Tesla founder and CEO Elon Musk is getting into the insurance business again, sort of.

Musk has cancelled his company’s directors and officers insurance (D&O), replacing it with a promise to personally provide his board members with “equivalent” coverage to what insurers would provide.

Musk said he decided against renewing his D&O because the premiums quoted were “disproportionately high.” Musk explained in an April 28 amended 10K filing with the Securities and Exchange Commission:

“Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.”

Liability insurance expert Kevin LaCroix, writing in his D&O Diary, said Musk’s arrangement, while unusual, is “not unprecedented” in his experience. However, he warned, it could be a problem for the other board members to rely on Musk for coverage.

“His agreement to provide coverage to the directors is dependent on his financial ability to honor his commitment,” wrote LaCroix, an attorney and executive vice president at RT ProExec, a division of R-T Specialty. “However, the directors’ need for coverage could arise in a set of circumstances that could itself undermine Musk’s ability to honor his commitment.'”

According to LaCroix, Tesla’s directors and officers could find they need Musk’s insurance at a time when both Musk and Tesla are facing a crisis.

High Premiums

Musk cited high cost as a reason for saying no to D&O.

Tesla would not be alone in being quoted higher premiums. Even before the current coronavirus crisis, D&O insurers were on track to be raising prices. A report from rating agency A.M. Best in early March urged D&O insurers to continue to both raise rates and narrow coverages in the face of exposures linked to social inflation, securities action lawsuits and cyber security, as well as climate change and environmental damage.

“We expect the profitability of D&O insurance underwriters to remain under pressure over the near term, following six or seven years of inadequate pricing,” A.M. Best said in its report. “Companies need to take reasoned, corrective rate actions, leading to accounts being priced more adequately for the exposures presented. Underwriters will also need to be more astute with regard to decision-making about risk selection, coverage provisions, limitations and exclusions.”

Today insurers are also worried about coronavirus-related claims against company executives. The litigation has already started. A shareholder lawsuit has been filed against a pharmaceutical firm and its chief executive for alleged “misstatements” that the company had developed a coronavirus vaccine. Also, a cruise line, its chief executive and chief financial officer are being sued for allegedly misleading customers about the virus in order to book cruises. On April 30, a class action was filed against health care software firm SCWorx over allegedly misleading claims about the purchasing of two million COVID-19 testing kits.

Legal History

Even without those exposures and cases pressuring insurers to raise rates, Tesla’s D&O premiums might be high. Entrepreneur Musk has not been a model of executive behavior from an insurance perspective.

Currently, Tesla is facing a shareholder suit over a tweet Musk made about going private. Earlier this month, a federal judge said Tesla and Musk must face a lawsuit claiming they misled shareholders when in August, 2018 Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” The judge said investors could have taken Musk’s tweet as a sign he had obtained financing to take Tesla private. But that was not a true statement and Musk tweeted on Aug. 24, 2018 that Tesla would remain public. In September, Musk agreed to pay a $20 million civil fine to settle fraud charges related to the tweet and was forced to step down as chairman by the SEC.

Tesla has also dealt with shareholder litigation surrounding Musk’s purchase of SolarCity in 2016. According to Bloomberg, insurers covering Tesla’s directors and executives paid $60 million to settle claims Musk duped investors to go along with the $2 billion buyout of the solar-panel installer. That deal left Musk, Tesla’s largest shareholder, to battle alone against investors.

Tesla also faces a stockholder complaint over an alleged “excessive” 2018 performance award to Musk. A shareholder has accused the board of corporate waste and Musk of unjust enrichment.

In a legal twist that turned in his favor, last December a jury sided with Musk and rejected a $190 million defamation lawsuit by a British cave explorer who claimed Musk labeled him a pedophile when the Tesla CEO called him “pedo guy” in a tweet.

Insurance Story

The D&O insurance development is the latest chapter in the Musk insurance story, which at times reads like a mystery.

Deciding to provide personal D&O insurance for the board is not Musk’s first insurance undertaking. In 2019, Tesla partnered with State National Insurance Co., a unit of Markel Corp., to launch an insurance product for Tesla drivers in California that promises lower rates that reflect the safe driver technologies on Tesla’s electric vehicles.

Then there is SpaceX, the space flight company owned by Musk. It suffered an explosion at its Florida launch site in 2016. At that time, SpaceX told Reuters it would not disclose what, if any, rocket or launch pad insurance it had beyond what was required by the Federal Aviation Administration. It was the second failed mission for Musk’s space company in 14 months.

Space X was no more forthcoming about its insurance in early 2018 after a U.S. government satellite that Musk’s company launched crashed into the ocean. Bloomberg reported that it was unlikely that either SpaceX or Northrop Grumman Corp., the satellite builder, would pay for the lost missile because they probably had contracts with the government that limit their liabilities.

*This story ran previously in our sister publication Insurance Journal.