Author: Priya Cherian Huskins
Imagine you were a board member for a company that was acquired last year.
Fast forward to today: You're served with a lawsuit concerning events that took place while you were still a board member and before the company was acquired.
Remember, your old company, which no longer exists, stopped paying the Directors and Officers (D&O) insurance premiums when the company was acquired.
Defending yourself in a lawsuit is notoriously expensive. Panic starts to set in. Are you going to have to mortgage your home?
The stakes are high. As a result, the one personal question that savvy directors ask when selling their companies is, "Are we getting a six-year tail policy?"
What is a tail policy?
A tail policy is a contractual extension of an insurance policy that allows claims to be reported after the policy ends for conduct that occurred during the original policy period. You need one if the insurance policy in question is a "claims-made" policy, meaning it will only respond to claims if the policy period hasn't expired yet. D&O insurance policies are always claims-made policies.
When do tail policies apply?
Mergers & acquisitions (M&A)
- When a company is sold, merged or taken over, most director and officer liability insurance policies automatically go into what the insurance industry refers to as "runoff" or the "discovery period."
- This means the policy will continue to accept claims related to activities that took place before the start of the runoff period through the end of the current policy period.
- When a policy goes into runoff, companies typically have the option to purchase a "tail policy," which is a contractual extension of that runoff period.
- This article will focus on tail policies in the context of M&A.
Corporate bankruptcy
- Tail policies are also relevant when a company is dissolved due to bankruptcy and can no longer pay for D&O insurance.
IPOs = Not necessary
- A company's IPO is typically not a reason to purchase a tail policy.
- While you will replace your private company D&O insurance policy with a public company D&O insurance policy, that latter policy can have terms that make a tail on the private company policy unnecessary.
What do tail policies cover?
The fact that a company was sold or otherwise ceases to exist doesn't necessarily extinguish claims against its directors and officers related to prior activities. Potential claims can include anything from a shareholder suit to regulatory actions.
Tail claims don't occur, but when they do, they can be serious.
How does coverage work?
When it comes to a tail policy, the policy that existed before the change in control is the one that will respond. With some limited exceptions, the policy terms and conditions — including exclusions — will remain in place.
If the limit of insurance of the expiring policy is impaired, meaning claims have already been made on the policy, your insurance broker can negotiate for fresh limits.
In most cases, companies won't seek to increase the total limit of insurance being bought, but you can ask your insurance broker to put in place additional runoff limits to provide extra protection (as long as the broker can find a willing insurance carrier and, of course, the company can afford the purchase).
Keep in mind that if there are any existing weaknesses in coverage, the tail policy won't fix those, unless otherwise negotiated.
For example, some struggling companies may end up with policies that exclude any claims brought by government regulators. Such a provision is unlikely to be negotiated away (at least at a reasonable price) when the tail is put in place.
This is especially true when the tail is being placed due to corporate bankruptcy.
How long does a tail policy last?
In the US, tail policies typically run for six years.
Why six years? This often aligns with common statutes of limitation for many types of claims, including fiduciary duty and securities-related claims. Shorter terms are available, however.
The cost for each year is not the same. The earlier years, when claims are more likely to arise, are more costly than the later years.
Who is responsible for buying the tail policy?
During a typical M&A process, the merger agreement requires that a tail policy be put in place at closing. The target company usually purchases the tail.
The next thing you might be wondering is: Could the company's buyers simply cancel the policy once the deal closes?
The answer to that is "no." One key component of a typical tail policy is that it can be made noncancelable.
What if a tail policy isn't purchased?
If no tail policy is in place and a new claim arises after the existing insurance expires, there may be no insurance coverage for future claims.
In the case of a company being acquired, the acquiring company likely has a contractual obligation to fund defense costs and settlements for the former directors and officers.
You should confirm with your lawyers that the acquiring company has, in fact, agreed to such an obligation before the deal closes.
Unfortunately, promises of the advancement of legal fees and indemnification won't be worth anything if the acquiring company is unable to cover these costs due to its own financial troubles.
Worse, the acquiring company might simply refuse to do so — bad behavior that might only be corrected through expensive and likely self-funded litigation.
In these situations, former directors and officers would be left to fund their own defense costs.
Having a tail policy is clearly the better choice.
Tail coverage: A technical detail that matters
Most directors will never face a post-transaction claim. However, if a lawsuit arises after you sell the company, a properly structured D&O tail policy will provide protection when it matters most.
Published June 2026
