Is your D&O policy ready to handle M&A?

• Author: Weiss, Stephen J.
• Position: Mergers and acquisitions - Directors' and officers' liability insurance

Take steps now to ensure that your merger will not be derailed by insurance considerations.

In today's dynamic economy, it is vital for anyone purchasing directors' and officers' (D&O) liability insurance to evaluate how the numerous policies in the marketplace handle mergers, consolidations, and acquisitions.

A poor D&O policy can impede the merger or acquisition process - or even stop it in its tracks. A well-negotiated policy, by contrast, can facilitate the process as well as save considerable corporate funds.

Directors play a key role in any merger. The board of directors must approve a merger and recommend its adoption by stockholders. Directors would do well to expand this role to include supervising their company's effort to become "insurance compliant" - that is, to have in place a D&O insurance policy that will facilitate, not impede or prevent, a merger.

The merger agreement that sets forth the terms of the transaction often calls for the acquiring corporation to provide D&O insurance for the directors and officers of the new subsidiary ("Newco") formed in connection with the merger. (D&O policies customarily cover the directors and officers of all subsidiaries in existence at the inception of the policy.) The availability and terms of insurance coverage for the directors and officers of Newco vary dramatically from policy to policy.

From the point of view of the acquiring corporation, the worst policy provision in the marketplace today provides coverage for Newco and its directors and officers only if:

1. timely written information about the merger is given to the insurance company, and

2. the acquiring company accepts any terms, conditions and limitations, and pays any additional premium, required by the insurance company in its sole discretion.

What if a condition to consummating a merger is that Newco and its directors and officers have D&O coverage and the insurance company does not agree to provide such coverage on a reasonable or affordable basis? That can throw a monkey wrench into the merger negotiations.

In sharp contrast, the best policies available provide automatic coverage, without any additional premium, for a new subsidiary below a specified size. If your policy does not contain this provision, it should be amended.

The best time to press for a policy enhancement is at renewal. That is not the only time, however. If you discover this major shortcoming in your policy, it is often possible to correct it during the...