Meaning
Indemnity coverage purchased during a merger or acquisition to protect former directors and officers from claims arising after they have left their positions. This run-off D and O insurance covers acts that occurred before the transaction but are only reported during the multi-year tail period of the policy. The scope of the policy is limited to past events and never covers new management decisions made after the closing date.
Tail Period
Coverage typically lasts for six years to match the statute of limitations for most commercial and fiduciary claims. Without run-off D and O insurance, a retired director might be forced to use personal funds to defend a lawsuit involving an old board decision. The policy is usually fully paid at the time of the transaction to ensure the protection remains in place even if the buyer later goes bankrupt.
Prior Acts
Claims are only valid if the alleged wrongful act happened after the policy’s retrospective date and before the transaction date. This run-off D and O insurance is a standard requirement in exit negotiations to provide peace of mind to the selling team. It prevents the surviving entity from cancelling the coverage to save on premiums.
Premium Calculation
Cost for this insurance is usually a multiple of the final annual premium of the active policy. Because run-off D and O insurance represents a fixed and known risk with no new exposures, the underwriting is based on the history of the firm rather than its future plans. High litigation environments in the manufacturing and industrial sectors often drive up the price of this protection.
