Saturday, April 21, 2018   You are here:  Features   Search
  Industry News Minimize
 Print   
  Do Not Forget About D&O During M&A
Do Not Forget About D&O During M&A
Do Not Forget About D&O During M&A
 
By Michael Read
 

Mergers and acquisitions are becoming more and more common in the banking industry, and anyone who has been through one will attest to the fact that they present numerous challenges. There are countless due-diligence concerns and personnel matters that must be addressed, not to mention all of the internal and external communication demands. One equally important item, however, always seems to get lost in the shuffle during these hectic periods – your Directors and Officers liability policy. 

It is precisely during these times that you should consider the impact of the organizational changes on your D&O policy. M&A activity leads to increased stakeholder involvement and scrutiny, and problems can quickly arise for a myriad of reasons. Perhaps your shareholders do not want the bank to be sold in the first place. Maybe they’re agreeable to a sale, but they believe the offer is unacceptable. What if a potential acquisition does not fit the overall business model of the bank? Whatever the case may be, a basic understanding of how M&As affect your D&O policy is something every banker should have. 

A prevalent misconception of many bankers is the expectation that your policy continues “as is” after a merger or acquisition. While there are many intricacies of D&O coverage and each carrier has their own interpretation of policy language, most policies contain very specific language stating that coverage ceases upon the acquisition of the bank by another entity or the merger or consolidation of the bank into another entity such that the bank is not the surviving entity. 

 
THE CONVERSION PHASE
Nevertheless, you are not completely bare at this point because it is standard industry practice that your policy enters into an automatic conversion phase. Essentially, this means that your policy will convert to what is known as “run off,” a time period in which coverage will continue in full force and effect with respect to claims for wrongful acts that were committed prior to the merger or acquisition, but not for claims arising from wrongful acts that occurred after the effective date of the merger or acquisition. This is a very important distinction to keep in mind. Automatic conversion is not an extension of coverage or a reinstatement of limits; it is simply an extended claims reporting period. 

Another consideration is the purchase of the Discovery Period. Similar to the automatic conversion phase, Discovery is not an extension of coverage, but rather an additional extended reporting period in which to report claims for wrongful acts that occurred prior to policy termination. While every D&O policy is different, the right to purchase Discovery is generally included in the actual policy language with a time frame that is set forth in your Declarations Page. In most cases, depending on state-specific requirements, the length of the Discovery Period is 90 to 365 days with a cost of somewhere between 75 and 150 percent of the annual D&O premium. 

 
WATCH YOUR TAIL
An additional buying consideration is the purchase of “tail” coverage (so named from industry jargon describing the long lag between the occurrence and reporting of a claim). The mechanics of tail are the same as Discovery, but a few distinctions make it unique. First, tail is offered solely at the insurer’s discretion. Unlike Discovery, the right to purchase tail coverage is not part of your D&O policy. Tail is also subject to additional underwriting. There is nothing in your policy that dictates length of time or pricing. However, it is normally offered for a three- or six-year period at 200 to 350 percent of annual premium. 

D&O policies also include some critical time constraints that must be followed as you consider your extended reporting needs. Most insurers require that you give them notice of your election to purchase Discovery or tail in writing and that you pay any additional premium due within 60 days of the effective date of the merger or acquisition. Failure to do so will void your right to the extended claims reporting period. Premium is deemed fully earned and coverage is non-cancelable in most cases. 

While any merger or acquisition can be a trying event, a basic understanding of how such activity impacts your Directors and Officers liability policy will create some peace of mind during these challenging times.    
 
Michael Read is the business relationship manager for the American Bankers Association-sponsored insurance program underwritten by Progressive, a leading provider of professional liability and financial institution bond coverage for community financial institutions. He can be reached at (800) 274-5222 or via e-mail at michael_read@progressive.com.

Posted on Saturday, September 30, 2006 (Archive on Friday, December 29, 2006)
Posted by kdroney  Contributed by kdroney
Return

Rating:
Comments:
Save

Current Rating:
  

Privacy Statement   Terms Of Use   Copyright 2013 The Warren Group    Login