When a company is sold through a sale of equity (stock or member interests), buyers will often require the sellers to procure a D&O Tail. This Deal Note® explains the purpose of a D&O Tail and discusses how premiums are priced.
Standard Directors and Officers (D&O) insurance policies are renewed annually and provide benefits on a claims-made basis, for actions or inactions of the directors and officers that occurred at any time in the past. A D&O Tail is a non-cancellable prepaid D&O insurance policy that covers claims made against the directors and officers for actions or inactions prior to the sale, for an agreed number of years after the closing.
In the middle market of the aerospace and defense industry, the current standard period for a D&O Tail is 6 years. While there are numerous variables impacting the premiums for these policies, for a 6-Year D&O Tail we often see premiums of roughly $50,000. On a $50 million transaction, that equates to 0.10% of the purchase price. Typically, these policies are procured 2 – 3 weeks prior to closing.
Have a great day everyone.
William Alderman
President
