Please do not hesitate to contact us regarding any queries you may have. The key personnel within Jobson James specialising in this area are:-

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Morris Bridges
6 years ago
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Following our transaction insurance seminar on 24 November 2011 we have received many requests in respect of Directors and Officers Liability insurance Run-Off cover.

1 Following our transaction insurance seminar on 24 November 2011 we have received many requests in respect of Directors and Officers Liability insurance Run-Off cover. We therefore felt it was appropriate to provide a little more background in respect of this cover and we trust that you will find the information below of interest. A change of control in a company, such as acquisition by another entity or private equity firm, has important implications for the D&O insurance held by the directors and officers of such company. In these circumstances, D&O policies typically go into run-off and significant residual exposures may remain to face the erstwhile directors of the company being acquired. These exposures may be amplified by the fact that the company for which they acted as directors no longer exists and therefore they are unable to be indemnified by it for any claims made against them. This note looks at some of these issues and highlights some of the solutions delivered by a D&O Lifetime RunOff product: Please do not hesitate to contact us regarding any queries you may have. The key personnel within Jobson James specialising in this area are:- Richard Waltier: ( ) richard.waltier@jobson-james.co.uk (direct line) +44 (0) (mobile) +44 (0) Jon Parry: ( ) jon.parry@jobson-james.co.uk (direct line) +44 (0) (mobile) +44 (0) Contents 1. What is D&O RunOff? 2. Potential run-off exposures

2 3. Potential run-off exposure timescales 4. D&O Lifetime RunOff highlights: An indefinite policy period Defence costs in addition D&O protection after the company no longer exists Differences in conditions Claims by the acquiring company Non rescindable cover Cover for non-executives 1.What is D&O run-off and what triggers it? A company s D&O insurance goes into run-off if there is a change of control such as an acquisition by another company or by a private equity firm. Once in run-off, the D&O policy will only cover claims for wrongful acts occurring prior to the change of control. However as this note will show, there are several reasons why directors may want to augment their protection by purchasing specific D&O run-off insurance, to cover claims that may be brought against them in the years ahead. 2.What are the exposures? Sources of claims against directors whose companies have been acquired could include: Alleged misrepresentations, errors or omissions by directors to the counterparty in the transaction. (Counterparties could sue for loss.) Alleged misrepresentations, errors or omissions by directors to regulators in respect of the transaction. (Regulators could take action.) Alleged collusion between directors and the counterparty in order to secure a lower price for the company. (Original shareholders could sue for financial loss.)

3 3.How long can these exposures last? When put into run-off, D&O policies typically carry a policy duration of 6 yrs, as this period reflects the standard statutory limitation periods prescribed in the UK for tortious and contractual claims. But in fact these prescribed periods are not in themselves a definitive liability shield. Executives can be sued for many years beyond the six-year period. Here are some instances where under UK law a six year policy would be inadequate: In respect of negligence and contract claims, it is possible to bring a claim outside the 6 year limitation period if the damage complained of was not discovered by the claimant until after the expiry of the 6 year limitation period. This is known as latent damage and in such circumstances the claimant has three years to bring a claim from either the date of knowledge of the loss or the date when the claimant ought reasonably to have known of the loss so long as it is within 15 years of the original negligent act or omission. So in this respect, directors have a potential liability exposure of 15 years. Time does not run in cases of fraud, concealment or when the action is for relief from the consequences of a mistake, until after the claimant has discovered or should reasonably have discovered such circumstances. In each case a director can be sued for up to six years after such discovery or expected discovery- no matter how far in the future this might be. The time limit for bringing contribution claims does not start to run until the right to bring such claim accrues to the claimant. This right may accrue when the claimant is found liable by judgment, award or agreement. Such a finding of liability may not occur until well after six years, as court cases can often take years to resolve, particularly if the original claim against the claimant is not brought until immediately before the expiry of the six year limitation period. Therefore, if the court hearing of the original claim takes 5 years to hear to final resolution, then the contribution claim against the director may not be brought until just short of 11 years after the

