SPACs: D&O Insurance
Insurers seem to have 'curbed their enthusiasm' for SPACs
As we know, SPACs have taken the capital markets by storm and it seems like every A-list celebrity has a SPAC, except maybe Larry David (“Curb Your Enthusiasm”). I don’t know why Mr. David does not have a SPAC, but I think he could do a very clever comedy routine about this if he were so inclined. Mr. David is a Martha’s Vineyard summer person, so maybe I’ll suggest this to him the next time he invites me over to his house. (No, I don’t actually know Mr. David, but I do know where he lives, so maybe I’ll just drop by with a few SPAC jokes in hand.)
Yes SPACs are very popular but they remain quite controversial in certain circles, for example among those of us who understand finance and have lived through more than one bull market cycle. The controversy over SPACs is in part due to the way in which SPACs are structured and the process by which they raise money, which generates potential conflicts of interest between the SPAC sponsors and other transaction counter-parties. As one experienced investor and astute B&B reader commented, “SPACs are terrible vehicles the way they are currently being used; they need to be much more sharply regulated”. This reader also suggested that I “curb my enthusiasm” for the Altus Power deal, which I will attempt to do.
Students who have taken my Financial Services class will recall our popular guest speaker, Thomas K. Smith. In his talk to the class, Mr Smith regularly advises students never to join a board of directors, even a not-for-profit board, without having in place a good D&O (Directors & Officers) insurance policy to protect you against personal liability for actions taken (or not taken) in your role as a director or trustee. Few students will be asked to serve in these roles early in your careers, but many of you will one day be asked to do so and I hope you will then recall Mr. Smith’s advice.
The more financially successful you become, the more important it is to have good D&O coverage. Many young professionals are largely “judgment proof” (ie broke), but this is not true of most senior executives and directors. And these folks don’t want to lose their house(s) or retirement savings as a result of serving on a corporate or non-profit board, even if the pay is good (which it isn’t on non-profit boards). Think for example of the very successful people who served on the Theranos board, much to their later regret. I don’t know what these folks were thinking when they agreed to serve, but I sure hope they had good D&O coverage (and deep pockets).
D&O insurance is a rather esoteric type of liability coverage written by P&C (Property & Casualty) companies, and most of you will not need to know much about this until later in your careers. But you should understand at least the basics—what claims are covered, how the policies are structured and priced, etc. And given the popularity of SPACs, you might also want to know something about the complications and costs of writing D&O insurance for SPAC officers and directors. The insurance premiums on SPAC D&O policies have quadrupled in the past year or so as investors, regulators and insurance companies have woken up to the particular risks associated with SPACs and SPAC transactions, which have been rising with the increased volume of SPAC activity.
Those of you who are interested in careers in investment banking, private equity or investment management—and of course those of you interested in insurance or corporate law—might like to have an even deeper understanding of D&O insurance and the complications that arise when insuring SPACs. If you can talk knowledgeably about this sort of advanced topic in a job interview, I guarantee it will set you apart from your competition. (“So you want to be an investment banker. Tell me what you know about SPACs.” Won’t the interviewer be surprised when you describe the structure of a SPAC, discuss the conflicts of interest and litigation risks and then note the rising cost of D&O insurance!)
To that end, here are three articles worth reading (or skimming at least), provided by my good friend Smitty (Mr. Smith to all of you):
Demand for D&O insurance explodes with SPAC related activity and future litigation concerns, Reuters April 2021
Insurers Overwhelmed by Demand for D&O Coverage for Blank Check Companies, Insurance Journal February 2021