If investors are joining your board after a search fund acquisition, expect them to ask whether the company carries directors and officers (D&O) insurance, and plan to have a policy bound (formally put in force by the carrier) from the closing date. A board seat exposes investor directors to claims about management decisions, and the company's promise to indemnify them is only as good as its cash. Investors' own policies are often written to pay only after yours, so the first question is usually: will your policy respond first? This guide is for search fund CEOs and their investors deciding who the policy should protect, how much limit makes sense for a small company and what to settle before closing.
The short answer
- In a traditional search fund, investors typically hold a majority of the board seats after closing, so there are now outside directors who can be sued over how the company is run.
- Check your investor documents and board term sheet. Some set insurance expectations; where they do not, D&O is still a standard question for the board.
- Confirm the policy's definition of insured persons covers investor-appointed directors, and ask about board observers, who are not always included.
- Watch for wording that hits search funds hard: major shareholder exclusions, insured vs insured exclusions, and limits on claims for money owed under contracts such as an earnout or seller note.
- Bind the policy to start on the closing date, deal with the seller's policy separately, and revisit limits at each renewal and add-on.
Why do search fund investors care so much about D&O?
In the traditional search fund model, a group of investors funds the search and then the acquisition, and after closing they typically hold a majority of the board seats. The board sets strategy; the searcher, now CEO, runs the company and reports to it. That structure is good governance, and it also creates people who can be sued for management decisions: the directors.
Investor directors usually want to know their personal assets are protected. The company's governing documents and any indemnification agreements may promise to cover their legal costs, but that promise depends on the company having cash and being legally allowed to pay. A company servicing acquisition debt may have neither in a crisis. Some investment firms also carry their own policies that cover their people when they sit on outside boards, and those are commonly written to pay only after the portfolio company's indemnity and insurance. So when an investor asks about D&O, the real question is often: will your policy respond first, so mine does not have to?
None of this means investors legally require a policy. Read the investor documents and board term sheet for any insurance commitment, and treat D&O as a board decision to make with your broker.
Who does the policy protect, and who might be left out?
Who counts as an insured is set by the policy's definitions, not by your board seating chart. Read them against your actual governance.
| Person or entity | Usually covered? | What to check |
|---|---|---|
| The CEO and other officers | Usually, as insured persons | Titles and roles match the definition |
| Investor-appointed directors | Usually, as directors of the company | Past, present and future directors are all included |
| Board observers | Not always | Ask whether observers can be added by endorsement |
| The company itself | Usually, through entity coverage | How broad entity coverage is on your form |
| The investors' own funds or firms | Usually not | Whether investors rely on their own coverage, and in what order |
| Subsidiaries and future add-ons | Often, within limits | Acquired subsidiary thresholds and notice windows |
| Employees who are not officers | Sometimes, for some claims | Whether employees are insured persons and for which claims |
A hypothetical example. A search fund closes on a services company. The board has three investor directors, the CEO and one board observer from a lead investor. A year later, a minority co-investor sues over a recapitalization and names everyone in the boardroom, including the observer. The company's D&O policy defends the directors and the CEO, subject to its terms, with the company paying the $25,000 retention (the D&O version of a deductible) because it indemnifies them. But its definition of insured persons does not include observers, so the observer turns to their firm's own coverage. One endorsement request at closing could have avoided the gap.
For the line-level review of a D&O policy, including common exclusions, see the D&O review for new owners.
What kinds of claims does a search fund board face?
When a small company does face a D&O claim, it is often tied to the people around the cap table:
- Investor and minority holder claims. A co-investor who did not join a follow-on round alleges unfair dilution, or a minority holder objects to the price of a later sale.
- Seller claims. A seller with rollover equity, a seller note or an earnout alleges the board ran the business in a way that cut what they were owed.
- Lender claims. A lender alleges that compliance certificates or financial reports were misleading.
- Regulatory investigations. A state or federal agency investigates the business and its leaders. Many forms respond to formal investigations of directors and officers but cover the company itself more narrowly, and fines and penalties are often not covered, so check your form.
- Customer and competitor claims. Allegations of unfair competition or interference with contracts, though many forms exclude or limit these, so check yours.
- Employment claims. Usually handled by employment practices liability insurance (EPLI), not D&O, unless your package combines them; see why ownership changes trigger employee claims.
Be careful with seller and lender disputes. Many private company forms exclude or limit claims for money owed under a contract, such as the earnout, the seller note or the loan itself, though defense of individual directors may still be covered. Ask your broker how the contract exclusion reads on your form.
Defense costs are usually paid inside the D&O limit, so a long fight can use up much of the limit before any settlement. See defense costs inside vs outside limits.
What do the three parts of a D&O policy (Side A, B and C) cover?
Most D&O policies have three parts, often called sides, and all three usually share one limit.
| Part | Plain meaning | Why an investor director cares |
|---|---|---|
| Side A | Pays directors and officers personally when the company cannot or will not indemnify them | Protects personal assets if the company is insolvent or legally barred from paying |
| Side B | Pays the company back when it indemnifies its directors and officers | Keeps an indemnity promise from draining company cash |
| Side C (entity coverage) | Pays when the company itself is named in a covered claim | Useful, but it shares the limit with Sides A and B |
Because all three usually share one limit, a big claim against the company can reduce what is left for individual directors. Two features address that. A priority of payments clause, found in many forms, says individuals get paid before the company. A separate Side A policy adds limit that only individuals can use. Whether a small company needs the second is a board conversation, but investor directors often ask about the first.
Which exclusions matter most when investors own the company?
