When companies merge or one company acquires another in a landmark deal, one component that sometimes gets overlooked is the need for insurance coverage.
But having management liability insurance in place for directors and officers, known as D&O insurance, is essential to any major corporate deal.
When it comes to M&A agreements, directors and officers insurance is chosen to protect the parties and decision makers involved from possible discrepancies that can arise. But it’s not as simple as just buying management liability insurance and calling it a day. Those involved have to understand the issues related to D&O insurance in mergers and acquisitions in order to keep from major legal problems.
Here are some key insurance issues to consider when structuring M&A deals to cut down on risk and exposure, and maximize recoveries if a claim arises.
A surviving company might not assume all or any existing liabilities of the organization it’s buying. Buyers and sellers should take note of the potential adverse impact that limited transfer of liability may have on the surviving company’s ability to obtain historic insurance assets. The right to claim D&O coverage under insurance policies that have already been in place may be cut off if the liabilities of the policyholder were ended in a M&A deal.
The change in control provision can include conditions requiring that one company provides notice to the insurer within a specific time frame in order to preserve coverage for the restructured entity. The issue here comes down to the policy language and the fine print of a deal. Parties may assume that if the asset sale takes place as part of bankruptcy issues, then the change in control provision is automatically put into motion. But some policies can switch on whether there is a receiver or similar entity, which doesn’t always happen.
M&A agreements usually include tail coverage and runoff, which depend on the policy’s change in control provision and the date the deal was put into effect. Runoff and tail coverage terms usually become active whether the claims are based on conduct from before or after the effective date of a transaction. However, policyholders shouldn’t assume that the terms and conditions of those coverages will stay the same forever. To avoid lapses in coverage for conduct before a M&A deal is underway, a company can purchase tail coverage by endorsing the policy on top of what they have.
All parties involved in a mergers and acquisitions deal must assess its impact on M&A insurance policies, both current and future. But there can still be ways to mitigate risk by purchasing insurance the deal itself. One option is representation and warranty insurance, which provides protection for the buyer or seller from losses that may occur due to inaccurate representations or warranties that were made by the seller during the merger, asset sale, or acquisition.
A buyer-side policy for representation and warranty provides protection for the purchaser by paying out losses if the target company provides inaccurate information, like failing to disclose a particular liability on purpose.
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