Road-Show Coverage in a D&O Policy. What is it and who needs it? A lot of startup founders begin their business journey with an eye to the future of a potential public offering. An IPO is a big deal which can lead to potentially significant financial rewards, but it has its downside risks as well.
Properly transferring these risks to an insurance company begins early in the process of founding a new firm with the purchase of a private company D&O or Directors & Officers Liability insurance policy.
D&O protects the directors, officers, and other company leaders as well as your entity from lawsuits which can arise alleging a plethora of wrongful acts in running and managing the company. Since these types of lawsuits often name company leaders personally for their acts, D&O becomes what we call “personal net worth insurance”.
Further along in your company’s development and growth you will probably find it prudent to purchase higher limits of D&O protection and include something called A-Side protection.
This layer of coverage is intended to provide failsafe protection solely for the company’s leadership. You can watch this video about A-Side D&O to learn more.
When discussions begin to take place about going public, your advisors may indicate that you procure something called Road Show Coverage, and you may be thinking;
What is Road Show Coverage?
Road Show Coverage is an endorsement to an existing private company D&O policy to encompass and cover the risks of your pre-IPO roadshows.
A roadshow is a series of meetings where company leaders will pitch their potential offering plan to investors in an effort to build enthusiasm, demand and interest in the offering. Often, roadshows are arranged by a company’s investment bank and other advisors.
As you can imagine, there are significant risks when company executives are promoting their company in advance of an offering. Anything said or presented during this promotional period is subject to scrutiny and potential lawsuits, should those statements turn out to be less than true, or projections turn sour. This is why adding the Road Show endorsement to your D&O policy is critically important.
A footnote here is that most D&O policies exclude these activities and potential claims which may arise from them. That’s why it must be endorsed to the policy.
What if you don’t have D&O insurance in effect at this point?
If Private Company D&O hasn’t been purchased up to this point, then you should be working with a skilled broker who knows D&O coverage well so they can arrange as broad a policy form as possible, including Road Show coverage. We are specialists in D&O and would welcome the opportunity to speak with you about this.
Other considerations leading up to an offering.
As mentioned previously, firms along a growth path that gets them to IPO territory should be gradually increasing their levels and scope of coverage, including employment practice liability, fiduciary liability, cyber, and possibly even employed lawyers coverage if the company has inside counsel.
Prior to going public, company decision makers should be working with their insurance broker to arrange splitting these policies off on their own, if they’re combined into one policy, as well as preparing for higher limits of protection as needed as a newly minted public company.
Industry benchmarking reports can be helpful in determining the proper limits of protection, but isolating policies into separate silos will help preserve coverage limits for D&O separately from other policies, in an effort to protect your board and the demands of your directors.
Post Offering Issues
Once the offering plan goes public, your private company D&O policy is cancelled due to that policy’s condition known as a change in control provision. Normally when a D&O or other claims made policy is terminated it is recommended that an extended reporting period (ERP or Tail coverage) is purchased to allow the policy to receive claims for acts that occurred prior to the policy termination but haven’t been reported to the policy yet.
This begs the question, should you purchase a Tail or ERP on the private company policy now terminated?
The answer is, it depends.
In most cases the new public company policy underwriter will match the existing private company’s prior-acts date, but the new public policy will likely have a much higher retention or deductible so purchasing a tail on the private company will do three things.
First, it will adjust potential claims to the private policy at a much lower retention, and second it preserves full entity coverage for non-securities related claims. Third the tail also preserves coverage for claims that may arise from the roadshow.
Yes, this is complicated and it really can’t be explained in a video, but I think it points to the need to work with a skilled broker who can negotiate and advise you through this process so that you maximize your protection at the lowest cost possible.
And I think this is where our team shines for clients. We have access to the global D&O market to craft bespoke coverage for you now as a privately held startup, through your growth phase, and ultimately to going public. In addition to D&O and other management lines of coverage we also work on general business insurance for our clients.
Have other questions on Road Show coverage or unresolved issues and don’t know who to speak to about them?
Why not give me a call, or drop me an email. I welcome the opportunity to speak with you.
Thanks!
