Insurance Advisory Newsletter – Run-off Cover under Directors and Officers Insurance: Sept 2023

Run-off Cover under Directors and Officers Insurance

A Directors and Officers (“D&O”) Insurance policy offers to indemnify the directors, officers or any such person working in a managerial capacity of an organisation (“Insured”) as well as the organisation itself against claims relating to the actions or decisions of such Insured taken in their official capacity.

Bilateral Discover Period

Each D&O policy will cover the claims arising during the term of such policy. After the expiry or cancellation of the policy for a defined period, the Insured may notify claims made, or inquiries commenced, before the expiry of the current policy program; this defined period is the discovery period.

Subject to the terms of the D&O policy, the Insured will be able to avail a standard discovery period without any additional premium and an extended discovery period by paying an additional premium. However, such a discovery period is not applicable in the case of happening of a Transaction (defined below).

What is a Transaction under D&O policy? 

Each D&O policy is issued only after the insurer satisfies itself about the exposure, risks and shareholding pattern of the Insured. If any of the foregoing parameters are altered, the D&O policy stands invalid and a new policy has to be issued.

Each D&O policy will state that on happening of a significant change or a transaction or an event (“Transaction”), Insured may procure an additional cover (upon written request to the insurer) and the insurer may quote a premium for a run-off discovery period. In considering such a request, the insurer shall be entitled to fully underwrite the exposure and to extend such offer on whatever terms, conditions and limitations that the insurer deems appropriate. The D&O policy stands null and void post happening of the Transaction.

The transaction is said to have taken place in the following circumstances:

• Insured consolidates with or mergers into or sells a part or all of its assets to any other third party or a group of people or entities acting in concert; or
• Any person or entity, other than a subsidiary becomes entitled to exercise more than half of the rights to vote at general meetings of Insured; or
• Control the appointment of directors who exercise a majority of votes at the Board of Directors (BoD) meetings of the Insured.

What is a Run-off Cover?

A run-off cover, also known as an “extended reporting period” or “tail coverage” (“Run-off Cover”) acts as an additional insurance policy that, provides coverage for claims made against an Insured even after the policy period has expired.

Run-off cover covers any claim pertaining to the Insured and its directors and officers prior to the Transaction. With respect to the D&O policy, a Run-off Cover assures to indemnify the Insured in the instance that claims are made for past acts occurring during the expired policy term.

Run-off Cover after Transaction

In the event of a Transaction, the Insured has the option to procure an additional Run-off Cover at the quoted premium for a period ranging from two years to five years.

Who benefits from a run-off coverage?

• The erstwhile directors, stakeholders and officers of an entity at the time of Transaction, will benefit from a Run-off policy even after they have retired from the Insured entity or have stepped down from their positions at the Insured entity;
• In cases of mergers and acquisitions transactions, the directors and officers from the company getting acquired are protected;
• It protects any claims that may arise in the future after the directors have stepped down from their positions as directors and officers;
• The directors and officers might face future claims arising from insolvency claims, negligence, lawsuits, investigations, alleged wrongful accusation claims, etc. In the instance the policy has lapsed and is not active when any of these claims arise, they will get no coverage or protection from the policy. However, a run-off policy may cover the costs of the attorney, miscellaneous legal costs, identification and various other burdensome expenses that may occur.

Run-Off Cover Policy – How Is It Issues?

Insured must inform the insurer about the happening of the Transaction at the earliest or within the time period specified in the D&O policy. The Run-Off Cover is issued in the form of an endorsement to the expiring D&O policy to extend the discovery period. It ensures that the new policy has identical coverages and sum insured to the original D&O policy.

The premium differs basis the period of Run-Off Cover as well as the claims during the D&O policy. Tenure of Run-off Cover may vary from two years to five years. Run-off premiums generally decrease annually after the first year, provided that there have not been any claims against the Insured and there are no significant changes to the re-insurance treaty of the respective Insurance company. 

Points To Remember:

On the happening of a Transaction, as part of due diligence, the Insured must:

• Get a new D&O policy issued on the happening of the Transaction.
• Get a Run-off Cover to cover claims which might come for wrongful acts prior to the Transaction.