Terminating Operational Agency After Divesting Private Company Equity
Divesting private equity transfers ownership but leaves operational agency active until corporate appointments, banking mandates, and third-party notices close.
run-off insurance
Meaning
Specialized liability coverage protects past directors and officers against claims alleging historical wrongful acts made after their management tenure has ended. Standard directors and officers policies operate on a claims-made basis, leaving an executive completely unprotected the moment an annual policy expires or terminates. Securing run-off insurance creates an extended reporting window that covers litigation arising from pre-resignation decisions, asset sales or operational conduct.
Protection stops applying at the end of the contracted run-off term or when claims fall outside the defined historical operational acts.
Coverage Mechanics
Protection attaches strictly to conduct occurring before a specific corporate event or handover. Unlike traditional liability policies that cover acts during the active policy year, run-off insurance isolates the past and rejects claims stemming from post-transaction conduct. The multi-year policy requires a single upfront premium paid at closing, protecting the policy against non-payment or cancellation by subsequent management teams.
The coverage window typically spans six years to match the statutory limitation period for commercial contract and negligence claims. It guarantees that the past operator retains independent legal defense resources irrespective of the company’s financial future.
Insolvency Protection
The value of this coverage becomes apparent when an enterprise fails under successor leadership. When a company collapses, commercial bankruptcy trustees actively scrutinize legacy accounting records and operational transactions to bring clawback claims against previous leaders. Under those circumstances, an active corporate indemnity is useless because the bankrupt entity has no funds.
An independent run-off insurance policy stands outside the bankruptcy estate, providing ring-fenced legal defense funding and settlement capital. Without this dedicated asset, a former executive must fund commercial legal defenses from personal savings.
Procurement Terms
Securing coverage requires negotiation during transaction structuring rather than after departure. Acquirers often resist funding run-off insurance due to the significant upfront capital cost. Departing executives must make policy funding a closing condition, ensuring policy binders are issued and fully paid before control passes.
Careful drafting ensures policy limits cannot be eroded by future claims against other managers. An unalterable, non-cancellable run-off policy remains an indispensable defense against retrospective operational litigation.