Consultations:
The second half of this year is seeing more companies exploring acquisitions, divestitures, and other deal-type transactions — a surge that isn’t expected to slow down anytime soon.
In fact, according to PwC, the number of acquisitions by the end of the year is expected to exceed 2020 totals, as company valuations remain high and the current seller’s market continues. However, when it comes to merger and acquisition (M&A) transactions, directors and officers (D&O) insurance is a commonly overlooked component that is critical in mitigating risks and maximizing claim recovery efforts.
According to the American Bar Association, it’s important for all companies involved in an M&A deal to not assume that existing insurance policies will provide sufficient protection for current or future liabilities once the deal has closed. The following are key insurance considerations when exploring D&O insurance during an M&A deal or other type of business restructuring.
Change in Control Provision
When an M&A occurs, it can trigger a change in coverage under the current insurance policy. It’s critical for both parties involved to review all relevant insurance policies to better understand the potential impact a transaction may have on existing coverage. This includes being aware of any restructuring that could trigger a change in control under a company’s current D&O policy.
Inadequate Consideration Exclusion
This exclusion, also known as a “bump-up” clause, can be found in many D&O policies. According to the International Risk Management Institute, it’s not uncommon for shareholders of the acquired organization to file a lawsuit alleging that the purchase price paid by the acquirer was too low. The clause essentially bumps up the purchase price between the amount the acquiring company paid in the transaction and what stockholders claim is the actual value of the shares.
Tail or Runoff Insurance for D&O
Tail or runoff coverage is activated when there is a “change in control” to the insured. This is a term of art and is clearly defined in each D&O policy. Typically an acquisition above a certain threshold will trigger Runoff, and the company will have to buy tail coverage. This coverage will now extend the reporting period for claims against the company prior to the runoff date for a period of 3 to 6 years. Simply put, the provisions permit an insured to report claims that are made against the insured after they have either acquired or been acquired, if the wrongful act that gave rise to the claim took place during the term of the now-expired/canceled policy. In an M&A situation, the extended reporting period of tail or runoff coverage is critical because once a company is acquired, it could take several years for a lawsuit to arise against an executive or board. The provision allows the D&O policy to remain in force and run past the acquisition date until the end of the policy period.
Conclusion
These are just a few of the D&O insurance coverage issues involving M&A deals. Working with a D&O insurance expert can help you better identify potential coverage gaps and the types of insurance needed to mitigate risk exposures.
While there isn’t a blueprint when it comes to the ins and outs of M&A and D&O insurance, the experts at Oakwood D&O can serve as a vital resource.
Are you a company or broker with a quality book of D&O business that you are planning to sell? Currently, Oakwood D&O is expanding its book and market reach by acquiring D&O business accounts. With proper due diligence and favorable agency terms, we can ensure a smooth transfer of business when you’re ready to move forward.
Get in touch – email Eli Solomon, CEO, at eli@oakwooddno.com or call (323) 686-7519
