Taffae, who says he’s worked on hundreds of runoff policies over the past 30 years, says that merger-agreement wording “is pretty standard.” What is not standard is the language of D&O policies. And because Southwest was purchasing the tail from a carrier that wasn’t AirTran’s current carrier, it was almost impossible to ensure the merger requirement specifying the same or broader coverage would not be violated, Taffae says.

“Each D&O policy is different. There’s overlap, but every single insurance company has its own form,” he says.

Referring to AirTran’s pre-merger carrier as Carrier A, Taffae reports that he found another carrier—B—that gave a runoff proposal. “We tried to make B as close to A as possible. We added a bunch of endorsements. We did everything. But still, it’s a 14-page document even without the endorsements” he says, stressing that a single word out of place could ultimately violate the merger requirement.

He gives the example of a bodily-injury (BI) exclusion, which in some forms has the wording “arising out of bodily injury” and in others, has the less exclusionary phrase “for bodily injury.”

So “if A had the ‘for’ wording and B had ‘arising out of,’ then even though we added 30 endorsements to B, if a BI claim came up, it would clearly be less broad than A and that would be a violation,” he says.

Chris Thorn, risk manager for Dallas-based Southwest, says that there was no particular coverage provision that he was worried about as the programs were being compared. “It’s really the invisible that we were concerned with—the things that are not necessarily obvious at the time you’re putting the program into place,” he says.

Thorn, who notes that Southwest was flying into new airspace without Taffae’s expertise because the airline had not done a merger since the 1980s, says the wholesale broker’s solution—which Executive Perils has branded as “trilateral coverage”—“provides a safety net” for Southwest. “It covers us for anything we might have missed,” Thorn says.

Explaining the first two-sides of the “trilateral coverage” option, Taffae says the only way Executive Perils could give complete and absolute confirmation that there would be no breach of the merger contract’s “at least as favorable” provision was to get Carrier B to endorse its policy to reference Carrier A. In other words, Carrier B’s policy says, “In no event will this policy provide less coverage than Carrier A,” and specifically references A’s policy number.

“If a claim comes in, the claims adjuster will look at both the Carrier-B policy and the Carrier-A policy and will take the most favorable terms to the insured to settle the claim,” he explains.

BEST OF THREE

For the insured, “it even gets better,” Taffae says, diagramming the last side of this “trilateral” coverage deal for NU and introducing “Carrier C”—the lead carrier on Southwest’s existing nine-figure D&O tower. He proposed that “Carrier B’s” runoff policy should reference Carrier C’s very broad, carefully manuscripted policy language as well, reasoning that any claim that surfaced after the merger would likely name the deep-pocketed owner Southwest as a co-defendant.

With the last of the three legs in place, he explains that if a claim falls under the AirTran runoff, it will be handled based on the most favorable language of all three policies.

Taffae notes that before his aha moment, he was confident that Carrier B’s policy was roughly 95 percent equal to Carrier A’s. Carrier B, in fact, was substantially broader on about 30 percent of the policy, he reports. “It was that 5 percent that we wrestled with because we didn’t want to ever be subject to any scrutiny in hindsight,” he says. “We weren’t going to get Company B to put Company A in the word processor.” The policy-reference invention was the only complete solution, he says.

Thorn notes that this safety net was particularly important because even though the broker and risk manager were diligent in matching up policies to put together a six-year tail “on behalf of executives of a competing airline,” there were a number of challenges complicating the task—not the least of which was the fact that AirTran was a competitor up until the date of close.

That meant communication was limited, he says, noting that the AirTran policy was given to Southwest just 30 days before the merger closed.

Thorn adds that from Southwest’s perspective, the new coverage would not just to shield AirTran executives, but also protect Southwest’s balance sheet from the indemnification that it provides to those executives. “So we wanted to make sure we were familiar with the coverage as well.”

“Not having direct communication [or] the same brokers, it was very difficult to get the information we needed to put a good quality program in place and enough time to be able to study it,” he says.

“Keep in mind that this is a six-year policy and it’s a one-shot deal. You never renew it,” Taffae adds. “There are no little mistakes.”

But why not just use the AirTran’s pre-merger carrier for the runoff—avoiding the need to match up policy language? And why didn’t brokers worry about all this before?

Thorn and Taffae don’t reveal specific reasons, reporting that they are confidential, but do say that in this particular situation, there were a number of coverage-related reasons not to go with Carrier A. It was not an economic decision, they say, noting that the carriers involved were competitive on price.

Taffae says that up until about seven years ago, “it was an unwritten law that the incumbent got the runoff. No one would compete,” he says, chalking up the erosion of the unwritten rule to market conditions. “While it’s still a good idea in most cases to keep it with the incumbent carrier, in some cases you have to get a new carrier to write the runoff—either because the current carrier doesn’t want to do it or their terms are just horrendous.”

Thorn says he would have given preference to the incumbents on AirTran and Southwest’s D&O programs. “But when given such a great opportunity that outshines what “A” and “C” are willing to do, you’ve got to give that a look,” he says, noting that Carrier B’s willingness to think out-of-the- box along with Taffae may enhance Carrier B’s relationship with Southwest going forward.

Carrier B, the two men confirm, has been a participant on Southwest’s D&O tower, but not the lead. Taffae says he doesn’t have permission to reveal the identity of the carrier, adding that the insurer may be wise not to broadcast this. “They’re going to get overwhelmed. Once people know about this, it’s going to become an industry standard. Every broker and every insured is going to want it,” he predicts.

Indeed, when asked if he’ll try to get “trilateral coverage” on the next large merger deal he places, Taffae says, “it would be compulsory. This is going to completely change how six-year runoffs are done.”

In a world where getting alternative bids on runoffs is commonplace, how have brokers helping their clients comply with the “at-least-as-favorable” warranty until now?

For years, as long as the coverage was cheaper or the retention was the same or lower, brokers would provide coverage that was “generally equal, but not specifically exactly,” Taffae responds.