Business leaders must consider many factors when executing a merger or acquisition. One factor that should not be overlooked is how the merger or acquisition will affect insurance policies for the business and its leaders.
D&O insurance policies can help executives and businesses in many ways, but the main purpose of this type of policy is to protect the personal finances of directors and officers in the event that they are held personally liable for actions they took in the fulfillment of their duties for the company. Some D&O policies can also help the company by, for instance, reimbursing the company if it has been forced to indemnify an executive who was held personally liable for certain wrongful acts.
Because these policies must cover a wide range of needs and purposes in a wide range of circumstances, they may be customized to the exact needs of the policyholder. As those needs change, the policy can become outdated. In particularly bad scenarios, this can mean that when a problem comes along — for instance, a lawsuit or regulatory action — the policy is no longer able to protect the company or the executives it was meant to protect.
Mergers and acquisitions
One big change that can render a D&O policy obsolete is a merger or acquisition. Many D&O policies contain what is known as a “change in control” provision, which limits the policy in the event of changes to the ownership or management of the business. Since these policies are meant to cover actions involving top executives, it makes sense that a change in executives or ownership of the company might trigger a change in the policy.
Of course, a merger or acquisition can easily count as such a change in control. This means that if the company and/or executives do not change their D&O policy during or soon after the merger or acquisition, they may find themselves unexpectedly exposed to liability. This could mean financial disaster for the individuals involved, and it could easily destroy a smaller company.
Business leaders considering a merger or acquisition should carefully consider how the move could affect their D&O insurance. An attorney with experience in business and insurance law can help them assess their options.