Elon Musk’s alleged drug use leaves his companies and their boards exposed to potential shareholder claims that directors’ and officers’ insurance is meant to cover.
Musk, the world’s richest person, has used recreational and illegal drugs in recent years—including LSD, cocaine, ecstasy, and psychedelic mushrooms—and has an active prescription for ketamine, according to a report from The Wall Street Journal.
Musk’s reported behavior carries risks for the board directors of
The board of directors now must show the public that Musk’s alleged drug use won’t bring financial or reputational damage to his companies, or endanger almost $1 trillion in assets held by investors, attorneys say.
Read More: Elon Musk’s Drug Use Is the Latest Headache for Tesla’s Board
The principal exposure for both Musk and his directors are investors’ “breach of fiduciary duty claims for how they choose to address, or not address, any actual drug use and how it might affect decision-making and company operations and results,” said Mike Manire, a partner at Manire Galla Curley LLP who represents D&O insurers.
Risky Coverage
Allegations of lax board oversight are the very essence of claims covered by D&O insurance, but Musk’s companies may lack that coverage entirely. In April 2020, Tesla announced it would no longer purchase outside D&O policies. Musk—whose net worth now stands at around $217 billion, according to the Bloomberg Billionaires Index—reportedly decided to pay for insurance coverage out of his own pocket. The company disclosed it paid him back to the tune of $3 million for 90 days of short-term coverage he provided.
The company later said it had found a custom D&O policy with outside parties. It’s unknown whether that policy remains in place today; the companies didn’t respond to a request for comment.
But insurance professionals say D&O carriers would likely charge higher premiums, impose more restrictive terms, or avoid covering Musk and his companies altogether because of the high exposure underscored by his drug use.
It’s a question of whether a D&O insurer wants to “take on the risk of someone like Elon Musk, who has proven to be controversial and proven to attract claims,” said Kevin LaCroix, executive vice president at broker R-T Specialty and a former D&O insurance underwriter. Musk had already gotten his board in hot water, for example, when he tweeted about taking Tesla private in 2018, sparking a lawsuit from investors against Musk, Tesla, and the company’s board.
Musk’s behavior could spur D&O insurers across the board to scrutinize executives’ drug use.
Although D&O policies don’t explicitly address drug use, “any underwriter now would likely now consider adding such an exclusion,” Manire said.
Board Investigation
Tesla and SpaceX board directors—including Musk’s younger brother, Kimbal, and others closely tied to the CEO—will likely find themselves in the hot seat over the latest drug use reports, especially given the questions about D&O insurance coverage, insurance attorneys say.
Class action attorneys could demand on behalf of investors that the boards stay informed about Musk’s drug use. Plaintiff lawyers may view SpaceX as a particularly vulnerable target because of its relationship with NASA and federal requirements for drug-free work environments, LaCroix said.
The board needs to figure out whether “Musk has engaged in behavior that could imperil that key relationship with NASA now,” he said. “SpaceX needs to be in a position where they can respond to NASA’s concerns if they are raised.”
The question is how much Musk’s alleged drug use was done in his capacity as a company officer and whether it inflicted any financial harm, said Evan Bundschuh, vice president at insurance broker GB&A.
The boards at Musk’s companies can conduct an internal investigation to show they aren’t ignoring the issue, said LaCroix. The companies also have the option to hire an outside law firm with no prior relationship to the company, he said.
“The conservative thing for companies to do when they receive information about the alleged misconduct of senior executives is to investigate and to take appropriate steps,” he said.
For his part, Musk appeared unfazed by the latest reports of his drug use, and seemed to minimize any financial impact on his companies.
“Whatever I’m doing, I should obviously keep doing it!” Musk said in a post this week on his social media platform X, touting Tesla and SpaceX as the world’s most valuable car and space companies. “If drugs actually helped improve my net productivity over time, I would definitely take them!” he said.
Musk has been “a lightning rod for private securities claims and SEC enforcement actions,” LaCroix said. “The question any prospective D&O insurer would want to ask is: is that the kind of risk you want in your portfolio?”