When your company undergoes a change of control event, it’s important that your Directors and Officers liability insurance coverage remains intact. Take these steps to ensure that it stays intact.
When control changes in your corporation, it can create a significant change in your corporate insurance and risk management affairs. Change of control events are as varied as your company, but may include:
- The sale of all or a substantial number of the company’s assets
- Change in board members.
- Mergers 4. Acquisitions
- Any other significant change of ownership or company control
Each event, regardless of other factors, requires special attention to insurance and risk management matters associated with your company. Note that these evaluations should take place as soon as possible because most policies will cease to pay claims that are made after these major events until a new policy has been written or issues have been handled. Your provider should, if possible, be involved early in the process to ensure that there is not a gap in your insurance or risk management coverage.
Why Is It Necessary to Work with Insurance Providers During Change of Control Events?
Insurance companies carefully consider a variety of factors when they’re creating the policies they use for their companies. Many include the need to rewrite policies after a Change of Control event. When company control changes, it, in essence, becomes a new company–that is, it is no longer the same company it was before. Following a Change of Control event, insurance companies will need to view the new company entity and examine existing policies to determine whether those policies are appropriate for the new company. It’s also important to work with your insurance provider to understand what additional premiums are due as a result of your company’s changes. Don’t find out about the problem only when you discover that there are sudden changes to your policy–or worse, when you realize that you no longer have coverage for an issue that you thought would be covered.
What Happens to My Insurance Once the Change of Control Clause Is Triggered?
Chances are, there’s a Change of Control Policy in your Directors and Officers Liability Insurance Policy. This clause is triggered any time a Change of Control event–including large mergers, acquisitions, large sales in company stock, and other events–creates a coverage gap in the insurance used by board members.
Consider this scenario: Your company has recently sold off the majority of your stock, triggering your Change of Control clause. After the closing, your claims-made policy will no longer provide coverage for any events that occur after the closing. Most companies understand this, and the new controlling entity or entities will purchase insurance policies that will provide the gap coverage needed.
Unfortunately, there’s one area where companies often stumble: in some cases, your insurance policy also will not provide coverage for events that occurred before the closing, but for which claims were not made until after the closing. If the suit isn’t filed until after the change in ownership, your Directors and Officers Liability Policy may no longer provide the coverage your business needs.
How Can I Protect Myself?
Fortunately, there are several things you can do to help protect yourself during and after a change in ownership or other change of control shift. The easiest strategy is simply to purchase “runoff coverage,” which is a policy specifically designed to protect the company during Change of Control events.
Who purchases runoff coverage?
Usually, runoff coverage is purchased by the old company. It’s not the responsibility of the new company to procure this coverage. In some cases, however, the new board may have a vested interest in ensuring that the old members are covered under the details of the policy.
How does runoff coverage work?
Look at runoff coverage like life support for your former policy: it keeps it going until the new board or controlling entities are able to acquire the coverage they need in order to provide the necessary protection. The old policy has technically lived out its term and is “dead,” but runoff coverage provides the basic essentials necessary to keep it functioning for a little longer until the change in power is complete.
As you embark on your journey of due diligence contract review, pay attention to the details. In some cases, Change of Control events could put the personal assets of board members at risk–and that can create substantial problems for all parties involved. Want to learn more about the potential risks associated with Change in Control events and how they can impact your business, your shareholders, and your directors?