SPACS growth increases demand for D&O insurance coverage

Increased market demand for coverage has delayed carriers with bids – a problem exacerbated by the fewer markets willing to underwrite the risk due to the growing potential for lawsuits. (Credit: rawpixel.com/Adobe Stock)

The huge growth in the number of Special Purpose Acquisition Companies (SPACs) has increased demand for directors and officers (D&O) insurance. As a result, insurers are grappling with the growing stack of submissions for SPACs seeking coverage to protect against potential claims.

According to Bloomberg Law, between September and the end of 2020, the number of after-sales services that have become public has skyrocketed. This increased market demand for coverage has delayed carriers with bids – a problem exacerbated by the fewer markets willing to underwrite the risk due to the growing potential for lawsuits.

Increased premium growth

According to a recent report by Willis Towers Watson, the strong demand for D&O coverage for after-sales services was also a key factor in the increase in D&O premiums. Others include:

• The global expertise of the SPAC sponsor and the management team: Underwriters base their perception of the risk of an SPAC on the experience and strength of the company’s management team. This information is used to determine bonuses, so it is essential to highlight the strengths and quality of PSPC.

• The structure of the mandate: The Securities and Exchange Commission (SEC) recently issued statements regarding the proper accounting for warrants. D&O underwriters can review the structure and terms of warrants, as well as the extent to which a company adheres to SEC guidelines and requirements regarding proper disclosure and accounting.

• Target industry: D&O underwriters may find some industries to be riskier than others. While there may be limits to risk reduction in this category, SPAC sponsors and management teams should be aware of the impact that 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 rates, SPACs can get the coverage they need to mitigate their risk exposure and minimize premium costs.

Eli Solomon is CEO of Oakwood D&O Insurance, who for over 15 years has specialized in all aspects of management responsibility, with a strong focus on D&O. He can be contacted at [email protected]dno.com or 323-498-6437 or by connecting with Oakwood on LinkedIn.

Reprinted with permission from Oakwood D&O Insurance.

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Justin D. O'Neill