4 alleged wrongful act occurred. A twoyear time limit then applies. 4.Overseas liabilities Directors also need to be mindful that exposures can also originate from outside the UK where limitation periods vary widely, often extending beyond six years. For instance, in Belgium the limitation period for civil and non-contractual claims starts to run from the date of discovery of the wrongful act. There is a maximum limitation period of 20 years. In Denmark civil or creditor claims can be brought up to five years after the creditor knew or ought to have known of the circumstances giving rise to the claim which can be at any point in the future. In some cases a 20 year period applies commencing from the date of the wrongful act. In France, tort claims may have a limitation period of 10 years, from the date of discovery of the wrongful act, whilst in Poland the 10-year rules also applies, but from the date of knowledge that damage has occurred. It is noteworthy that in the US, prosecutors are accelerating their efforts to have the courts hear claims alleging the backdating of stock options in order to avoid being time-barred by the US s 5 year statute of limitations in respect of securities claims (almost all of the alleged wrongdoing dates from before the introduction of Sarbanes-Oxley in 2002). However many commentators believe that federal prosecutors will seek to waive the limitation period in any event because the offences were deliberately concealed. The UK and US approaches are therefore consistent with respect to the extending of limitation periods where a wrongful act was either undiscoverable or deliberately concealed D&O Lifetime RunOff cover highlights Indefinite policy period: D&O Lifetime RunOff reflects the true currency of these exposures. Given the possibility of claims being brought more than six years after the alleged wrongful act, D&O Lifetime RunOff provides an indefinite policy period, thereby ensuring that directors have cover available regardless of when a claim is brought. Defence costs in addition: In the event that the D&O limit is eroded by

5 one director s claim, the other directors can rest assured that D&O Lifetime RunOff will give them additional limits to allow them to defend actions brought against them. This is particularly pertinent in a run-off situation where the original employing company may no longer exist and therefore the directors may have no access to company indemnification. D&O Lifetime RunOff aims to give directors more comfort by providing additional defence costs beyond the limit purchased. Addressing the absence of a company policyholder: D&O policies are written with the assumption that the policyholder is a company, and that this company, as a legal entity, can carry out certain acts including indemnification of the directors, notification of claims, etc. In a run-off situation, the company may no longer exist or is unable to function in the expected way. The company indemnification may not be available to directors and the company may not be able to notify claims on their behalf. D&O Lifetime RunOff addresses these potential pitfalls for directors by way of the following: Reporting provisions: D&O policies typically require that a claim is notified to the insurer by the policyholder inevitably the company will be responsible in the first instance for reporting to the policyholder - as soon as practicable on behalf of all defendants. Failure to comply with this provision will often result in no cover being available for the claim. In a run-off situation however, the policyholder or company may no longer exist or the various directors may not be in contact with one another. We arrange policies that addresses this by enabling individual directors to report claims separately and directly to the insurer. Indemnification provisions: D&O policies frequently assume that directors are indemnified by their company to the fullest extent permissible in law. In the event that such indemnification is not in place, the policy will usually state that a retention will be payable in any case. In a run-off situation, the company may no longer exist, and access to indemnification by the company may therefore be impossible. D&O Lifetime RunOff is written on the premise that no indemnification will be available and does away with presumptive indemnification provisions. General Severability: The fraudulent act provisions of D&O Lifetime RunOff of concern to directors have been made fully severable, so that should one director act or fail to act in a certain way, this will not in any

6 way affect coverage available to any other director. Difference in Conditions Provision: Moving from one D&O carrier to another can be a difficult decision, however the difference in conditions (DIC) clause in D&O Lifetime RunOff makes changing carrier significantly easier. If the same cover provided under the company s previous D&O policy is not available under D&O Lifetime RunOff, then we will cover the loss to the same extent as the previous policy would have done. As a result purchasers of D&O Lifetime RunOff will be afforded the full breadth of a wide policy wording in addition to the entire scope of cover they are otherwise entitled to based upon the terms and conditions of their existing policy. Non-rescindable policy cover: We make sure that insurers waive their right to be able to avoid the policy on the grounds of innocent or negligent non-disclosure or misrepresentation by any insured. This ensures that when directors need cover most, the policy will be in force. Additional cover for Non-Executive Directors: Lifetime RunOff provides an additional ring-fenced limit per non-executive director. Nonexecs can be the last to be sued, and in such cases they may find the limit has been eroded by claims against the executive board. Ring-fencing a limit for each non-exec ensures that no matter how many claims have been made on the policy beforehand, Lifetime RunOff will still have cover in place for each Non Executive director. This document is intended as a guide only. The scope and terms of any insurance policy are subject to the terms and conditions of the policy.

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