Grounding Personal Liability Risks in Distressed Corporate Workouts
Grounding director liability in distressed workouts requires strict cash tracking, segregated statutory tax accounts, clear CRO deeds, and pre-funded Side A D&O tail coverage.
Runoff Coverage
Meaning
Insurance provisions that protect against claims reported after a business has ceased operations or been sold ensure that past liabilities do not haunt the former owners. This type of insurance is a variation of a claims-made policy that extends the reporting window for many years. It is a critical component of merger and acquisition deals.
Runoff coverage provides a clean exit for sellers who would otherwise remain personally liable for historical errors.
Liability Tail
Professional mistakes often take years to surface and result in a lawsuit. If a company dissolves without runoff coverage, the injured party might seek damages from the individual directors or the proceeds of the sale. This insurance picks up those claims long after the office doors have closed.
It covers work that was performed while the company was still active.
Deal Certainty
Buyers use these policies to ringfence the risks they are acquiring. By insisting on runoff coverage as part of the purchase agreement, the buyer ensures that they are not paying for the previous management’s mistakes. This separation of past and future liability simplifies the valuation of the firm. it makes the transition of ownership much smoother.
Policy Duration
Term lengths for this protection are usually set to match the statute of limitations for the relevant industry. In construction or medicine, runoff coverage might last for a decade or more. The premium is typically paid as a single lump sum at the start of the period.
This payment ensures the policy remains in force regardless of the financial health of the former owners.