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Understanding Your D&O Insurance Cost: Are You Paying Too Much?

Before purchasing D&O insurance, understanding the D&O insurance structure and policy terms is essential to directors’ and officers’ protection. However, premiums and retentions determine if they are getting the best value on the right policy. Typically, a company considers buying a primary D&O policy and some excess policies, but the key consideration here is whether the coverage is worth the deal.

To answer the question, we will first focus on understanding D&O insurance costs from the coverage structure. Standard D&O policies commonly provide three clauses, categorized as Side A, Side B, and Side C. Side A usually covers directors’ and officers’ individual losses when the company is not able to indemnify or refuses to do so. It is crucial and often has a 0 retention size. Side B covers the company’s loss when claims are against directors and officers but they are indemnified. Side C covers losses related to the company itself from securities claims, and it is also referred to as “corporate entities” coverage. These three types of losses basically describe the most necessary parts of a D&O insurance structure. In most cases, retention often applies only to Side B and C clauses.

It is no wonder that the key consideration when buying D&O insurance is the premium cost. Simply put, the size of the company’s balance sheet, time length of the business, policy terms, risk appetite and focus, and claim history can all affect insurance costs. Intuitively, company size, business time length, and claim history are easier to cope with, and these standard measures are not likely to drive much price change. So the question would also be, why is the rate of D&O insurance rising now? The market and climate of D&O insurance have changed drastically in recent years, with the increasing cost of regulatory investigations and growing D&O insurance popularity among smaller-sized companies. In addition, according to some online reports, it is apparent that the risk trends for directors and officers spread from traditional lawsuits to cyber risk concerns when online paperless systems may trigger litigation against directors’ and officers’ company and personal accounts. The collapse of FTX, one of the largest cryptocurrency exchanges, could be an example to see how important cyber risk management is nowadays. Other than that, Environmental, Social, And Governance (ESG) activities also play a notable role in the D&O insurance market. Company directors and officers are often exposed to the risk of litigation when these issues and events are formed. By all the factors, the costs of D&O insurance inevitably grew over the last several years, however, that does not mean purchasers have absolutely no choice.

With the right broker understanding the needs of coverage and reasonable price, First Cover provides an affordable premium matching plan for D&O insurance. We are happy to help and explain our D&O insurance program because we believe in potential savings with the right coverage for every client.

Quick Facts: D&O insurance for SPACs and the Timeline

A special purpose acquisition company (SPAC), commonly categorized as a blank check company with no specific business plan and a purpose to merge with or be acquired by a target company, typically involves four stages in its lifecycle. Generally, we can understand their risks and D&O needs along the lifecycle through two important phases – pre-merger and post-merger.

The formation and IPO of a SPAC company can be categorized as the pre-merger stage. Generally, the time between its formation and IPO would be three to four months. SPAC’s preparation, registration, and fillings with the SEC happen during the Pre-IPO and formation stage. Information on fees and ongoing regulatory filings could be either public or confidential. When they are ready, in most cases, a SPAC company does not necessarily have a target acquisition when they go public. While the SPAC is a private company, D&O insurance should be in place. Why? Directors and Officers are already facing risks when they start to raise capital. Once IPO proceeds are done, and the SPAC company starts trading publicly, the pre-merger phase officially steps into the process of finding a target company. This process typically takes 18-24 months, and the SPAC company will be exposed to risks like allegations of fraud and securities liability related to its SEC’s filings. Although this phase may seem less risky in the past, more SPACs have reportedly been facing litigation and regulatory scrutiny since 2021. SPACs may encounter lawsuits even before they find their target companies. Directors and Officers ideally need a public company D&O policy starting from their IPO date to prevent potential loss. Some optimal choices for premium would be about 100k per million, with retentions starting from 1 million. Typically, the policy period would be 1-2 years in this case, and if the SPAC company is not near its closing date, they might extend the policy period by months. After a target company is identified, SPAC’s lifecycle goes to a live-deal phase, then, if fortunate, the SPAC’s executives will vote on the merger. With the merger outcome and closing deal, SPAC will enter its post-merger phase.

After completing the merger or acquisition, the SPAC will have the option to continue as a public company in the US or outside the US market or a private company, and follow ongoing compliance. This De-SPAC process often requires an upgrade and change in the D&O coverage for the SPAC company, which is also called run-off coverage or tail coverage. In simple words, the D&O policy here mainly covers all the risks that the management group/key executives face from merger and acquisition activity and other litigation. What’s worth mentioning is that, the tail policy will only respond to claims related to events before the closing date, and the length of a tail policy is typically set up to 6 years. The broker usually presents this option in advance, so the 6-year policy could start immediately as the deal closes. Moreover, the other side of the De-SPAC transaction involves the target company. For the target company and its SPAC management team, the D&O process should begin when LOI is signed. At this stage, the SPAC entity and the target company will both need D&O policies, except D&O coverage for the target company will be more standard, just like other traditional IPO companies.

Overall, the rapid change in the public market these years drew regulators like the SEC and FINRA’s attention to SPAC’s business combinations. Therefore, selecting the right D&O insurance for a company’s stage is crucial for directors and officers to protect their assets.