D&O Tail Policy for Directors and Officers

A D&O tail policy extends the insurance coverage for directors and officers beyond the policy’s expiration. This coverage is crucial during mergers, acquisitions, or ownership changes, protecting leaders from lawsuits over past actions. By understanding how a D&O tail policy works, companies can safeguard their directors and officers effectively.

Key Takeaways

  • D&O tail policies extend coverage beyond the expiration of D&O insurance, offering critical protection during corporate transitions like mergers and acquisitions.
  • These policies are particularly essential for companies undergoing significant changes, ensuring that directors and officers are not vulnerable to lawsuits for actions taken before the transitions.
  • Key features of D&O tail policies include extended reporting periods, customizable coverage scopes, and various cost factors, such as company size and claims history, which influence the premiums.

Understanding D&O Tail Policies

D&O tail policies, also known as ‘run-off’ policies, are designed to extend the coverage of D&O insurance beyond the normal expiration date. This extension, also referred to as ‘tail coverage,’ provides an extended reporting period for claims arising from actions before the policy’s expiration date. Put simply, a tail policy ensures that the protection from D&O insurance persists for directors and officers even after its official expiration.

Tail coverage, also known as tail insurance, in a D&O policy serves the purpose of extending the reporting period for noticing claims arising from conduct that occurred before a change of control. It provides added protection under the existing D&O policies in such cases. This becomes particularly important during mergers and acquisitions, a time when post-acquisition claims can surface. By extending the coverage, a D&O tail policy ensures that directors and officers are not left vulnerable to lawsuits alleging mismanagement or failure to uphold fiduciary duties.

Tail policies typically extend coverage for a specified time after the policy ends, commonly six years. This retroactive protection, which tail policy covers, is vital for safeguarding directors and officers’ personal assets against claims made after a policy’s expiration. Fundamentally, D&O tail coverage promotes business continuity by covering legal and defense costs for directors and officers, even when lawsuits are filed following a business transition.

Who Needs a D&O Tail Policy?

High-growth startup undergoing transition

Companies undergoing transitions like mergers, acquisitions, or changes in ownership particularly need D&O tail policies. These transitions can leave directors and officers exposed to personal lawsuits for actions taken before the change. High-growth startups and public companies are especially vulnerable during these periods of rapid change and should strongly consider D&O tail coverage to protect their leadership.

The necessity of D&O tail policies is underscored by the high incidence of shareholder litigation in M&A deals. For instance, 82% of mergers and acquisitions involving public target companies result in shareholder litigation challenging the deals. Without a D&O tail policy, directors and officers may find themselves unprotected if the acquiring company declines to offer future protection. Therefore, securing a tail policy is a prudent step for any company looking to safeguard its leadership during and after significant transitions.

Key Features of D&O Tail Policies

D&O tail policy coverage duration

One of the key features of a D&O tail policy is its duration. A standard D&O tail policy holds open the D&O insurance policy for six years past its policy’s normal expiration date. This extended reporting period, often six years long, provides retroactive protection for directors and officers by covering incidents that occurred during the active policy period but were reported after its expiration.

The scope of D&O tail coverage can be customized to include both personal liability protection for directors and officers and corporate entity protection. This dual coverage is crucial because it ensures that both the individuals and the company are protected from legal actions. Companies can also modify the scope of D&O tail coverage to control costs by adjusting coverage limits.

Adjusting the scope of coverage is a strategic approach to manage the costs of D&O tail policies. By carefully assessing the length, retroactive date, and scope of coverage, companies can balance protection and cost effectively. With a tail policy in place, directors and officers are covered for claims arising within a specified period post-acquisition, typically up to six years.

Common Exclusions in D&O Tail Policies

Like all insurance policies, D&O tail policies come with exclusions that outline which types of claims are not covered. Common exclusions include lawsuits between directors and officers within the same company to avoid covering corporate infighting. Additionally, most D&O policies exclude coverage for antitrust law violations to enforce fair corporate conduct.

