A rundown on D & O run-off insurance: what is it, when would you need it, and how do you get the best coverage?

YOUR COMPANY, MiniTech Inc., is about to be acquired by Titan Tech Corp. Among the many issues that must be negotiated by the parties to the transaction--whether it is a merger, sale of assets, or change of control ("acquisition")--is the purchase of D & O run-off insurance for the directors and officers of MiniTech. Although this issue is not at the top of many acquisition checklists, the existence and quality of run-off insurance after an acquisition can directly affect your personal assets and so should be considered carefully in the course of negotiations.

What is it? Run-off insurance, sometimes also called "tail insurance," extends for a specific number of years the coverage provided by a D & O policy for claims arising from pre-acquisition wrongful acts of the directors and officers of the acquired entity. It usually is written as an endorsement to an existing D & O policy, but it also may be in the form of a policy newly issued by another insurer.

When would you need it? Why would you need D & O insurance after the acquisition if you will no longer be part of MiniTech's management? D & O policies provide "claims-made" insurance that only covers lawsuits (claims) brought against you before the expiration date of your policy. This leaves you without coverage for claims with long statutes of limitations that can be filed years after MiniTech's policy expires, such as fraud claims, which, under Sarbanes-Oxley, may be filed by stockholders up to five years after the fraud was allegedly committed. For the same reasons you wanted D & O insurance when you served as a director and officer of MiniTech, you will want D & O insurance after its acquisition to cover delayed claims for pre-acquisition wrongful acts.

How do you get the best coverage? There are many factors that should be considered when purchasing run-off coverage:

* Premium and Duration of Coverage: The initial questions generally are: How much will run-off coverage cost and how long will it be effective? First, check your policy. Does it include a predetermined premium for three or six years of run-off coverage? Since it probably does not, you will need to negotiate those terms with your existing insurer before the acquisition is effective. The typical duration of run-off policies today is six years, for which the premium is likely to be 150% to 250% of the expiring policy's annual premium.

* Remaining Policy Limit: Purchasing run-off insurance does not automatically reinstate the expiring policy's limit. Consequently, if all or most of the limit on the expiring policy has been eroded by payments of losses, run-off insurance will not provide the financial comfort you seek unless you negotiate a fresh limit.

* Terms and Conditions of the Expiring Policy: Because run-off insurance is usually provided by an endorsement to an expiring D & O policy, your run-off insurance will inherit any coverage defects in that policy unless you negotiate the terms of the expiring policy. Your insurer would prefer to confine negotiations to the premium and duration of the run-off endorsement, but you should push to widen the scope of the negotiations especially given the substantial amount of premium involved.

A key first step. Most agreements for the acquisition of a public company (and many for a private company) provide for run-off insurance for the management of the acquired company. These run-off insurance provisions typically are limited to specifying the maximum premium and duration of such coverage and the party that will bear such cost. Rarely do these provisions identify the party authorized to negotiate the terms of the run-off coverage. Consequently, responsibility tends to be assumed by the party paying the premium, usually the acquiring company. Its interest is a low premium. Your principal interest is broad coverage. This disconnect will not produce optimal results for the directors and officers of MiniTech.

Hence, our final thoughts: Ensure that your acquisition agreement contains a provision regarding run-off coverage, that the premium cap in such provision is high enough to allow you to buy the run-off coverage you seek, that the duration specified therein is long enough to cover potential claims, and that the agreement authorizes the acquired company to negotiate the terms and conditions of such run-off coverage.

Stephen J. Weiss is a partner in the law firm of Holland & Knight LLP and is one of the nation's leading authorities on D & O and employment practices liability insurance. Shannon A.G. Knotts is an associate with the firm specializing in the same areas.

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The authors can be contacted at [e-mail] and [e-mail].