Common Exclusions in SPAC D&O Insurance Policies

When you're running a Special Purpose Acquisition Company (SPAC), directors and officers (or D&O) insurance is your financial safety net. But these policies don't cover everything. Understanding the exclusions in your D&O policy is like knowing where the holes in your safety net are — it's pretty important if you don't want to fall through.

Beyond just knowing what they are, timing plays a huge role, as you might expect. These can have an oversized impact during the de-SPAC stage, when risks are generally higher for many of the most common exclusions.

Common Exclusions in SPAC D&O Policies

Fraud and Criminal Acts

First up is the fraud and criminal acts exclusion. It's pretty much what it sounds like: If you're found guilty of fraud or criminal behavior, don't expect your D&O policy to bail you out. But here's a pro tip: look for policies that require a "final adjudication" before this exclusion kicks in. This means you're still covered during the legal process, which can be a lifesaver for your bank account.

Prior Acts

Next on the list is the prior acts exclusion. This one's all about timing. It bars coverage for things that happened before a certain date, usually when your policy started (or whatever the effective date of your policy is). For SPACs, you want this date to go all the way back to when your company was formed. Otherwise, you might find yourself on the hook for something that happened in those early days.

Insured vs. Insured

The insured vs. insured exclusion is another tricky one. It basically means the policy won't cover lawsuits between people who are insured under the same policy. This can be a problem during the de-SPAC process when you're dealing with folks from both the SPAC and the target company. The fix? Negotiate for carve-outs that keep you covered during this critical time.

Professional Services

Professional services exclusions can be a real headache for SPACs. These typically bar coverage for claims related to professional services, but the definition of "professional services" can be pretty broad. Make sure it doesn't accidentally include your SPAC's main job — finding and merging with a target company.

Regulatory Actions

With the SEC keeping a close eye on SPACs these days, regulatory exclusions are something to watch out for. Some policies might try to exclude coverage for certain types of regulatory actions. Given the current climate, you'll want to push back on these and aim for full coverage of regulatory investigations and actions.

Inadequate Consideration

The inadequate consideration exclusion is particularly relevant for SPACs. This one can leave you exposed if someone claims you paid too much (or too little) in a transaction. Given that SPAC mergers often lead to stock price fluctuations, this exclusion could leave you vulnerable to one of the most common types of post-merger claims.

PIPE Offerings

Finally, keep an eye out for PIPE offering exclusions. Private Investment in Public Equity (PIPE) deals are the bread and butter for many SPACs, so an exclusion here could leave a big gap in your coverage. If you can't get rid of this exclusion entirely, try to at least narrow it down as much as possible.

Negotiate Exclusions

Before anything, you should understand that exclusions are truly a standard part of any insurance policy. Because of them, insurance premiums don't skyrocket (more than they already are, anyway).

Still, even with a set list of black-and-white exclusions, there is generally room for negotiation — if you know what you're doing. Work with an experienced broker to get exclusions better tailored for your specific needs as a SPAC. It's often (but, unfortunately, not always) possible to narrow the scope of some exclusions, add carve-outs, or even remove them altogether.

Conclusion: Strengthen Your Safety Net

Remember, the goal isn't to eliminate all risk — that's simply not possible. What you're aiming for is a policy that provides solid coverage for the risks your SPAC is most likely to face, ideally at a cost that won't break the bank.

By understanding your insurance policy's exclusions and negotiating smartly, you can make sure your D&O policy is there for you when you need it most. SPACs often have enough to worry about, and the last thing you want is to find out too late that your safety net has holes in it.