Two standard exclusions work differently when outside investors own most of the company:
- Major shareholder exclusion. Some private company forms exclude claims brought by owners above a set percentage. If your investors together hold most of the equity, ask whether yours has this, what the threshold is and whether it can be removed or narrowed.
- Insured vs insured exclusion. This removes coverage for claims one insured brings against another, such as the company suing its own director. Investor directors are insureds, so check the exceptions to this exclusion (carve-backs), for example for derivative suits (a shareholder suing on the company's behalf) and for claims by former directors.
Conduct before closing is usually a matter for the seller's or target's existing policy. That policy may go into run-off, meaning it stops covering new conduct but still answers claims about pre-closing acts, or it may carry a tail, which adds time to report claims after it ends. Wording for acquired companies often covers only conduct after the acquisition date, so check the wording. Prior acts and pending litigation dates are covered in the D&O review for new owners. The directors and officers coverage overview explains the basics.
What will investor directors ask before they join the board?
Expect a short list of questions before or right after closing. Having the answers ready shows the board you have thought about their exposure.
- Is there a signed indemnification agreement for each director?
- Does the policy cover past, present and future directors, and can board observers be added?
- Does the policy have a priority of payments clause that pays individuals first?
- Is there a separate Side A limit, or only a shared limit?
- How does the company policy line up with the investor firm's own coverage for its people on outside boards, and which pays first?
- Who gives the carrier notice of add-ons and changes in control, and by when?
- Will the board see the policy summary at the first meeting and at each renewal?
Indemnification agreements are legal documents, so draft them with deal counsel. The insurance questions are ones your broker can help answer from the policy wording.
How much D&O limit does a small search fund company need?
There is no rule of thumb that fits every company, and published averages rarely match a company with a few investors and one operating business. Build the answer from your own facts:
| Factor | Points toward more limit | Points toward less limit |
|---|---|---|
| Cap table | Many investors, minority holders, seller rollover equity | A few aligned investors |
| Debt | Large senior loan, current-pay seller note, tight covenants | Modest leverage |
| Growth plan | Add-ons, new raises, a planned sale | Steady operations |
| Industry | Regulated work, government contracts | Lightly regulated services |
| Package structure | Limit shared with EPLI, fiduciary liability or other parts of a management liability package | Separate limit for D&O |
| Defense costs | Paid inside the limit | Paid outside the limit, where available |
A practical approach is to ask your broker for limit options at a few levels, the premium for each, and how similar private companies are structured. Then ask the board a simple question: if a shareholder dispute and an employment claim landed in the same year, would the limit still protect the directors? For cost drivers, see what D&O insurance costs, and remember a commercial umbrella usually does not sit over D&O.
When should D&O coverage start, and what happens to the seller's policy?
| Stage | What to do |
|---|---|
| Letter of intent to diligence | Ask for the seller's D&O policy, if any, and its change in control wording (what happens to the policy when the company is sold). Start quotes for your own policy. |
| Before closing | Answer the application carefully; it asks about known claims and circumstances. Settle board composition and indemnification agreements with deal counsel. |
| Closing day | Have the policy bound and effective that day. A quote or a submitted application is not coverage. |
| Seller's policy | In a stock deal, many policies go into run-off. A six-year tail is common in acquisitions, and terms are negotiated. |
| First board meeting | Share the policy summary: insureds, limit, retention, exclusions and renewal date. |
| Each renewal and add-on | Revisit limits, check acquired subsidiary terms and report changes in control early. |
See prior acts and tail coverage for the seller's side, and how to report on insurance to your board for the summary format.
Morrow can review your D&O terms against your board structure and request quotes; final terms depend on carrier underwriting.
Keep reading
- New Owner Review: Directors and Officers (D&O) Insurance
- Insurance for Search Funds: The Complete Guide
- Prior Acts and Tail Coverage After an Acquisition: Who Pays?
- How to Report on Insurance to Your Investors and Board
- Why Ownership Changes Trigger Employee Claims (and How EPLI Responds)
- All guides for new business owners
Frequently asked questions
Do search fund investors require D&O insurance?
Not as a legal rule. Many investors who take board seats ask about it, and some investor documents or board term sheets set insurance expectations. Read your documents, and treat the decision as one for the board and your broker.
Are investor directors covered by the company's D&O policy?
Usually, as directors of the company, if the policy's definition of insured persons includes all past, present and future directors. The investors' own funds are usually not insured under your policy. Check the definitions and ask about board observers.
Can claims from our own investors be excluded from the D&O policy?
Some can. Some private company forms have a major shareholder exclusion, which removes claims brought by owners above a set percentage. In a search fund, investors may own most of the company together, so ask whether your form has this exclusion and whether it can be removed or narrowed.
When should our D&O policy start?
It should be bound and effective on the closing date for the company you will run. Get quotes during diligence so terms are settled in time. Until the carrier binds it, a quote or application is not coverage.
Whose policy pays first, ours or our investor's own fund policy?
Usually yours, if the wording lines up. Investment firms often carry coverage for their people on outside boards that is written to pay only after the portfolio company's indemnity and insurance. If your policy's other insurance clause also says it pays only after other coverage, the two clauses can conflict and delay payment. Ask your broker to compare both clauses and settle the order before closing.
References
- Fredrikson and Byron: Search Funds, The Life Cycle
- Stanford Graduate School of Business: A Primer on Search Funds (2026 edition, catalog page)
- Hunton Andrews Kurth (via ABA Business Law Today): Four D&O Coverage Issues to Consider in M&A Transactions
- Hunton Andrews Kurth: Five Things to Know About D&O Insurance Tail Coverage
- Skadden: Insurance Considerations for Directors and Officers of Delaware Entities
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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.