D&O Transaction Clause

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By Tim Weymouth, Associate Director, ACII, AIoL

March 2020 – 9:01am

Me: “Can I speak to Mr Smith, please.”

Clients’ receptionist: “Mr Smith is very busy today, as we have just announced our Management Buy Out (MBO) so has a diary full of press and staff meetings.”

Me: “I appreciate that, but please tell Mr Smith that your Directors & Officers Liability (D&O) cover has gone into automatic run off and your new company is currently uninsured.”

Clients’ receptionist: “Ok I’ll tell him.”

Call ends.

9:10am – Phone rings.

Mr Smith: “Ok Tim, I have just cancelled on my trade press meeting – how do you get my D&O cover back?”

The above exchange took place recently (I have changed the name of my client contact). We got it sorted quickly for them, but how did we reach this point?

Firstly, you might be wondering how the insurance broker picked up this news for a business within a boutique market sector (I didn’t hear about it from BBC News). Well, we don’t want to give away all our secrets, but let’s just say that, at Howden, we monitor our clients to ensure that when something happens, we are ready to act.

As a quick refresher, D&O is a claims made policy. This means that it must be in place for cover to be provided. D&O policies also normally contain a transaction clause which states that the insurer will not provide any cover following a transaction – at best, it will put the current policy into run off for acts undertaken by the original owners before the transaction.

Transaction will be defined within the policy along the lines of the following:

• Policyholder is acquired, merges into, or sells all or most of its assets to a third party outside the group.
• Any person or entity gains control of the policyholder (this would include an MBO).
• Listing on a publicly listed security exchange.

The broker must then approach the insurer (doesn’t have to be the same one) to look to place a new D&O policy in order to cover the new owners. We cannot simply use the old one as the vendor could receive a claim from the new owners. Not only that, you would also want a Warranty & Indemnity policy to provide better coverage but we will discuss this in another article. But you will appreciate the need for separate D&O policies for the interests of the two parties involved in the transaction for the operation of the business under their respective stewardship.

The following diagram illustrates the situation:

So, you can see that if you are expecting to undergo a transaction you need to ensure your insurance broker is aware of it so that they can take steps to ensure your D&O cover is adjusted appropriately.

I cannot overstate how valuable a D&O policy is – after insurance policies which you are legally required to hold, D&O is the policy I would prioritise for any company. It’s purchased by the company for the benefit of its directors and employees. Without it, personal assets can be at risk in the defence of prosecutions against directors and employees for which, legally, the company cannot indemnify them. Corporate Manslaughter is one such example.

• Have you undergone a transaction or think you might have, and your broker hasn’t said anything?
• Are you planning a transaction and your broker hasn’t outlined the above?

If the answer is yes, or you are thinking about a transaction, then please do not hesitate to contact Tim Weymouth – [email protected]. We will make sure your D&O policy adapts seamlessly with your transaction with, perhaps, the addition of increased cover via Warranty & Indemnity cover.