Meaning
Insurance policy amendments extend the reporting window for claims arising from wrongful acts committed during the active policy period but reported after its termination. This coverage extension, known as a run off tail endorsement, is purchased when a company undergoes a merger, acquisition, or liquidation. It provides a multi year window, typically six years, during which retired directors can still file claims for their past actions.
Without this endorsement, the directors would lose all liability protection the moment the active policy is canceled or lapses. The endorsement does not cover any wrongful acts committed after the transaction date.
Trigger Scenarios
Corporate transactions represent the primary driver for acquiring this type of coverage. When a company is acquired, its existing directors and officers liability policy terminates, leaving them exposed to legacy claims. The run off tail endorsement is activated at this transition point to secure long term protection for the outgoing board members.
It is often structured as a single payment premium paid at the closing of the deal. This structure guarantees that coverage remains in force even if the acquiring company subsequently faces financial distress or bankruptcy.
Pricing Mechanism
Underwriters determine the cost of the endorsement as a percentage of the annual policy premium. It usually ranges from one hundred to three hundred percent of the final annual premium, depending on the length of the run off period and the transaction risks. This capital expense must be factored into the overall transaction budget of the merger.
Coverage Scope
Legacy liabilities are locked in on the date of the corporate transition. No new actions or decisions by the former directors can be added to the policy once the run off period begins.
