Elon Musk, founder of SpaceX and chief executive officer of Tesla Inc. Photo: Andrew Harrer/Bloomberg

When Tesla Inc. determined that its directors and officers liability insurance policy was too expensive, CEO Elon Musk made the relatively unusual decision to step in and personally provide coverage.

Tesla disclosed the arrangement Tuesday in a 10-K/A filing with the Securities and Exchange Commission. Attempts to speak with a company representative were not immediately successful. 

To what extent, if any, Tesla's legal department was involved in advising Musk on the insurance decision was unclear. But the company has apparently been without a named general counsel since Jonathan Chang exited in late 2019. He was the third Tesla GC to depart within a year. 

"I've never heard of anything like this before," said Ed Ryan, former general counsel of Marriott International Inc.

Asked what advice he'd give, as a general counsel, to a CEO who was considering providing D&O insurance, Ryan said:

"I'd say, 'Well, the directors have to sign off on it but, just to begin with, it's a transaction where I'm not representing you, Elon Musk. I'm representing the company and its directors. If you want us to treat you as the insurer in some unrelated party deal, if we can get over the fact that the CEO is our insurer, we have to look at you as: Do you have the capacity? What are the limits? And what backstops are there to make sure everyone is protected?'"

In its SEC filing, Tesla stated that it opted against renewing its D&O 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," Tesla stated. 

The company added, "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."

Musk shouldn't have any trouble covering the insurance premiums. Reuters reported Tuesday that he stands to receive about $750 million from stock options as shares of Tesla rebounded based, at least in part, on anticipation of the company reopening its automotive plant in Fremont, California. 

The factory had been shuttered as a result of the COVID-19 outbreak.

"His net worth is probably enough," Ryan said of Musk's ability to provide liability coverage to Tesla's directors and officers. "But you've gotta make sure that it's set aside. When D&O typically comes into play, something terrible has happened to the company. And I don't know what that net worth is at the time."

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