The case for run off on a D&O policy is well established. However, an internet search for ‘crime insurance run off’ will deliver slim pickings.
And even though crime is often purchased alongside D&O, ask an underwriter about the need for, and availability of, run off for crime, and the response might not be as eloquently articulated. Granted, the frequency of the request is nowhere near as great, but it does raise the occasional curiosity, and the common response that there is no market for crime run off is perhaps an answer to a different question than the one that was asked.
As recently as 2010, there was no acquisition provision in crime forms (which would define the policy mechanics in the event of takeover of the policyholder). The view was that the underwriter could take a sense check on events and calibrate the response accordingly. Sometimes, the view might have been that the change of ownership could be irrelevant to the risk. However, as policy forms expanded their generosity in most areas, some of the policy design around corporate transactions was adjusted to cede control back to the underwriter. Notwithstanding this, the underlying question remained. With D&O, there was always a digestible simplicity to acquisition, but this was never the case with crime, and the answer to the question is therefore necessarily more complicated.
What ultimately can matter in the case of crime run off is who might have suffered the loss, and this is partly the reason for the lack of clarity. It is useful to look at some scenarios, but keep in mind that, generally speaking, it is the policyholder to whom the indemnity is paid (not the shareholders at the time of any loss/discovery). Let’s assume the policyholder is MPR Limited:
- if MPR Limited buys a subsidiary, then only losses that are sustained/discovered after the date of the purchase will be covered;
- if MPR Limited sells a subsidiary, then only losses that were sustained/discovered when such subsidiary was a subsidiary, would be covered;
This stands to reason, as the insurance should cover the loss that MPR Limited has suffered. If it paid £10,000 for a business that was valued at that amount, it won’t benefit from payment for any crime loss sustained prior to that, and which wasn’t accounted for in the valuation (the losers would be the sellers, whose own crime insurance would cover the loss). Equally, if MPR Limited sold a business for £10,000, but which might have been valued at £12,000 had the crime not occurred, then it is sensible that these ‘run off’ provisions built into standard wordings would accommodate that loss. So far, so straightforward. There might also be cases where an underwriter would consider crime run off, including:
- where the policyholder simply does not wish to buy crime cover any more but wants to buy a reporting period for several years to cover the risk of future discovery, accepting that losses sustained after the run off date are not covered (rare, but not unheard of);
- where the assets of the business are sold, but not the shares, so a similar situation to the previous example. Again, this is rare, and underwriters are not allergic to this.
The more complicated scenario is where it is the policyholder itself (MPR Limited) which is sold. The shareholders and buyers agree a sale based on a valuation of the assets (net of any undiscovered crime loss). However, whilst the ownership of the policyholder changes, the policyholder is still the beneficiary of the policy proceeds. This might ultimately lead to the new owners receiving the benefit of a crime loss that they haven’t suffered i.e. they have paid for the business based on current assets and valuations. It is the essence of this dynamic which is at the centre of the question of willingness to provide, and availability of, crime run off. Those with the true insurable interest in run off are the former shareholders, as it is they who (indirectly) suffered the loss, but it is technically and mechanically difficult to engineer this because the policy will always be issued, and cover, the corporate entity. Notwithstanding this, and paradoxically perhaps, well manufactured crime policies should provide cover until the end of the policy period, “but not for crimes occurring after such merger, consolidation or acquisition (unless specifically agreed to by the insurer).” This gives the underwriter a contractual entitlement to take that sense check we referred to earlier but does give cover for run off until renewal if no other arrangements are subsequently made. There’s also a tactical reason for not defaulting discovery or run off provisions into a policy as standard language. The architecture of modern crime forms typically grants cover on a ‘losses discovered’ basis. A ‘smart’ buyer, worried about activity stretching a long way back, but less so about the future, could buy a policy for a single year and then run it off into the distance, with all the prior acts covered. The structure of crime wordings in not allowing a built-in entitlement, militates against this.
The long and short of it, is that crime run off is more nuanced than it is for D&O and the outcomes are not as one-dimensional, with much depending on the specific circumstances associated with a transaction. And in over 20 years insuring this class, it’s difficult to recall too many examples of the cover being transacted on an extended basis, beyond that which is within the current constructions. That’s also a possible explanation for the sparsity of results from our internet searches.