A Woodruff Sawyer blog addresses the importance of “tail” coverage for the seller’s directors in an M&A transaction. Here’s an excerpt:
In M&A, the D&O insurance policy that responds to a claim is the policy that is in place at the time the claim is made. So, for example, if in 2020 a set of actions took place that is later challenged in 2021, it’s the 2021 policy that would respond, assuming you still have an active insurance policy in place.
This is where a D&O tail policy is crucial. A tail policy covers what would otherwise be a gap in coverage for directors and officers after the sale of a company. The gap exists because the D&O policy of the acquiring company will typically not respond on behalf of the selling company’s directors and officers for claims that arise post-closing that relate to pre-closing activities.
When a tail policy is purchased, the insurance carrier for the selling company agrees to hold open the D&O insurance policy for a specified period past the policy’s normal expiration date. In the United States, six years is the standard.
In other words, if a claim arises within six years after a company is sold, the selling company’s directors and officers will be covered under their original D&O insurance policy.
Another benefit of a tail policy is that it’s generally non-cancelable. This feature guarantees that the seller’s former directors and officers will not run the risk of the acquiring company cancelling the policy in order to get back the cash paid for the policy.
The blog addresses a number of related issues, including who should purchase the policy, when it should be purchased and — last but not least — how to go about purchasing tail coverage.
-John Jenkins, DealLawyers.com November 13, 2020