For independent agents who specialize in private company D&O, the expectation that mergers and acquisitions will continue to be active for the foreseeable future is good news. When clients are acquiring other firms or vice versa, these transactions present great opportunities for agents to do what they do best: provide valuable counsel.

M&As were markedly robust in 2015, and while it’s difficult to predict with certainty, many are anticipating similar activity in 2016. Agents and brokers will need to know how to respond when their private company customers are acquired or acquire other companies. Understanding how to navigate these changing situations requires a specialization many agents may not possess.

These situations present an opportunity for independent agents to bring value to their customers by fully understanding the impact an acquisition may have on existing D&O coverage and ensuring appropriate coverage is in place post-acquisition. With a number of interested parties and various business and personal liability exposures, independent agents who understand these potential exposures will be better equipped to negotiate appropriate coverage terms as far in advance of the transactions as possible. 

D&O underwriters can play a valuable role in the success of these transactions. Agents who work closely with their D&O underwriters can help ensure they maintain appropriate coverage by examining the terms and conditions of the transactions. Reviewing and understanding companies’ transactional agreements, or purchase sale agreements, is critical.

To start, agents should work to understand a few crucial elements: whether the transaction is an asset sale only or an equity purchase; the impact on ownership and shareholders; the estimated transaction date; outside valuations of the company being acquired; and any planned management terminations or employee layoffs, among others. One of the best ways to understand these elements is to communicate with their customers financial experts, lawyers and acquisition advisers.

Not all D&O policy forms are the same, which creates another layer of complexity. Depending on the form, the specific “change in control” provisions may differ. It is essential that independent agents and their underwriters agree on the details of the transactions and how the policy terms apply. For the majority of D&O policies, “change in control” provisions dictate that when a change in control has occurred, the policy automatically converts into a runoff policy. This provides coverage for claims arising from wrongful acts that occurred prior to the change in control, but no coverage for acts that occurred after the change in control. If a “change in control” provision is triggered, D&O coverage is essential to protect the newly formed company going forward.

Naturally, the acquiring company will obtain its own insurance for all acts that occur after it has taken control. It is important to note when an agent’s customer acquires a company, it is acquiring not only its assets, but also its liabilities. Some liabilities may not be fully discovered at the time of acquisition, so they may not come to light for some time. In addition, runoff must be adequate for the prior activities of the companies and their executives. 

For example, investors may be disgruntled with the way previous directors and officers ran the business; third-party vendors may feel they did not receive fair treatment under previous contracts; or a competitor may claim infringement of intellectual property rights. In order to protect itself from these unseen liabilities, the acquiring company will often require the selling company to purchase additional runoff coverage for a set period—such as 1-5 years—to protect the directors and officers for acts taken when they were a part of the selling company. Additional runoff coverage often can be negotiated and purchased from the incumbent carrier, or another carrier may agree to provide runoff.

M&As are part of the normal life cycle for many private companies. Working closely with D&O underwriters will help ensure thorough protection of company assets and individuals. When independent agents’ customers are preparing for acquisitions, it is an excellent opportunity to provide expert risk management services and comprehensive protection for the selling or acquiring companies.

Helen R. Savaiano is president of management liability at The Hanover Insurance Group, Inc.