Growth in SPACs increases demand for D&O insurance coverage
Moves by the SEC regarding proper accounting of warrants are also driving premiums up for D&O coverage.
The tremendous growth in the number of Special Purpose Acquisition Companies (SPACs) has increased demand for directors and officers (D&O) insurance. As a result, insurers have been grappling with the growing stack of submissions for SPACs looking to secure coverage to protect against potential claims.
According to Bloomberg Law, between September and the end of 2020, the number of SPACs that went public skyrocketed. This increased market demand for coverage has backlogged carriers with submissions ― a problem exacerbated by fewer markets willing to write the risk due to the growing potential for lawsuits.
Increased growth in premiums
According to a recent report by Willis Towers Watson, the high demand for D&O coverage for SPACs has also been a key contributing factor in the increase in D&O premiums. Others include:
• The overall expertise of the SPAC sponsor and management team: Underwriters base their risk perception of a SPAC on the experience and strength of the company’s management team. This information is used to determine premiums, so it’s critical to highlight the strengths and quality of the SPAC.
• The warrant structure: The Securities and Exchange Commission (SEC) recently issued statements regarding the proper accounting of warrants. D&O underwriters may scrutinize the structure and terms of warrants, as well as how well a company adheres to the SEC’s guidelines and requirements regarding proper disclosure and accounting.
• Target industry: D&O underwriters may consider certain industries higher risk than others. While there may be limitations on reducing risk in this category, SPAC sponsors and management teams should be aware of the impact a specific industry may have on perceived D&O risk.
By planning ahead and working with a D&O insurance expert who can negotiate appropriate coverage enhancements and pricing, SPACs can secure the coverage they need to mitigate their risk exposure and minimize premium costs.
Eli Solomon is CEO of Oakwood D&O Insurance, which for more than 15 years has specialized in all aspects of management liability, with an ardent focus on D&O. He can be reached at eli@oakwooddno.com or 323-498-6437 or by connecting with Oakwood on LinkedIn.
Reprinted with permission from Oakwood D&O Insurance.
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