Increasingly, companies that haven’t historically purchased D&O insurance are waking up to the need for the coverage at the point of selling the business.
A surprising proportion of business owners still don’t buy D&O liability cover, perhaps because of a perception that they are not the ‘type’ of business that requires it, or because of competing demand for insurance spend from other pressing coverage areas, such as cyber risks.
However, we have recently seen an increase in submissions for D&O quotes. In the current challenging business environment, with economic uncertainty, supply chain issues, increased costs, changing working patterns, regulatory pressures and new taxation rules all testing businesses, some companies are waking up to the fact that D&O is more of a ‘must have’ than a ‘nice to have’.
Tellingly, a high proportion of these D&O queries come from companies considering or in the process of selling their business, who have realised that securing extended D&O coverage is an important part of that process – and could even be a non-negotiable condition of the transaction.
Whether the transaction is an acquisition by third parties or a management buyout, the vendors have typically been either told by their own advisors (lawyers, accountants, consultants) or by other parties to the transaction (lenders, private equity/venture capital buyers) that they need D&O run-off cover.
These queries can be from companies that have never bought the cover or that have previously bought it but whom, during the process of an M&A transaction, have realised there are restrictive endorsements in place and that they require extended cover from the point of sale.
The insurance sector can sometimes find it challenging to persuade business leaders of the value of D&O coverage, particularly where it is a smaller and/or family-owned business, and where ownership resides with one or two people.
D&O insurers are operating in an increasingly commoditised market, where SME and private limited company D&O insurance can be purchased through online platforms where buyers may not be aware of the complexity of the product.
Without the assistance of a broker, insurer, or other advisor, they may also be unaware that while extended cover is available it could potentially be excluded from the online product they have selected.
Non-purchasers of D&O cover may be unaware that reputable underwriters will give buyers the option of purchasing extended or run-off cover which gives insureds the same level of cover for a set period after a business has been sold (typically one, three or six years). It should also be noted, however, that run-off coverage is typically offered on the same terms as the main insurance policy; it shouldn’t be an upsell of the original cover, but should provide the same scope of coverage and limits.
D&O run-off policies provide coverage post-sale to directors and officers for any complaints made against the company during the period when the vendors were the owners/managers – whether from customers, shareholders, tax authorities, or regulators.
It also covers them against subsequent complaints from the buyer. These could include accusations that the financial condition of company has been misrepresented or that the business relationships, key personnel contracts and pipeline of work contracts that were deemed to have been part of the business as a going concern are in doubt.
Historically, it has been challenging for companies in this position to acquire extended coverage if they have never purchased a D&O policy for the business before, as insurers would typically view their lack of underwriting history as a case of ‘selection against’.
However, as an insurer we can often help, albeit with pricing that is commensurate with the level of risk and where we feel the deal is benign with no underlying issues. For insureds with existing D&O policies it’s much easier and a quote can be provided as per the policy terms and conditions with a one-off premium tailored to the length of run-off coverage required.
In a more commoditised market it’s also important to emphasise the integral role that brokers play in introducing D&O coverage options to commercial customers. If the hit rate for selling D&O to limited companies, LLPs, non-profits, and EOTs is below average we have to ask ourselves as an industry why that is and how it can be increased.
Arranging cover at the point of transaction will only lead to restricted choice which comes at a price. Kayzen Specialty is committed to removing the barriers to understanding. We can provide binding quotations based on the company name and our sector insights will help the client understand why they should buy the cover.
Importantly, as an underwriting-led MGA we aim to avoid needless exclusions, and our ongoing portfolio maintenance tool ensures we keep abreast of any changes in client exposures.
But let’s be clear, while coverage options may be open to businesses needing extended D&O cover when they haven’t purchased it before, having an existing policy removes the extra cost and challenge of trying to secure coverage at the point of selling the business.
