Beyond the Tail: Should You Secure a Go Forward Policy in Every M&A Deal?

The Foundations of Post-M&A Directors and Officers Risk

D&O insurance is a foundational policy for any business these days, whether they’re a public or private company. As demands evolve, so has its coverage, turning it into a multi-layered policy worth reviewing. Let’s start with each side:

• Side A: This is the most personal form of insurance protection, providing individual coverage when the insured company is legally or financially unable to indemnify the executive and their personal assets when involved in a lawsuit. This side is indispensable during an M&A deal.
• Side B: This is currently the most common type of coverage, pertaining mostly to corporate affairs by reimbursing the company when it indemnifies its directors.
• Side C: This coverage specializes in securities claims, protecting the company’s balance sheet when named in a lawsuit, alongside an individual executive. It covers the costs and settlements incurred.

The Runoff Policy and Go Forward: Complementary Needs

A D&O Tail (or runoff coverage) insurance policy covers wrongful acts involving company leaders when they happen before the M&A process is done, but were not filed until years later. This is called a run-off, allowing the company to make a claim up to six years after the policy period. Becoming part of another bigger company can be hectic, which is why a Tail is ideal when striking these kinds of deals to give you more time post-deal to handle claims.

However, it only addresses the past; it does not address future liability from post-closing changes or integration failures. Claims resulting from the transaction itself (e.g., shareholder lawsuits post-merger) often land in a gray area, making overlapping coverage vital. This is when another layer of protection is needed.

A Go Forward policy provides coverage for claims made against the previous executives after closing an M&A, primarily relating to the new entity or the integration process, effectively bridging the gap left by a Tail—the “during” and “after” stages are now protected.

Why the Tail Policy is Insufficient (The Liability Gaps)

The process of integrating two companies isn’t always smooth. In fact, it’s typical for there to be rocky patches along the way that even the most prolific of risk management strategies can’t prevent. The joining of two companies with different cultures, practices, leaders, and sometimes even technologies, is anything but easy. This is why, even after protecting past directors and officers, it’s key to ensure they stay safe during and after the M&A process is over.

The Integration Risk Gap

The rocky patches during the integration process after an M&A deal can result in D&O claims from mismanagement of the merged entity, failure to meet integration goals, and even cause cyber risks such as data breaches. In these scenarios, a Tail policy will deny any claims as the wrongful acts occurred after the closing of a deal.

The Limit Exhaustion Risk

A typical D&O Tail covers all executives, meaning they share this limit with the acquiring company’s own D&O insurance program for some claims. As a result, if there’s a large, systemic claim against the acquiring company, the limit could be quickly exhausted, leaving the former directors and officers exposed. This case happens due to Priority of Payment provisions, in which a claim payment order is established to prioritize certain entities, typically placing personal and non-indemnifiable claims over corporate ones.

Take this example from Lehman Brothers Holdings Inc., where the company believed insurance could pay off its settlement. Instead, part of this payment went to directors and officers first as part of their personal liability due to a Priority of Payment clause, causing the limit to shrink, reducing the amount that could cover the settlement.

The Fiduciary Duties and Public Company Risk

When it comes to public companies, shareholders might also be involved in derivative suits and securities claims protected under D&O during the M&A, whether due to inadequate disclosures or conflicts of interest. Moreover, even upon finalizing the deal, the directors’ final acts leading up to closing can be challenged years later, making a Tail clearly insufficient to cover them post-deal.

The Acquirer’s Policy Risk (The “Who Pays?” Problem)

Once a deal is through, former directors and officers might be folded into the acquirer’s D&O policy. This means they’ll jump into a new coverage with different exclusions, limits, and retentions that might be less favorable than their previous policy. Without a Go Forward, these former executives lose control over their own protection.

Structuring Your Go Forward Policy: The Expert’s Playbook

A Go Forward policy is, then, the best way to secure leaders through the trajectory of an M&A deal. Structuring it accordingly to get an advantageous agreement is also paramount.

