Aon  |  Financial Services Group

The pendulum may be swinging the other way after a record year of special purpose acquisition company (SPAC) activity. In the face of global unrest, inflation, and significant supply chain challenges, many SPACs are nearing the end of their two-year window to find a merger target. SPACs that complete a de-SPAC transaction under less than ideal circumstances can face liquidity issues as public companies.

An electric vehicle start-up announced in a press release that it filed for Chapter 7 bankruptcy less than a year after going public via a de-SPAC transaction. The press release noted a host of issues that impacted the company, ultimately affecting its ability to secure financing and continue operating.

Given the volatility in the public company market and the economy, other companies could experience a similar predicament. As companies contemplate their options for protection under the United State Bankruptcy Code, attention should be paid to the directors and officers (D&O) insurance program, which could prove to be crucial in the event of a claim.

Ideally, a bankruptcy filing will not trigger the change in control provision in a D&O policy, and therefore the policy will remain in force until a company emerges from bankruptcy.

During the bankruptcy process, more time under a D&O policy is generally preferred, and companies should work with their broker to obtain an extension of the policy period that will secure coverage past emergence. While weighing the need for, and possibly securing, an extension, “run-off” or “tail” pricing should be negotiated before filing.

Run-off is an extension of time to notice claims stemming from an alleged pre-emergence Wrongful Act (as defined in the policy). It is typically priced as a multiple of the annual premium and underwritten on a case-by-case basis. Run-off pricing should be secured throughout the D&O tower and paid before filing, so leave of court is not required. Where possible, excess insurers should follow the run-off endorsement wording issued by the primary insurer to avoid conflicting provisions. If a company is liquidating via Chapter 7, the wording should include wind-down language to cover the individuals involved in the liquidation process.

The D&O insurance market has moderated in the last six months, making additional limits more attainable for many insureds. Where economically feasible, insureds should proactively adjust their limit commensurate with loss analytics to ensure ample coverage in the event of a claim.

Addressing these issues and getting ahead of a bankruptcy filing can provide comfort around a D&O policy in an already challenging time. Aon has a team of professionals prepared to answer your questions and facilitate the process. If you have questions about D&O coverage and the bankruptcy process, contact your Aon broker.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.