Meaning
Specialized coverage within a directors and officers liability policy extends the reporting period for claims arising from acts committed prior to the corporate transaction. The purchase of director tail insurance protects former board members from personal liability after the company has been sold or dissolved. This contract prevents coverage gaps during the transition of corporate control, guaranteeing that past decisions remain covered.
Trigger Event
Corporate acquisition or merger typically activates the need for this protective instrument. When a transaction completes, the active policy terminates, and the runoff period begins. The transaction marks the moment the policy locks and begins covering only historical acts.
Liability Protection
Former directors face continuous exposure to claims filed by shareholders or regulators after a transaction concludes. Tail coverage protects these individuals by paying defense costs and settlements when the post-closing company cannot or will not indemnify them. This structure operates as a non-cancellable policy, ensuring that changing corporate ownership does not compromise the security of the covered individuals.
Premium Allocation
The total premium for the runoff period is paid upfront as a single lump-sum payment at the closing of the transaction. This cost is factored into the transaction expenses of the target company. The premium is calculated as a percentage of the annual policy fee, which typically ranges from one hundred fifty percent to two hundred percent of the last annual premium.
