Of all of the "oddities" to come out of Tesla over the last decade or so, the one thing the company was never stupid enough to do - amidst what appears to be a neverending flurry of lawsuits and legal problems - was drop its D&O insurance.
Directors and officers insurance is "liability insurance payable to the directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers."
D&O insurance is absolutely vital for any public company, but especially for a company that finds itself embroiled in far more controversy and litigation than others. Like a company where the CEO bails out his cousin's failing solar company.
Or a company where the CEO openly and brazenly commits securities fraud on Twitter.
But alas, that is the path that Tesla has now taken, making it one of the only major public companies we can remember anytime recently that will go forward indemnified personally by its CEO, instead of carrying insurance. Tesla's newly filed 10-K/A states:
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.
There's obviously a couple of odd conclusions we can draw from this:
- First, it appears that absolutely no one wants to be on the hook for insuring Tesla, at least at a price that's reasonable. Just like car insurance, D&O insurance premiums rise depending on how much of a risk the insured is.
- Second, we have to ask why Tesla can't pay these premiums regardless. Doesn't the company have $6 billion in the bank and isn't it generating cash consistently?
- Third, Elon Musk's net worth is, by his own admissions, illiquid and tied to the price of Tesla stock. If the stock were to crater as the result of a liability, wouldn't it serious infringe on Musk's ability to providing all of his Directors and Officers with costly legal representation?
Finally, the craziest thing is that Tesla "determining" to drop its coverage comes at a point where the company's legal issues appear to be escalating the most, according to numbers PlainSite pointed out as of January 2020:
Perhaps Musk is just feeling emboldened monetarily and has already accounted for a $750 million payday he has coming if the company's market cap can stay over $100 billion for a couple more days. Recall, just yesterday we noted that Tesla laid off 300 janitors to save $2 million after Musk's net worth had advanced $650 million in April.
Regardless, why might D&O insurance be of extreme importance for Tesla in the future?
"Such coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. Intentional illegal acts, however, are typically not covered under D&O policies."
40 year veteran of Wall Street and well-respected short seller Jim Chanos commented on Twitter:
In 40 years on Wall Street, I have never seen this before. The CEO is insuring the board for negligence.