A directors and officers policy operates on a claims-made basis: it responds to claims MADE during its period, not to acts committed during it. That single feature governs everything that follows in a sale, and it must be kept in mind before entering the mechanism. A director who did the job well for eight years and leaves on the day of closing remains exposed, for years, for acts predating that departure. The policy that covered them stops or changes hands with the company. Their protection now depends on people they have just left.
Run-off cover answers exactly that, and its nature is best understood through what it is not. It opens no new cover: no act after closing enters it, no new risk is taken. It extends the period during which a claim may be notified, ordinarily six years, for matters predating completion, for the benefit of the departing directors. It is a window held open on a period now closed, and that phrasing is not ornamental: it explains why an insurer can price it as a single amount paid once, since it takes no new risk, only a lengthening of the notification period.
Then comes the rule that justifies this module on its own. This cover is bought at completion at the latest, and it is never bought afterward. Once the deal is done, the company is no longer in a position to buy a policy for the benefit of former directors covering a period now past, and no insurer agrees to open a window onto a past it was not asked to cover in good time. In a field where almost everything can be renegotiated, repriced or worked around, this is the only thing a delay renders permanently impossible. It should be put in those terms: it is not a point handled badly if handled late, it is a point that disappears.
That leaves why it is so often missed, and the answer is structural rather than human. This protection belongs to nobody in the room. The seller's advisers are on the sale agreement, the buyer takes no interest since it does not protect the buyer, the broker is placing the warranty policy which is the day's subject. And the people it protects, the departing directors, are generally not represented at the table: they are the seller's employees who have most often just lost their jobs. A protection with no advocate in the room is the one that falls away, and it falls away without anyone having decided to let it.
There is even, on the buyer's side, a mildly adverse interest better named than left unsaid. Run-off protects former directors, some of whom might become its opponents if it later discovers failings and decides to act. Yet it is frequently the buyer, now in control of the company, that inherits the administrative task of putting the cover in place. The execution of a protection is thus entrusted to the party with the least reason to care about it, and sometimes a reason to prefer that it not exist. That asymmetry is not dishonesty, it is a design defect, and it explains why the cover must appear in the agreement as a quantified obligation with a payer and a deadline, and not as a shared intention.
The interaction with the structure of a D&O policy then decides its real usefulness. The section reimbursing the company once it has indemnified its director is worth nothing to a former director the company refuses to indemnify, and that is precisely the post-sale situation: the company is now controlled by the buyer, which may refuse because it is itself the claimant, or because it is cooperating with an authority and regards the individual as the problem. The section paying the director directly where the company does not or cannot indemnify is therefore the one that counts in a run-off. Cover carrying a high headline amount but a thin version of that section protects almost nobody in the one case it existed for.
The conduct that avoids all this comes down to two steps, and the timing of their execution matters as much as their content. The first is to write the cover into the sale agreement as a precise obligation, with the payer named, the amount, the duration and the deadline set at completion at the latest: a best efforts clause, asking for reasonable endeavours without requiring a result, is worth close to nothing to a director who is not even a party to the agreement. The second is to look at the composition of the cover rather than its headline amount. And one piece of advice should be added for the individuals concerned: departing directors must ask the question before signing their exit, because they are the only people in the room with a reason to ask it.
The sale of a mid-size group completes on June 30. The sale agreement provides that the company 'shall use its best efforts to put in place' a six-year run-off cover for the departing directors; no payer is named, no amount is fixed, no deadline is set. At completion, the finance director and two board members leave. The buyer's team, absorbed by integration, never places the cover, and nobody chases it. Fourteen months later, an authority opens an investigation into pre-closing conduct and names the former finance director personally. His defense costs reach 800,000 euros. The company, now controlled by the buyer, refuses to indemnify him: it is cooperating with the authority and holds him responsible. Where does he stand?
He is personally exposed, personally uninsured, and no repair exists. The cover could no longer be bought after June 30, and fourteen months is not a delay but an extinction: it is the only protection in a deal that a delay causes to disappear rather than to become more expensive. The best efforts clause gives him nothing enforceable, for three cumulative reasons: it names no payer, fixes neither amount nor deadline, and imposes an effort where a result was needed. The tempting course is to sue the seller for breach of that clause; the difficulty is that he is not a party to the sale agreement, so in principle has no standing to invoke it, and an obligation of means drafted that way is almost impossible to establish as breached. The second reflex, relying on the company to indemnify him, fails exactly where it was meant to serve: that is the reasoning of the section reimbursing the company, and it assumes a company willing to indemnify. Yet it is today controlled by the buyer, which is cooperating with the authority and has no interest in funding the defense of the person it is pointing at. What he needed was the section paying the director directly when the company does not, and that is the one nobody bought. The lesson goes beyond the case: this protection had no advocate at the signing table. The three people it was for were leaving, had no seat, and everyone still in the room had either no interest or a mildly adverse one.
- 01A D&O policy is claims-made: it responds to claims made during its period, not to acts committed during it.
- 02Run-off opens no new cover: it holds a window open on a closed period, for the benefit of those leaving.
- 03It is bought at completion at the latest and never after: it is the only protection in a deal that delay makes disappear rather than more expensive.
- 04It protects people with no seat at the table, and whoever inherits the task sometimes has an adverse interest: write it as a quantified obligation, not an intention.
- 05After a sale, the section reimbursing the company is worth nothing to a former director it refuses to indemnify: only the one paying him directly counts.