A rundown of “run-off insurance”

Run-off insurance is a particular aspect of director and officer liability (D&O) insurance that can protect directors and officers of a target company following an M&A transaction.  In many cases, a target company’s directors and officers will resign from their roles following an acquisition. Run-off insurance (also known as closeout insurance or run-off cover) protects directors and officers from claims made against them after they have stepped down.

D&O insurance will protect acting directors and officers, but it does not necessarily cover former directors and officers.  Former directors and officers could be unprotected if they don’t have some type of contractual indemnity in place. Run-off cover allows parties to buy insurance for departed directors and officers without the use of a director or officer indemnity provision.

Although the details of a run-off insurance policy may vary across providers, run-off insurance usually covers a specific period of time following the transaction – generally 6 years. The term of the run-off insurance is called the “run-off”. So long as a claim against the former director or officer is first made during the run-off period, it is covered by the insurance (regardless of whether the underlying event took place before or after the acquisition).

Run-off insurance can form part of a comprehensive D&O insurance policy or can be purchased separately as an add-on to an existing policy. It can also be purchased as a stand-alone policy and from a third party insurance company. Often, if run-off insurance is added on contemporaneously to an M&A transaction, the cost of the policy is paid for as part of the transaction. However, depending on the hostility of the transaction, the target company or the directors and officers may cover the cost of the policy directly.

Parties interested in obtaining run-off insurance following an M&A transaction should consider: whether there is an indemnity or insurance policy already in place to cover post-transaction claims; the length of the run-off needed; and the length of the statutory limitation period in the applicable jurisdiction. All this can inform the decision to obtain run-off insurance.

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