What You Should Know About D&O or R&W Insurance In Mergers and Acquisitions

7 Min Read By: Michael Gehrt, Mikaela Whitman, Pamela Woods


There are a multitude of issues and terms to address when companies merge or when one company acquires another. One aspect of the deal that is often overlooked is insurance. Specifically, directors and officers liability insurance, also known as D&O insurance, is an essential part of any merger or acquisition and must be carefully considered in order to avoid significant liability down the road. Companies should not overlook the option of representations and warranties coverage when planning a merger or sale.  

This is especially true in the current climate.  Merger and acquisition activity since the latter half of 2020 has seen unprecedented growth. Some bankers have said that the M&A market has gone into “overdrive” and the number of mergers and acquisitions is “far beyond the historical norm.”[1]  With this increased M&A activity, litigation resulting from the transaction – including shareholder lawsuits – is inevitable. According to Cornerstone Research, 82% of the significant deals announced in 2017 and 2018 were challenged by shareholders, resulting in roughly three lawsuits filed per challenged deal.[2] 

Suffice it to say, the risk and exposure in a merger or acquisition is high, for the companies involved but also individual executives. This article addresses some of the key insurance issues that decision makers should keep in mind to mitigate that risk and maximize coverage. 

D&O Insurance

D&O liability insurance is meant to protect directors and officers if they are named as individual defendants in lawsuits for acts taken in their roles as such. D&O insurance protects the insureds in the event of suits by plaintiffs such as employees, shareholders, competitors, investors, and customers.  Some D&O policies also provide coverage for the company.

D&O policies usually provide coverage for legal fees incurred as well as amounts paid by the insureds in judgments or settlement disbursements. If the directors and officers are entitled to indemnification from the company by way of company bylaws or their employment contracts, that indemnity obligation is typically backed financially by a D&O policy.

Change in Control Provisions

D&O insurance policies typically insure against certain “Wrongful Acts” as defined by the policy that the company or other insureds allegedly commit.  These policies often contain a “change in control” provision that limits the available coverage for these “Wrongful Acts” if there is a change in company ownership.  Before any merger or acquisition, it is crucial to review and understand any change in control provisions and corresponding notice requirements to keep the intended insurance in place, uninterrupted, or secure new coverage.

Change in control provisions are generally triggered upon the happening of a named event (i.e., mergers, acquisitions, or change in voting control). When that triggering event occurs, coverage under the policy changes. While the change in coverage will depend on the specific policy language, the provisions typically provide that the policy will not insure “Wrongful Acts” that occur after the triggering event and will only cover acts that occurred prior to the change in control. That is, the policy will cover acts and omissions which occurred in the regular course of business, but not those after a change in control when circumstances (e.g. management, business goals, or other essential characteristics of the insured) have been altered. When the triggering event occurs and the coverage terminates, the policy is placed into run-off (discussed below). Note that the change in control provisions in some D&O policies are even stricter and eliminate all coverage, even for acts and omissions that predate the change in control. 

Questions of change in control are highly fact-specific and are determined by the policy language, deal specifics, and the governing law. Therefore, it is important to understand these nuances before any deal, especially because once the provision is triggered, it can create unintended gaps or even eliminate all D&O coverage. 

A change in control provision can also include notice conditions that require the insured to provide notice to the insurer within a specific time frame (either in advance of a deal or after its completion) to preserve coverage for the new entity.  Like all notice requirements in an insurance policy, it is imperative that an insured not overlook these notice requirements, or the company risks losing coverage. 

Tail or Runoff Coverage

D&O insurance policies are typically written on a “claims-made” basis, which generally means that the policy covers claims made while the policy is in effect.  As addressed above, if a merger or acquisition triggers a policy’s change in control provision, then any claims based on conduct after the transaction date may not be covered and any claims presented for pre-transaction conduct will only be covered through the end of the policy period (likely a matter of months after the transaction).  This creates a potential gap in coverage because the acquiring company’s policy will not respond on behalf the selling company’s directors and officers for pre-transaction conduct. 

How, then, do you cover claims for pre-transaction conduct that are made after the policy expires?  The answer is “tail” or “runoff” coverage. This coverage extends the D&O insurance policy for a certain period of time beyond the standard policy period. Essentially, the D&O insurance policy is held open for a certain number of years to address claims that may arise after the deal is closed. Typically, the tail or runoff period is six years.

Accounting for tail or runoff coverage is critical because it safeguards the directors and officers of the selling company in the event the acquiring company refuses to protect them or, in the case of bankruptcy, is not there to protect them. Accordingly, the purchase of a tail or runoff policy should be a critical deal point for the selling company in any negotiation.

Bump-Up Clauses 

Following a merger or acquisition, it is not uncommon for shareholders of the purchased entity to file suit claiming that the consideration paid for the purchased shares was inadequate and seeking recovery of the difference between the amount they received in the transaction and what they claim is the actual value of those shares. Such a claim may implicate the “bump-up” clause found in many D&O policies. “Bump-up” provisions are generally found in the policy’s definition of Loss, and state that Loss does not include those amounts of any judgment or settlement that represent the amount by which the consideration paid in connection with the purchase of securities is increased.

Although such provisions are common, they vary substantially from policy to policy. For example, many bump-up provisions do not bar coverage for defense costs for claims asserting inadequate consideration. Others apply only to claims made under specific insuring clauses;[3] and yet others apply only when the amount representing the increase in consideration is paid by the insured corporation, and not by any director or officer.[4] Therefore, it is worthwhile to take a careful took at any D&O policy’s definition of “Loss,” both at the time of negotiation of the policy and in connection with any claims under the policy.

R&W Insurance: Coverage for the Merger or Acquisition Itself

While insurance considerations in corporate transactions are often focused on ensuring that there is adequate and available coverage in place if a company or other insured faces potential liability, insurance coverage is also available for the deal itself. This kind of insurance is called Representation and Warranties (R&W) insurance. Like the name suggests, R&W insurance protects a buyer or seller in a corporate transaction, like a merger or acquisition, from losses arising from inaccurate representations or warranties made by the seller or target company during the transaction. For example, a buyer-side R&W policy can protect the buyer by paying losses if the target company presents inaccurate information, misrepresents information, or fails to disclose particular liabilities. R&W insurance can also mitigate risk if a seller offers little or no indemnity protection for the deal itself.

Michael Gehrt, Mikaela Whitman and Pamela Woods are Partners at Pasich LLP, a national insurance recovery law firm. They can be reached at [email protected], [email protected] and [email protected].

[1] “M&A in 2021: An Accelerating Rebound,” (Feb. 8, 20201), available at https://www.morganstanley.com/ideas/mergers-and-acquisitions-outlook-2021-rebound-acceleration.

[2] https://www.cornerstone.com/Publications/Reports/Shareholder-Litigation-Involving-Acquisitions-of-Public-Companies-Review-of-2018-M-and-A-Litigation-pdf.

[3] See, e.g., Genzyme Corp. v. Federal Ins. Co., 622 F.3d 62, 72 (1st Cir. 2010) (“bump-up” provision applied only to Insurance Clause 3).

[4] See, e.g., Arch Ins. Co. v. Murdock, 2019 WL 2005750, at *9 (Del. Super. Ct., May 7, 2019) (definition of Loss did not include “any amount representing the increase in the consideration paid (or proposed to be paid) by the Policyholder in connection with its purchase of any securities or assets”).

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