DealLawyers.com Blog

This Hunton article addresses five common coverage issues when “runoff” or “tail” coverage extends a D&O policy to cover claims after a change in ownership. It starts with a reminder about why this is necessary:

Because modern directors and officers (D&O) liability policies are written on a “claims made” basis, coverage is determined based on when the claim for wrongful acts is first made against an insured. If a company does not have a D&O policy in place, it risks being uninsured for claims made during a gap in claims-made coverage. D&O policies also contain “change in control” provisions . . . So, what happens when a company is acquired, merges with another company, or sells its assets such that the selling entity no longer is a going company that maintains a D&O policy? The approach taken in many transactions is securing “runoff” and “tail” coverages.

Turning to the five common coverage issues, here’s one to look out for:

Be Wary of Straddle Claims. A company can seemingly do everything right—place robust D&O coverage, monitor forthcoming changes in control, timely elect tail coverage, and submit a post-transaction claim for coverage alleging pre-transaction wrongdoing ostensibly covered by the tail policy. But then comes a surprise denial. Some of the biggest offenders that can seemingly negate tail coverage altogether are exclusions aimed at so-called “straddle” claims. Straddle claims allege misconduct both before and after the effective date of tail coverage.

Coverage grants in tail policies are tailored to respond only to claims alleging pre-closing wrongful acts. But some insurers go a step further in adding exclusions to policies that bar coverage for any claim based upon, arising out of, directly or indirectly resulting from, or in any way involving a wrongful act allegedly committed on or after the runoff date. These provisions eliminate coverage entirely—even for portions of the claim tied exclusively to pre-runoff wrongdoing—based on the presence of a single post-runoff wrongful act. That can lead to finger-pointing between insurers, especially where a surviving entity purchased a going-forward D&O policy that has a similarly broad exclusion barring coverage for any claim involving any pre-closing wrongful acts.

To avoid this, the alert suggests:

Policyholders should closely scrutinize tail policies to eliminate or narrowly tailor these kinds of exclusions. Clarifying how policies address straddle claims can ensure that they do not fall through uncovered cracks because of conduct timing. Buyers and sellers should have an understanding of the pre-closing and post-closing insurance regimes that will be in place around a transaction in order to avoid any potential denials of straddle claims.

– Meredith Ervine