Why D&O Tail Insurance is Important in a Stock Purchase (Even if the Seller Doesn’t Want it)

It is standard practice that stock purchases include language requiring the purchase of D&O tail insurance covering the Seller’s directors and officers. Seller’s counsel may push for the addition of this language if not already included. In other cases, however, the Seller does not purchase D&O insurance and argues they don’t think it is important and they don’t want to pay for D&O tail cover. This would be fine if the transaction was an asset purchase and the preclosing liabilities and indemnity obligations were not assumed by the Buyer.

Ironically, in a stock purchase, the purchase of D&O tail provides more protection to the Buyer than the Seller, and it should, therefore, be a Buyer requirement. In the event of loss arising from a D&O tail claim (including defense costs), the Buyer assumes a responsibility to indemnify the pre-closing directors and officers.

The “Side–B” coverage section of the D&O tail policy provides reimbursement for this paid indemnity (less the retention). The “Side – C” coverage section reimburses loss incurred at the entity level. As such, an uninsured D&O claim arising from a pre-closing act would impair the Buyer’s balance sheet. The D&O tail policy insuring the pre-closing entity is the necessary insurance protection against this Buyer exposure.

Don't overlook this crucial aspect of the transaction. Make sure to consult with your legal counsel and insurance provider to ensure that you are fully protected.