The Small D&O Clause with Big Post-Deal Consequences

The Policy Provision Directors Cannot Afford to Overlook

When a company enters into a merger, acquisition, sale or other change-of-control transaction, the focus is naturally on the deal itself. But Directors and Officers (D&O) liability insurance for the company’s directors is another important consideration.

A transaction can trigger a provision in the D&O policy that fundamentally changes how cover operates, which means that arranging appropriate run-off and go-forward cover, should form part of transaction planning from the outset.

What is a transaction clause?

D&O insurance protects directors and officers in their personal capacity against allegations of wrongful acts committed in their managerial capacity, including claims relating to mismanagement, inadequate disclosure, breaches of duty or failures in oversight. A transaction clause determines how that protection responds when there is a significant change in ownership or control.

“Typically, once a transaction takes effect, the existing D&O policy moves into a run-off position,” explains Gillian Wolman, Business Unit Manager at Aon South Africa’s D&O Liability division. “It continues to respond to covered wrongful acts that occurred before the transaction but does not automatically provide cover for new wrongful acts committed after the transaction date.”

This distinction can have significant consequences. “If the transaction clause is misunderstood or overlooked, directors may assume they remain protected for decisions made during the post-deal integration period, when the existing policy may no longer respond to new wrongful acts,” Wolman says. “In the worst-case scenario, individual directors could face personal exposure for defence costs, regulatory investigations or shareholder claims arising from post-transaction decisions.”

Run-off cover is not automatic

Run-off cover is additional protection that needs to be specifically considered and arranged. It provides cover for claims arising from wrongful acts that occurred before the transaction, but which are only discovered or brought after the transaction has taken place.

Depending on the policy and circumstances, run-off periods can range from one to six years, with three years often considered in relation to prescription periods. Cover can generally be purchased annually or as a lump sum for the agreed period.

“Run-off needs to be negotiated and purchased – it is not something that happens automatically,” Wolman emphasises.

Timing is critical

D&O policies may impose specific notification requirements and time limits when a change in control or other qualifying transaction occurs. Waiting until signing or closing to address the issue can leave limited time to negotiate appropriate protection.

“Early engagement with your D&O broker is critical,” says Wolman. “As soon as a potential transaction moves beyond the exploratory stage, companies should understand when the transaction clause will be triggered, what notification requirements apply and what run-off and go-forward cover may be required. This is particularly important where signing and completion occur at different times. Companies need to understand how their D&O policy responds throughout the transaction process and ensure there are no gaps in protection. The D&O transaction clause should also be considered alongside other transaction solutions, such as Warranty & Indemnity (W&I) insurance and tax or contingent liability cover to get a full picture.”

Aon’s 2025 Transaction Solutions Global Claims Study highlights why transaction-related risks require careful consideration even after a deal has closed. In EMEA, financial statements accounted for the highest proportion of claim losses at 27%, while 64% of claims were notified within the first 18 months following a transaction.

“While these figures relate to W&I claims rather than D&O, they reinforce the broader point that transaction-related issues can emerge well after completion,” Wolman illustrates.

Make the clause part of the deal

The transaction clause may occupy only a few lines in a D&O policy, but its implications can extend well beyond the deal itself. By reviewing the transaction clause early, confirming notification requirements, obtaining appropriate run-off options and considering go-forward D&O protection, companies can avoid discovering a coverage gap when it is too late to address it.

“Understanding and negotiating the D&O transaction clause should be an essential part of transaction planning – not an afterthought at policy renewal,” Wolman concludes.