With the expansion of special purpose acquisition companies (SPACS), captive insurance can potentially fill insurance gaps, according to Jeffrey Raskin, partner and Lauren Burke, associate at Morgan Lewis.
Raskin notes that SPACs now make up nearly 70 per cent of initial public offering (IPO) activity and it continues to attract deep-pocketed sponsors, including high-profile athletes and public figures.
He explains to attract and retain qualified directors and officers, SPACs must offer comprehensive directors and officers (D&O) liability coverage to protect against that increased exposure and resulting derivative lawsuits.
“But this insurance hurdle is becoming tougher to clear as the commercial insurance market, particularly for Side A D&O coverage, which protects claims against D&O not indemnified by the public company, continues to harden. Captive insurance could be the solution to fill the insurance gap, including any timing gap,” Raskin states.
Burke explains the issues such as D&O insurance in the commercial market for new public companies, like SPACs, with no track record can be prohibitively expensive or completely unavailable.
She continues: “This coverage can be even harder to secure for SPACs because of the short life cycle of the insuring relationship: SPACs often seek short-term policies (18 months to two years) with no intent to renew.”
With the hardening of the insurance market and the surge in SPACS along with the current hesitance of many commercial insurers to write D&O coverage, Burke notes that SPAC sponsors may be left with a gap in the D&O market that makes it hard for SPACs to get off the ground.
Burke and Raskin highlight that captive insurance offers cost-saving benefits, in addition to filling a market void, including investment of risk premium, tailored coverage, access to reinsurance, tax savings and potential risk transfer mechanism.
Raskin comments: “Regardless of which captive funding option is selected, using a proper actuarial study, implementing claims procedures, and following insurance accounting practices are critical to demonstrate that the captive should be treated as an insurance company.”
