Meaning
Specialized insurance policies protect corporate officers and directors from claims arising after a company has been acquired or dissolved. Purchasing tail insurance coverage extends the reporting period for claims based on wrongful acts that occurred before the transaction’s closing date. This arrangement is necessary in corporate transactions because standard directors and officers policies only cover claims made while the policy is active.
Policy Activation
The coverage is usually acquired at the close of a merger, acquisition, or liquidation. It operates for a specified period, typically six years, which aligns with the statute of limitations for corporate fiduciary claims. This premium is paid in a single lump sum at closing, ensuring that the policy remains in force without further payment obligations.
Liability Protection
Former directors and officers depend on this protection to shield their personal assets from post-transaction lawsuits. If shareholders or regulators file a lawsuit after the deal closes, the tail policy provides defense costs and indemnity up to the policy limits. This protection is especially valuable because individual board members lose access to the company’s internal indemnification once the entity is dissolved.
Transaction Integration
Transaction agreements routinely mandate this purchase as a condition to closing. It allocates the risk of past actions to the pre-closing period.
