Consultations:
In part one of this article, we reviewed common issues associated with special purpose acquisition company (SPAC) litigation risks. Here, in part two, we’ll look at the three main types of directors and officers (D&O) liability insurance programs that typically respond to SPAC-related litigation claims, as well as information regarding policy coverages and limits.
Types of SPAC D&O Policies
The following are the three main types of D&O policies listed by Business Law Today (BLT) that are typically part of a SPAC transaction before, during and after the deal.
- Policy coverage for the SPAC and its directors and officers at the time the initial public offering is funded. This coverage provides protection against claims from the SPAC’s efforts to identify and merge with the target company. Typically, this policy includes an extended reporting period for claims that occur after the merger (prior acts) and is known as tail coverage.
- Policy coverage for the target company and its directors and officers until it merges with the SPAC. This private company policy provides coverage for a wide range of alleged wrongful acts committed by the company and may also include an extended reporting period for prior acts.
- Policy coverage for the combined company and its directors and officers after the merger. This policy typically provides coverage for securities claims only. Coverage is bound at the time of the merger. Policy language can differ among carriers, so it is important to address coverage for prior acts before binding.
Policy Limits
The article by BLT notes that when SPAC lawsuits arise, defendants typically ask whether there is an insurance policy in place to protect the company and its directors and officers. If the answer is yes, the next question is whether those limits are sufficient to cover litigation defense and settlement costs.
Unfortunately, cost has become a primary factor for companies opting for lower limits in their D&O policy. However, lower limits of coverage may not be adequate to cover rising defense and settlement costs. For example, in 2020, it was typical for SPAC teams to secure $20 million in coverage limits. Today, increases in D&O premiums have companies purchasing between $5 million and $10 million in coverage, with some considering even lower limits. Companies must consider that the cost of proper D&O liability insurance will typically far outweigh costly defense and settlement costs.
Conclusion
All too often, a D&O liability insurance policy is a secondary consideration for SPAC sponsors. Today, however, it’s clear that this vital coverage can no longer be overlooked. If you’re a business considering a SPAC, proper planning regarding D&O insurance starts with working with an experienced broker who understands policy forms, limits, coverages, enhancements and exclusions to ensure a policy can adequately respond should a claim situation arise.
If your business is considering a SPAC transaction and in need of D&O insurance or you would like to learn more about this vital coverage, contact the experts at Oakwood D&O. As the fastest-growing brokerage for D&O liability insurance, Oakwood gives you the advantage of direct access to dedicated and knowledgeable professionals.
Get in touch – email Eli Solomon, CEO, at eli@oakwooddno.com or call (323) 686-7519.
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