SPAC D&O Liability Insurance

What is SPAC D&O Liability Insurance? Why do you need SPAC D&O? What is run-off coverage? Why get it with First Cover? Still in doubt?

What Is
SPAC D&O liability Insurance?

SPAC, also known as special purpose acquisition company, is an alternative to traditional IPOs. These “blank check” companies allow private firms to raise capital through an IPO, with the intention of using that capital to acquire an existing, privately held business later. This approach has been seen as a way to reduce some of the costs of going public, while also enabling private companies quicker access to public markets.

However, with the growth of SPACs, comes the need for specialized insurance coverage to protect the participants in the SPAC process. SPAC directors and officers liability insurance, or SPAC D&O insurance, is designed to provide financial protection in the event of securities lawsuits brought against SPAC participants. With the rise in SPAC IPOs and de-SPAC transactions, demand for D&O insurance in this market has increased.

Why do you need
SPAC D&O Insurance

While taking a company public provides a company many benefits, it also opens the company up to the legal right of shareholders to file a number of lawsuits against the company’s directors and officers for fraud, securities liability related to the SPAC's registration statements, alleged conflicts of interest, and potential actions taken by regulatory authorities.

These are just a small number of the potential basis for lawsuits for a SPAC, and risk is increasing with exposure extending to before the acquisition window. Legal precedent was recently established when a lawsuit was filed during the SPAC discovery period wherein it was still searching for a suitable target private company.

Once a target private company is identified and acquisition begins, a public company D&O policy can be written for a a term of one-to-two years to overlap with the acquisition window.

What is run-off
insurance coverage?

With proper run-off insurance coverage, if the underlying event took place before or after the acquisition, a claim against a former director or officer is covered if it is made during the (generally up to six year-long) run-off period.

Run-off insurance may be purchased as add-on to an existing policy, or as a stand-alone policy from a third-party insurance company. When it’s added to an M&A transaction the cost is included, but the directors, officers or target company itself may pay for the policy directly if the hostility of the transaction reaches a certain threshold.