When added to an insurance policy by way of endorsement, tail coverage allows the insured to file a claim after a policy has expired or been canceled – essentially extending coverage for a stated period.
For coverage to apply, however, the incident for which the claim is being filed must have occurred when the policy was still actively in force and be filed during the extended reporting time. Another way to describe tail coverage would be a type of “liability extension” coverage.
Adding tail insurance to a directors and officers (D&O) insurance policy is an often-overlooked coverage for businesses. When it comes to mergers and acquisitions, tail coverage becomes especially critical in extending protection for claims that are reported after the current D&O insurance policy ends and during the extended reporting period.
Here’s a basic example:
Imagine that, years after an acquisition, a lawsuit is filed against a company’s board of directors for an incident that occurred prior to the close of the business transaction. Because the previous D&O insurance policy was canceled when the acquisition took place, no coverage exists, and the board members are now subject to a costly lawsuit.
However, if the company had purchased D&O tail insurance that would extend the claims reporting period during this post-acquisition time frame, the board members would have liability protection. The fact is, it isn’t an uncommon practice for an existing D&O insurance policy to be canceled in most acquisition and/or merger situations — typically on the acquisition date.
D&O tail insurance is also beneficial in litigation cases stemming from a Special Purpose Acquisition Company (SPAC) or de-SPAC transaction, where cases are typically brought to court by shareholders and investors. Today, most SPAC and de-SPAC post-transaction litigation is being filed in federal court and comes with significant defense costs and/or sizable settlement amounts – often in the tens of millions of dollars.
Simply put, when a company buys D&O tail insurance, it is purchasing time to report claims that occurred before the acquisition. Whether you are buying or selling a company, or are a business that is getting ready to go public, D&O tail coverage should be an important part of the conversation at the very beginning of the transaction.
The current increase in mergers and acquisitions makes it worth examining the litigation risks for directors and officers of these companies in a post-acquisition environment. If you are a business in need of D&O insurance, or would like to learn more about D&O tail insurance, contact the experts at Oakwood D&O. We have over 15 years of experience specializing in all aspects of management liability, with an ardent focus on directors & officers insurance.
Get in touch – email Eli Solomon, CEO, at firstname.lastname@example.org or call (323) 686-7519.
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