exclusions in commercial policies (e.g., war/sanctions) tighten."

Key Benefits of Captive D&O Structures

One of the primary advantages of using a captive for D&O coverage is the ability to obtain coverage that may be more affordable or accessible than what is available in the commercial market. Retaining premium within the captive structure may also provide organizations with greater control over costs while creating opportunities to retain underwriting profit.

For organizations using captives to fund Side B and Side C exposures, the structure can also more closely align with the organization's own balance sheet risks and capital management objectives.

"By utilizing a captive solution, organizations are able to tailor policy terms and hold layers when market pricing or capacity is unfavorable, particularly for higher risk sectors," said Ms. Miller. "They also provide flexibility to address emerging risks related to D&O, such as [artificial intelligence] governance. In addition, a captive can offer a solution to structure legal expense only coverage when defense outside limits isn't available or when claim approval requirements would otherwise slow down legal expense payments."

Captive Structures for D&O Coverage

Single-parent captives and protected or segregated cell structures are among the most common captive approaches used for D&O programs.

Protected cell captives are often viewed as particularly suitable for Side A risks because the segregated or ring-fenced nature of the structure can help address concerns related to bankruptcy remoteness and creditor access while maintaining separation from corporate assets.

"Some jurisdictions have explored using protected or segregated cell structures to address the unique challenges of Side A D&O risk," said Jeff Wilson, captive insurance director at the Iowa Insurance Division. "These structures can provide a degree of separation from the parent organization and independent governance, which helps mitigate conflicts of interest.

"In Iowa, protected cell programs require each cell to be incorporated. This approach provides a clear legal separation and several advantages, but it does not create the same degree of functional independence that may be sought when addressing Side A D&O considerations. As a result, these structures must be evaluated carefully within the context of Iowa's regulatory framework and the specific objectives of the program."

Mr. Fears said that while D&O risks are more commonly addressed through single-parent or cell captive structures, organizations have flexibility in how D&O captive programs are structured.

"By their nature, D&O may be more likely to be structured as a single parent or cell, but there isn't any limitation on or disadvantages to a group captive structure," said Mr. Fears. "The low frequency, financial advantages, and the flexibility to tailor coverages to meet gaps in the commercial market likely drive companies towards a single parent or cell structure, however."

Andrew Noga, captives director at the South Carolina Department of Insurance, said suitability for D&O inclusion within a captive depends heavily on both the captive structure and the organization itself. He noted that privately held companies and nonprofit organizations are often stronger candidates because they may have less exposure to risks related to securities and an initial public offering (IPO).

"While a recent AM Best Market Segment Report suggests that regulatory and IPO exposures are diminishing overall, new risks are emerging—including rapid technological change driven by artificial intelligence, economic volatility, and increasing geopolitical uncertainty," said Mr. Noga. "Organizations interested in insuring D&O risk through a captive must be mindful of the severity-driven nature of these claims, assess their particular risk profile, and consider whether captive financing is appropriate for the exposures they are likely to face."

Captive Domicile Considerations

Captive domiciles have taken varying approaches to D&O-related captive structures as organizations continue exploring executive liability risk financing options. From a regulatory perspective, Mr. Wilson said Iowa supports carefully designed approaches to incorporating D&O risks into captive programs.

"While these risks are complex, they also give sophisticated organizations an opportunity to take a more active role in managing executive liability exposures," said Mr. Wilson. "We expect continued innovation as market conditions evolve. Iowa's approach will balance flexibility with discipline, supporting tailored solutions while ensuring appropriate governance, capitalization, and risk alignment."

Examples of Captive D&O Applications

Captives are also being used in transactional and specialized financial liability scenarios.

Mr. Fears pointed to merger and acquisition activity and related financial transactions as examples where captive-supported D&O protection may play a role. Such exposures may include liabilities associated with IPOs or special purpose acquisition company-related activity.

"This sort of coverage does underscore how corporations can use captives to bolster the objectives of their parent organizations," said Mr. Fears.

Ms. Miller cited the example of an offshore captive used by a Latin American-based parent company to fund a primary layer of D&O legal expenses, allowing the organization to address legal costs without first confirming coverage with its commercial insurer.

She also referenced a large US financial institution that used its US-based captive to retain a high excess D&O layer while purchasing reinsurance above that level in response to rising commercial market premiums.

Future Outlook for Captive D&O Coverage

Although D&O market conditions have softened somewhat in recent years and capacity has improved, organizations continue to face evolving exposures tied to cyber risks, climate-related issues, and increasing regulatory scrutiny.

Even as pricing stabilizes, boards continue evaluating captives as a way to manage volatility, preserve broader coverage, and retain greater control over higher retentions.

Over the next 12 months, Ms. Miller said the D&O market is expected to remain relatively soft, particularly for private companies, even as the overall risk environment becomes more complex. She pointed to artificial intelligence-related governance concerns; evolving environmental, social, and governance-related disputes; and cyber disclosure requirements as factors likely to contribute to increasingly complex claims activity.

Policy term restrictions and heightened underwriting scrutiny may also remain challenges, particularly as insurers take a closer look at company financials amid broader economic uncertainty and concerns about bankruptcies.

"Similar economic scenarios have historically increased D&O claim frequency and severity," said Ms. Miller. "All of these could push more organizations to use captives to retain portions of their D&O exposure. As a result, captives may face an increase in capital and/or collateral needs to account for the increase in exposure and the potential for large losses."

Mr. Fears added, "Although the D&O market has softened a bit, captive affordability is always an attractive option and, as with other coverages, the secret is out with respect to the strategic advantage of captive insurance. The regulatory market in certain states has specifically addressed D&O concerns with legislation allowing D&O Side A coverage in captives. We may expect that trend to continue as well."