Other exclusions to be aware of include prior knowledge claims, which restrict coverage for issues known before the policy purchase. Misconduct exclusions also play a significant role, excluding losses related to criminal or deliberately fraudulent activities. Evaluating all exclusions present in D&O policies is necessary to ascertain the actual coverage scope and to confirm that directors and officers are sufficiently protected.

How to Purchase a D&O Tail Policy

Purchasing a D&O tail policy involves several steps, starting with consulting legal counsel and an insurance provider. This ensures that all potential risks are covered and that the company’s directors and officers are fully protected. It’s also crucial to involve an expert who understands both M&A litigation and D&O insurance, as they can provide valuable insights into the best coverage options.

The purchase of the tail should ideally occur during the period between the signing and closing of the M&A deal, especially for public companies with existing D&O insurance policies. Businesses should also consult with commercial insurance brokers to tailor the right D&O tail coverage at the best price. Grasping the fundamentals of D&O coverage, including insuring agreements and retention provisions, aids in acquiring the most comprehensive policy.

Factors Influencing the Cost of D&O Tail Policies

Several factors can influence the cost of D&O tail policies. The size of the business significantly impacts the cost, with larger companies typically paying higher premiums. The financial health of the business also plays a role, as companies in better financial condition may secure more favorable rates.

A company’s claims history is another critical factor. Businesses with a history of frequent claims may face higher premiums from their insurance carrier. Additionally, industries with higher risks, such as technology or pharmaceuticals, may encounter higher costs for D&O tail policies.

The legal structure of a selling company and the length of the tail coverage period can also affect insurance coverage pricing. For instance, when the selling company agrees to the purchase and sale agreement, it may require the seller to buy an Extended Reporting Period (ERP) of at least three years, with costs ranging from 75% to 300% of the annual premium. Carefully considering these factors, including insurance considerations, can help businesses manage their insurance budgets effectively.

Real-World Examples of D&O Tail Policy Claims

Directors and officers in post-acquisition dispute

Real-world examples of D&O tail policy claims highlight the practical importance of these policies in protecting directors and officers. For instance, a tech startup that faced multiple lawsuits following an acquisition was shielded by D&O tail coverage from claims related to their pre-acquisition decisions. Similarly, the directors of a manufacturing firm benefited from D&O tail coverage during the company’s bankruptcy, which protected them from substantial litigation costs.

These examples underline the critical role D&O tail policies play in shielding directors and officers from lawsuits that arise after certain events, ensuring they are not personally liable for actions taken before policies expired.

The following subsections will delve deeper into specific scenarios such as post-acquisition disputes, bankruptcy litigation, securities claims, and retirement liability.

Post-Acquisition Disputes

Post-acquisition disputes can pose significant risks to directors and officers. For example, a tech startup acquired by a larger corporation later faced allegations of financial misrepresentations. The D&O tail coverage protected the former directors and officers against these claims, covering legal defense costs and potential settlements. In cases where the acquiring company refuses to assume liability for pre-closing activities, this scenario illustrates how a D&O tail policy can bridge the gap in coverage that might exist after a corporate transaction, ensuring continuous protection.

Such coverage is crucial because the selling company’s directors and officers face the possibility of future litigation for their previous roles at the acquired company, asserting breach of fiduciary duties in connection with the sale. Without a D&O tail policy, these individuals could be left vulnerable to significant legal and financial repercussions.

Bankruptcy Litigation

Bankruptcy litigation is another area where D&O tail coverage proves invaluable. Consider a manufacturing firm that filed for bankruptcy and subsequently faced lawsuits from creditors alleging mismanagement and poor financial oversight. The D&O tail coverage protected the executives from these claims and litigation costs, ensuring that their personal assets were not at risk.

After two years from the bankruptcy, the creditors filed a lawsuit. The lawsuit alleged mismanagement and poor financial oversight by the directors and officers. In such cases, D&O tail policies are crucial in covering legal fees and potential settlements, providing a safety net for directors and officers against claims made on a claims-made basis.

