Directors & Officers insurance – Do you need run off cover?
Run off cover ensures insurance over a period of time after ownership of a company or organisation has passed from one party to another.
Although the management group or director may have departed or lost control of the organisation, their responsibility for alleged or actual wrongdoings during their time in charge exists for many years after they leave office.
An acquisition period can be a very complicated situation with many policies around that can wrongly give previous management the feeling of safety when handing over a company.
Many policies seem to provide sufficient cover but in reality, the safety net can evaporate right in front of your eyes.
Run off cover often gets confused with "Extended Reporting Periods" or "Discovery Periods".
Essentially both of these policies are the same thing but what differs is the trigger and a ‘refusal to renew’ (which should be bilateral i.e. at the option of either party).
Other confusions arise regarding the overlap with Warranty & Indemnity cover and the Directors & Officers liability run off for that product.
Both are distinctly different products with Warranty & Indemnity providing protection for the shareholders (warrantors) rather than the managers.
The confusing part of the policy comes when a warrantor may also be a director or officer of the company.
Warranties are typically given in the context of a shareholder rather than a director or officer, meaning a Directors & Officers policy would not respond to a contractual warranty claim arising under a Mergers and Acquisitions contract.
Run off cover provides protection against all the risks management can be faced with during the period they were in control of the company.
The majority of people take out run off cover for the same reason as the purchase, to protect the individual and his/her assets.
It is always important to look at Directors & Officers Liability Insurance carefully to make sure you are not hit with any unpleasant scenarios, even when the company is no longer yours.
Source - Neil McCarthy, MPR