Insurance Planning for Your IPO

When a company decides to go public, it's an exciting moment filled with opportunities for growth and expansion, but it's also a period of heightened vulnerability. The transition from a private to a publicly traded entity significantly changes a company's risk profile, particularly regarding insurance coverage. At Flow Specialty Insurance, we understand the complexities involved and how critical it is for businesses to have the right coverage at precisely the right time.

Why Insurance Matters When Going Public

The moment your company becomes publicly traded, your exposure to litigation risk escalates dramatically. Securities class actions can arise swiftly, especially in volatile markets. For example, consider a scenario where a company's stock initially trades at $100 per share at IPO but plunges to $70 shortly afterward. That's a 30% decline that can trigger lawsuits from shareholders alleging misrepresentation or inadequate disclosure.

Cases involving Peloton, WeWork, Uber, Rivian, Snapchat, and DoorDash underscore how prevalent securities litigation is shortly after IPOs. This is precisely why having a robust Directors & Officers (D&O) insurance policy becomes indispensable.

Understanding D&O Coverage

Directors & Officers insurance protects individual directors, officers, and the corporate entity against claims made by shareholders and other third parties. Coverage for publicly traded companies is categorized as follows:

• Side A Protects individual directors and officers from personal financial loss.
• Side B Covers the company when it indemnifies its directors and officers.
• Side C Specifically covers the entity itself against securities claims.

When transitioning from private to public, it's crucial to understand that Side C coverage narrows significantly—public companies are generally covered only for securities class actions rather than the broader protections private companies enjoy.

Adjusting Your Insurance for IPO

The journey toward an IPO demands meticulous insurance planning. Companies typically must increase their coverage limits substantially. A private company might have $5 to $10 million in coverage limits, but after going public, those limits often jump to $30 million or more. Retentions (deductibles) also rise sharply, typically ranging from $1 million to $2.5 million post-IPO.

This heightened exposure stems partly from the strict liability companies face during their first three years post-IPO. The legal threshold for securities lawsuits during this "prospectus liability" period is notably lower, making it easier for plaintiffs to initiate and sustain litigation.

Common Pitfalls to Avoid

One of the biggest mistakes companies make is underestimating how early insurance preparations must start. Ideally, businesses should engage their insurance broker as soon as they file their initial registration statement (Form S-1) with the SEC. Delays in planning can result in inadequate coverage, excessive premiums, or coverage gaps.

The Flow Advantage

At Flow Specialty Insurance, our experienced team guides companies step-by-step through the IPO insurance process:

• Early Preparation Reviewing private company policies, developing strategic insurance plans tailored for the public market.
• Detailed Underwriting Meetings Ensuring underwriters fully understand the company's risk profile to achieve optimal coverage and competitive pricing.
• Customized Coverage Structures Crafting tailored insurance towers that include dedicated Side A coverage to protect individual directors' and officers' personal assets.

Beyond IPO Coverage

Beyond the IPO itself, we ensure continuity of coverage through carefully managed policy transitions, including extending reporting periods for private company policies and launching comprehensive public company programs. Our goal is to make this critical transition seamless, allowing company leaders to focus confidently on their business growth.

At Flow Specialty Insurance, we don't just provide coverage—we deliver peace of mind. If you or your clients are considering going public, let us help navigate this complex journey.

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