Run-Off Coverage in SPAC D&O Insurance

So, your SPAC has found its perfect acquisition, and you're ready to tie the knot in a de-SPAC transaction. Congrats!

But you need to think about what happens after the transaction closes. That's where your run-off coverage for your SPAC directors and officers insurance policy comes in.

Run-Off Coverage: Your Post-Merger Safety Net

What Is Run-Off Coverage?

Run-off coverage, also known as "tail" coverage, is…I guess you could call it a bit of an insurance time machine. It extends your D&O policy to cover claims made after the policy period ends for wrongful acts that occurred before the end of the policy. In SPAC terms, it's your protection for claims that pop up after your de-SPAC transaction but that are related to your pre-merger activities.

Why You Need It

You might be thinking, "But we're merging into a new company with new insurance. Why do we need this?" Here's the thing: Claims can come out of nowhere, even literal years after the fact. Maybe a shareholder decides your disclosures weren't quite right, or the SEC decides to take a second look at your merger process. Without run-off coverage, you could be left holding the bag for these past actions.

The Nuts and Bolts of Run-Off Coverage

Duration Matters

Typically, run-off coverage lasts for a set period — most often three to six years. This is because most statutes of limitations for securities claims fall within this window. But remember, longer isn't always better. It's about finding the sweet spot between protection and cost.

What's Covered?

Run-off coverage typically mirrors your original D&O policy. It covers claims for wrongful acts that occurred before the end of the policy period, even if those claims are made during the run-off period. This can include:

• Shareholder lawsuits
• Regulatory investigations
• Employment-related claims

Who's Protected?

Run-off coverage protects the directors and officers who were in place during the SPAC's lifecycle. This includes those who may have left the company before or during the de-SPAC transaction. It's your (necessary, if not slightly untraditional) parting gift to those who helped get your SPAC to the finish line.

How (and When) to Secure Your Run-Off Coverage

Timing Is Everything

Don't wait until the last minute to think about your run-off coverage. Ideally, you should negotiate it when you first purchase your D&O policy. Many policies include options for run-off coverage, but the terms can vary widely.

Cost Considerations

Run-off coverage isn't free, but it's obviously going to be a lot cheaper than facing a lawsuit without insurance. Typically, you'll pay a one-time premium for the entire run-off period. This can range from 100% to 300% of your annual premium, depending on factors like the length of the run-off period and your SPAC's risk profile (like what industry it's targeting, and so on).

Limits and Retentions

Pay close attention to the limits and retentions in your run-off coverage. Some policies maintain the same limits as your original policy, while others might reduce them. Similarly, retentions (your out-of-pocket costs before insurance kicks in) might change in the run-off period.

Potential Pitfalls

The "Change in Control" Clause

Many D&O policies have a "change in control" clause that terminates the policy upon a merger. Make sure your policy either waives this for the run-off period or that you've secured separate run-off coverage.

Gaps in Coverage

Watch out for gaps between your original policy and your run-off coverage. Some policies might have different definitions or exclusions for the run-off period. Read the fine print or, better yet, have an experienced broker or lawyer review it.

Shared Limits

If your run-off coverage shares limits with the ongoing D&O policy of the merged company, you could find yourself competing for coverage. Consider pushing for a separate limit for your run-off coverage, if you're up for doing some negotiation.

Tailor Your Run-Off Coverage

Industry-Specific Risks

Remember those industry-specific risks we talked about in my other article? They matter for run-off coverage, too. If you're in a highly regulated industry like healthcare or finance, you might want a longer run-off period to account for potential delayed regulatory actions.

Transaction-Specific Concerns

The nature of your de-SPAC transaction can affect your run-off needs. Was it a particularly complex deal? Were there any contentious issues during negotiations? These factors might influence the duration and terms of run-off coverage you need.

The Bottom Line

Run-off coverage is a critical component of your SPAC's risk management strategy: Its importance cannot be overstated. This coverage serves as your insurance safety net for the post-merger phase, protecting both your company and the individuals who contributed to your SPAC's success.

By securing appropriate run-off coverage, you're acknowledging that potential risks don't simply disappear after the de-SPAC transaction. Claims can arise years after the fact, and without proper coverage, you could face some major financial and legal challenges.

At the core of the matter, just remember that thorough planning includes preparing for long-term risks. Carefully consider your run-off coverage options, taking into account your specific industry, transaction details, and risk profile. Engage with experienced insurance professionals (like us!) to ensure you have the right coverage in place.

Ultimately, robust run-off coverage provides peace of mind, allowing you to move forward with confidence after your de-SPAC transaction. It's an investment in your SPAC's legacy and the protection of those who helped shape it.