Don’t Let a Transaction Void Your Coverage: Understanding Change of Control Provisions in D&O Policies

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Financial analysts report that corporate and private equity executives are anticipating an increase in mergers & acquisitions activity in 2018, both in the number and size of Transactions. With this increased M&A activity, and given the increased dollars at stake, it is more important than ever to understand the impact of a Transaction on the insurance coverage available before and after the Transaction.  

One often-overlooked aspect of insurance coverage is the “change of control” provision in the policy. Businesses and investors should obtain a careful review of the relevant insurance policies to understand the potential impact of a Transaction on the available coverage.

Whether you’re on the acquiring or divesting side of a business Transaction, you likely understand the importance of confirming the insurance coverage available both before and after the Transaction. An important part of this analysis is determining when an insured has an obligation to notify its carrier of a Transaction, and what impact the Transaction may have on the coverage available.

Many policies – including cyber liability, D&O liability, fiduciary liability, workers compensation, and crime insurance policies – require insureds to notify the carrier of mergers, consolidations, acquisitions or other changes in control of the business. The failure to notify the carrier of the Transaction may operate to reduce or eliminate the coverage provided under the policy.

Further, in the D&O insurance context, it is frequently the case that the policy will either automatically cancel or provide substantially limited coverage in the event of a Transaction or a “Change of Control” of the insured organization.  

If the policy is not automatically canceled as of the date of a Transaction, it is likely the coverage will be substantially reduced if  the change fits the definition of the Transaction in the policy. In this scenario, the coverage will often be limited to claims arising out of what’s defined as Wrongful Acts occurring prior to the Transaction. 

There is no standard definition of "Transaction." However, some policies include sales of more than 50 percent of the insured’s assets, others include consolidations or mergers where the insured is not the surviving entity, and others have language relating to the acquisition by another entity or person of the right to appoint directors to the company’s board.

It is important for companies to obtain copies of the relevant insurance policies, and to get the advice of counsel, to confirm what impact the Transaction may have on the coverage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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