Ideally, it blends perfectly with the acquirer’s existing insurance: A standalone policy that specifically covers the new or integrated entity’s executives for all post-closing wrongful acts. This new coverage offers a dedicated limit, clear terms, and the ability to negotiate specific endorsements and provisions so no one is left hanging.

However, a standalone policy might not always be a feasible option. In this case, the acquirer must provide equivalent Go Forward protection through their existing policy. These are some elements you should look out for when negotiating entering the acquirer’s D&O coverage:

• Securing specific director/officer carve-outs that grant them “insured person” status indefinitely.
• Ensuring the policy’s indemnification and/or retention structure is favorable.
• Obtaining a “Difference in Conditions/Difference in Limits” (DIC/DIL) feature to bridge any gaps between the old and new policies.

Negotiating a Go Forward also includes its costs, as they will be part of the deal amount—bear in mind that this policy is typically split or rolled into the final cost. When the time comes to talk about finances, remind everyone that insurance is ultimately an investment with a much lower expense than covering legal costs out of pocket.

Lastly, during the M&A agreement process, it’s also crucial to include an indemnification clause to protect the former directors. Because indemnification will only be as good as the surviving company’s financial health, a Go Forward insurance policy is always the superior path to shield the previous leaders.

Advanced Scenarios and Due Diligence

There are special M&A deal scenarios when a Go Forward policy is just as necessary. For instance, some include a private equity (PE) acquisition and asset or stock sales, requiring extra provisions for former and new company leaders.

For example, the PE and carve-outs case means a company might be structured as a HoldCo/OpCo, where OpCo is a series of companies operating in different jurisdictions or dedicated corporate projects, all under the one HoldCo that keeps their joint equities (but not their assets). In this case, a PE has many directors and officers under its name, so the Go Forward must be structured so that the entire chain of insured companies is covered. Here, it might be challenging to overlap firm-wide D&O policies.

Another example involves asset and stock sales. The former could pose complications surrounding which liabilities are transferred to the purchaser, making a custom-designed Go Forward critical. As for the latter, it’s generally easier to enforce the former director’s D&O contracts, including their Tail and Go Forward.

It’s also important to highlight that Representations and Warranties (R&W) insurance is not a substitute for D&O in such cases. This policy directly covers breaches of R&W by the seller (contract breaches), not liabilities attached to the assets purchased, whereas D&O covers claims of wrongful acts by the company leaders (breach of fiduciary duty).

Proactive Due Diligence Checklist for the Risk Manager

If you’re handling an M&A on the risk management side, there are three things you must tick off your checklist to ensure your D&O policy is ready to go.

1. First, verify that the Tail has the correct six-year term and a full limit dedicated to the targeted directors and officers.
2. Second, audit the acquirer’s policy by reviewing exclusions, retentions, and limits to make sure they are equivalent to or better than your company’s former coverage.
3. Third, secure the Go Forward policy for the M&A process and beyond. Ensure a definitive agreement—either a standalone policy or an endorsement to the acquirer’s D&O coverage—is included in the closing document.

Protecting Directors and Officers Beyond the Tail

When you’re out there in the field, it’s crucial to remember that a tail policy won’t suffice when it comes to an M&A deal and special cases, given that it covers past acts, might run into limit erosion, loss of control, and the manifold risks of integrating two companies.

Thus, the decision is clear: Do not view D&O insurance in M&A as a simple “buy a tail” exercise. It requires you to go the extra mile to get bespoke risk engineering to ensure continuity of protection for both pre- and post-closing liabilities. This is where a Go Forward policy isn’t an expense but rather a vital fiduciary safeguard that will shield directors, officers, and their personal assets from ever-present legal risks.

Whether you’re a company leader or on the deal team, make sure to engage your risk and insurance advisors early in the M&A process. The path to building a proper risk management strategy is long and multifaceted, requiring careful attention to detail and lots of time to assess the best course of action. Also, check on your existing deal documents to ensure the former directors and officers are protected beyond the Tail to avoid future headaches, even six years in the making.

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