Selling or Merging Your Company: What Happens to D&O Coverage in a Change in Control

When a company is bought, sold, or merged, directors and officers often focus on price, timing, and deal terms. D&O insurance may not be top of mind. Yet decisions made during a transaction can be the subject of later claims, and the way your policy is structured can determine whether coverage remains available after the deal closes.

Why Transactions Create D&O Exposure

Mergers and acquisitions can lead to claims by shareholders, investors, employees, creditors, or others who disagree with how the deal was handled. Common allegations include that the price was too low, that directors failed to get the best terms, that disclosures were incomplete, or that conflicts of interest were not handled properly. Claims may be filed after the transaction closes, sometimes years later.

What a Change-in-Control Provision Does

Most D&O policies include a change-in-control, or change-of-control, clause. In general, if the company is acquired or merges into another entity, coverage under the existing policy may continue only for wrongful acts that occurred before the closing date. Coverage for acts after the deal may end or require new insurance. The precise trigger and consequences depend on the policy language, so it is important to read it before a transaction.

Because the existing policy may no longer protect new activity, the buyer's D&O program or a new policy will usually be needed going forward.

Run-Off or Tail Coverage Explained

To protect former directors and officers of the acquired company, a run-off policy, also called tail coverage, is often purchased. It typically extends the time during which claims can be reported for wrongful acts that occurred before the closing. Many run-off policies last six years, although terms and pricing vary and are negotiable.

The question of who pays for run-off, and what it will cover, is often addressed in the purchase agreement. Directors of the selling company may want to confirm that the agreement addresses it clearly.

Related Issues to Raise Early

Several topics may come up in a deal. Indemnification provisions in the corporate bylaws or the agreement may be a source of protection, but they are only as strong as the company's ability to pay. D&O insurance can back up that promise. Side A coverage, which protects individuals when the company cannot or will not indemnify them, can be particularly relevant in an acquisition, where the original company may no longer exist in the same form.

Private companies, nonprofits, and startups face these issues too. A small company that is acquired by a larger one may not consider its D&O policy until a claim arrives.

Questions Directors Commonly Ask

Consider discussing these questions with your agent and your attorney well before closing. How does our policy define a change in control? What happens to coverage for prior acts? Is a run-off policy available, for how long, and at what cost? Who is responsible for paying? Are there notice requirements before closing? Do other policies, such as employment practices, fiduciary, or cyber coverage, also contain change-in-control language?

Notice Matters

Some policies require that the insurer be notified of a pending transaction, and failing to do so can create problems. Report any circumstances that might lead to a claim before the policy ends, since the notice rules and deadlines for claims-made coverage can be strict.

Talk With an Independent Agent

An independent agent can review your D&O policy for change-in-control language, obtain quotes for run-off coverage, and coordinate with your attorney on deal timing. If your company is considering a sale, merger, or investment, reach out early to talk through your options.

General information only. Coverage is governed by the terms of the policy actually issued. This article is not legal advice.