Meaning
Insurance coverage provides protection for retired directors and officers against claims arising from decisions made during their active service. Companies purchase a runoff indemnity to cover the period after a business is sold or wound up. This protection remains in force for several years to address latent claims that arise after the transaction closes.
Long-tail liability policies ensure that former leaders are not personally exposed to litigation after they have left their positions.
Coverage Duration
Standard policy terms run for six years after the transaction date, matching the limitation period for contractual claims. This duration gives directors peace of mind as the business transitions to new ownership. Shorter periods are sometimes negotiated to reduce the insurance cost.
Claim Type
Covered actions include shareholder lawsuits or regulatory investigations related to pre-sale conduct. Claims must relate to wrongful acts allegedly committed before the effective date of the runoff policy. Post-closing decisions are excluded from this specific indemnity coverage.
Premium Funding
Buying the policy requires a single, upfront payment made by the company prior to the closing of the transaction. This cost is factored into the acquisition expenses during a merger or buyout. Allocating the cash before dissolution ensures the policy remains fully funded.
