Investigate the Options Before Incepting an Extended Reporting Period
With M&A activity in the community bank space setting a feverish pace, requests for Extended Reporting Periods (ERP) on Directors & Officers Liability policies have become a weekly occurrence for brokers and carriers who serve this market. In the vast majority of cases, accepting the ERP on the current policy is the way to go. But this is not universally the case, and buyers and sellers should research their options before putting out premium for the ERP. Not only are terms and conditions of the current policy often negotiable, but those involved in M&A should understand that there are specialty markets that will write ERP without having written the prior coverage which may provide compelling options to consider.
A major point to consider is if the current policy provides coverage as broad as the stakeholders would like to rely on for the next one to six years after closing. This is especially true for those banks that stumbled in the great recession, started to improve and are now attractive targets for purchase. Many of these banks saw their D&O coverage negatively affected and have not seen the broadest of coverage yet be made available to them. Taking an ERP on a policy that may have lower limits and more restrictions may be able to be negotiated to improve coverage with the incumbent carrier or a new carrier.
This consideration is not only important for the management of the purchased bank, but it should also be a concern for the purchasing entity. Most purchase and sale agreements provide indemnification agreements for the benefit of management of the purchased bank to be provided by the purchasing bank. By accepting what may be inferior coverage for the ERP, the purchasing bank is setting itself up to have to indemnify prior management without having a policy that will respond positively to cover this indemnification. There is also the potential for a lawsuit against the purchasing bank for not exercising due care in incepting the ERP on their target's prior policy.
Among all of the considerations undertaken when banks consider mergers, taking ERP on prior D&O policies is often made out of hand. Taking a bit more time to consider options is well spent by all concerned. In a later Bank Bulletin, we will discuss additional considerations that should be made in making this all important purchase.
Posted on 08/22/2014 1:53 PM by Tim Bennett