Retirement Liability

Retirement liability cases further highlight the importance of D&O tail policies. For instance, a retired CEO of a manufacturing company faced a lawsuit for alleged misconduct during his tenure. Thanks to an active D&O tail policy, he was protected from personal liability, and the policy covered his legal defense costs.

Similarly, a retired CEO from a pharmaceutical company was protected from a lawsuit regarding regulatory non-compliance during his tenure due to D&O tail coverage. These examples emphasize how D&O tail policies can safeguard retired executives from future claims, providing peace of mind long after they have left the company.

Best Practices for Maintaining Continuous Coverage

Maintaining continuous coverage during business transitions involves several best practices. One critical step is addressing the D&O policy’s Change in Control provision, which terminates coverage when there is a change in the majority interest in the insured company. Ensuring that this provision is managed effectively can prevent gaps in coverage that might leave directors and officers exposed.

Another essential practice is purchasing an extended reporting period (ERP), commonly known as a ‘Tail,’ when the D&O policy terminates. This ensures that claims presented after the transaction date are covered. Engaging an insurance broker early in M&A discussions is also crucial to manage risk and ensure no uninsured exposures remain after the transaction closes.

Next Steps for Implementing D&O Tail Policies

Implementing D&O tail policies involves:

  • Selecting appropriate coverage with the help of experts like Founder Shield
  • These experts can guide businesses through the process, ensuring that the company’s directors and officers are adequately protected
  • Selecting an appropriate tail policy is key to protecting leadership against claims that may arise after the policy’s standard expiration date.

Integrating D&O tail policies into a company’s insurance program is also essential. This integration ensures that the policies are aligned with the overall risk management strategy and provide comprehensive protection for the leadership. By taking these steps, companies can effectively implement D&O tail policies and protect their directors and officers.

The Role of D&O Tail Policies in Corporate Governance

Corporate executives discussing governance and protection

D&O tail policies significantly influence corporate governance by luring top-tier executives and assuring protection against any potential future claims. By having a tail policy, directors and officers can be assured that they are protected from lawsuits related to pre-acquisition activities, fostering a sense of security and stability in corporate governance.

Implementing D&O tail coverage can help attract high-quality executives to your company by offering them protection even if the company changes hands. This assurance makes the firm more appealing to top-tier talent, thereby enhancing its overall governance and operational effectiveness.


D&O tail policies are indispensable tools in the arsenal of corporate governance. From extending coverage beyond the normal expiration date to protecting directors and officers during and after significant transitions like mergers and acquisitions, these policies offer a safety net that ensures business continuity and leadership security. By understanding their key features, recognizing who needs them, and navigating the purchasing process, companies can safeguard their leadership against potential future claims.

In conclusion, D&O tail policies not only protect individual directors and officers but also enhance overall corporate governance. They attract top-tier talent by providing assurance of protection, thereby fostering a stable and secure leadership environment. As you consider the next steps for implementing these policies, remember that continuous coverage and expert guidance are key to maintaining robust protection for your company’s leaders.

Frequently Asked Questions

What is a D&O tail policy?

A D&O tail policy, also known as a ‘run-off’ policy, extends the coverage of D&O insurance beyond the normal expiration date, providing an extended reporting period for claims arising from actions before the policy’s expiration date.

Who needs a D&O tail policy?

Companies undergoing transitions such as mergers, acquisitions, or ownership changes, particularly high-growth startups and public companies, require a D&O tail policy to protect their directors and officers. This coverage is essential for ensuring ongoing protection during times of change.

What are some common exclusions in D&O tail policies?

Common exclusions in D&O tail policies include lawsuits between directors and officers within the same company, antitrust law violations, prior knowledge claims, and misconduct exclusions. Be aware of these exclusions when considering D&O tail coverage.

How can I purchase a D&O tail policy?

Consult with legal counsel, insurance providers, and experts in M&A litigation and D&O insurance to purchase a D&O tail policy. Involving a commercial insurance broker is essential for tailoring the right coverage.

How does D&O tail coverage influence corporate governance?

D&O tail coverage positively influences corporate governance by attracting top executives and providing protection against future claims, ultimately contributing to leadership stability and confidence.