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Managing risk
Constructing a D&O liability program
leading into an IPO is a dynamic process.
The goal is to understand the choices
and trade-offs and to achieve an optimal
balance that properly reflects the values of
the company and its directors and officers.
For example, many companies purchase
policies that protect both the company and
the individual directors and officers for
nonindemnifiable claims. This structure
involves a shared limit of liability that
protects the company and its directors
and officers. If a very large claim is made
against the company, it may exhaust the
limits made available to individual directors
and officers. One potential solution is to
purchase additional limits of coverage
dedicated solely to protect individual
directors and officers. Alternatively,
dedicated coverage may also be purchased
solely for independent directors of the
board, excluding nonindependent board
members and officers.
Selecting an appropriate level of
limits is now more science than art. Peer
benchmarking data is only one element
to consider in choosing the right amount
of insurance and retention. Analysis of
a particular company’s susceptibility to
securities class actions and projections of
realistic settlement amounts can provide
greater confidence in limit decisions.
Turbulence affecting the financial
condition of insurers several years ago
has raised concerns regarding insurer
stability, making the decisions on which
insurers to partner with more challenging.
An in-depth comparative analysis of an
insurer’s creditworthiness and financial
strength is a precursor to an assessment
of the company’s counterparty risk. Just
as important is the ongoing monitoring of
the financial condition of the company’s
partner insurers.
One of the more complex and
evolving areas of D&O coverage involves
subsidiaries located outside the United
States. It is important to understand
the tax, regulatory and coverage issues
associated with D&O exposures outside
the United States to ascertain whether
exposure exists. There are a number
of solutions to address such exposure,
depending on location and magnitude,
some of which may impact the company’s
choice of primary insurer.
(c) Timing the D&O liability insurance
purchase for an IPO
A D&O policy for a newly public company
generally becomes effective on the date the
company’s registration statement covering
the traded securities becomes effective.
The process and timeline leading up to
the commencement of the policy period
differ depending on the situation and can
be tailored to meet the specific needs of
the company. The following is a suggested
timeline for meeting key milestones in the
process of obtaining D&O coverage.
D&O strategy meeting: In the month
leading into filing of Form S-1, it is
recommended that the company meet with
its insurance brokers and outside counsel,
if needed, to strategize on D&O program
design options, selection of carriers,
coverage issues, limit analysis, timeline and
cost. Being beneficiaries of D&O insurance,
the entire board of directors or certain key
members may need to be engaged.
Filing of Form S-1: Once the company’s
registration statement is filed, a
submission can be made to the
underwriters, which would include the
draft Form S-1. Given the passage of the
JOBS Act in 2012, a draft registration
statement might be filed confidentially
with the SEC. In such event, additional
time and consideration should be given to
obtaining nondisclosure agreements with
insurers from which a company wishes to
solicit a quote. The submission, combined
with calls and/or face-to-face meetings
with the underwriters, will allow the
insurers to assess the company’s D&O risk
profile.
Timeline
-45 to 0 days
D&O strategy
meeting
0 days
Initial
S-1 filed
Information to
underwriters
Comments
from SEC
Meetings with underwriters: It is generally
expected that senior representatives of the
company will meet with the underwriters,
either in person or by teleconference,
before a premium quotation will be given
for a D&O policy. It is an opportunity
for the insurers to better understand
the company’s financial and operating
condition and its prospects and to speak
directly with management about corporate
governance issues and concerns. These
meetings typically take place during the
roadshow detailed in Chapter 3.
Analysis: Once quotes have been submitted
to the insurers, insurance advisors—
sometimes working in concert with
outside counsel—provide the company’s
management and/or board with detailed
comparative analysis to allow the company
to ultimately make a number of decisions
on the nature of its D&O program,
including the appropriate structure, limits,
retentions, coverage and insurers.
Binding of insurance: Once decisions have
been made by the company, insurance
advisors will execute those decisions
to build the D&O program and bind the
insurers in time for the effectiveness of the
registration statement.
8.5 Personal risk management
Marsh
An IPO will certainly have an impact
on your professional life, but it will
also have a considerable effect on your
personal lifestyle. The complexity of
a high net worth lifestyle requires a
new way of thinking about risk and
30–40 days 35–50 days 45–60 days 60–75 days
Initial feedback
from client
Amended
S-1 filed
Narrow field
of underwriters
Roadshow
Underwriter
calls and
meetings
Decide on
program, limits,
and structure
IPO
Bind public
company
D&O policy
NYSE IPO Guide
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