The clinic acquisition where a cancelled policy changed the leverage

The situation

Stavros noticed the gap on a Tuesday afternoon, reading an insurance schedule his own broker had flagged as needing a second look. An anesthesiologist who had built a chain of clinics across eastern Ontario over a decade, he was used to reading medical liability policies closely enough to catch what was missing from them. This was different territory, a corporate insurance schedule for a clinic group he was in the process of buying, and something about the director and officer coverage did not add up.

The target was a smaller clinic operation near Morrisburg that Stavros was acquiring in a deal worth somewhere between $50 million and $80 million, his first acquisition after years of opening locations from scratch rather than buying an existing one. The seller, Yan, had built the group over fifteen years with a business partner named Ming who had stepped back from an officer role less than a year earlier but remained a minority shareholder. The schedule Stavros was reading showed a director and officer liability policy that appeared current, but a closer read of the renewal history showed a six-month gap the year before, a period when the policy had lapsed and been reinstated under different terms.

That gap mattered because of what happens to director and officer coverage on an acquisition. When a company is sold, the directors and officers who ran it before closing remain personally exposed to claims about decisions they made while in office, sometimes for years afterward. A run-off policy, often called a tail policy, is what protects them, and by extension protects the buyer from being drawn into disputes over the previous owners' conduct. If the underlying coverage had a gap in it, any run-off policy built on top of that history could inherit the same hole.

Stavros brought the schedule to us the next morning, not with a specific legal question but with the instinct of someone who had caught a discrepancy and needed to know how serious it was before he signed anything further.

He had been careful throughout the process, deliberately slower than some of the other clinic operators he knew who had grown through acquisition years earlier and told him, half-joking, that the paperwork was the least important part of buying a business. Stavros had never fully believed that, and the insurance schedule was the first moment in the deal where his caution produced something concrete rather than just peace of mind.

The problem

The six-month lapse turned out to be more than an administrative oversight. Yan's clinic group had switched insurance brokers during a period of cost-cutting, and the new broker had placed a policy that excluded claims arising from conduct during the lapse itself. That meant any decision made by Yan, Ming, or the other directors during that six-month window sat outside coverage entirely, regardless of what policy was in place before or after it.

For Stavros, the exposure was not abstract. A clinic group's directors make decisions about staffing, patient safety protocols, and regulatory compliance that can surface in claims years after the fact. If a claim arose from something decided during the gap, the outgoing directors would have no coverage to respond to it, and depending on how the purchase agreement's indemnities were drafted, the exposure could flow through to the buyer as the successor operator rather than staying with the individuals who made the decisions.

What made the file unusual was how the gap had come to light. Yan's side, aware that a full insurance history review would take time and cost money, had proposed early in the process that the parties simply rely on a standard run-off policy purchased at closing and skip a detailed audit of the prior coverage. It was a reasonable-sounding shortcut that would have saved both sides some diligence expense. Stavros's broker's routine second look was what caught the gap instead, and the fact that Yan's side had actively pushed to skip the review that would have found it earlier became difficult for them to explain once we raised it.

That early tactical decision, made to save time and cost rather than out of any intent to conceal anything, ended up handing our side the turning point in the negotiation. It was no longer a question of whether a gap existed. It was a question of who should bear the cost of fixing it, and Yan's side was negotiating from a position where they had tried to avoid the very diligence that found the problem.

Yan, when we later discussed it directly through counsel, did not dispute any of this. His account was that the broker switch had been a straightforward cost decision at a time when the clinic group's margins were tight, made without anyone on his side fully appreciating what the new policy's exclusions actually covered. That account was plausible and consistent with everything else we saw in the file, which mattered, because it meant the negotiation could proceed on the basis of an honest mistake rather than a dispute over concealment that would have taken far longer, and cost far more, to resolve.

What we did

1. Verified the coverage gap against the actual policy documents rather than the broker's summary schedule. Summaries can smooth over exclusions that matter enormously in practice. Reading the full policy wording confirmed the exclusion applied exactly as feared, giving us a solid factual basis before raising anything with the other side, and meant we could point to the precise clause rather than a general worry when the conversation with Yan's counsel began.
2. Assessed how the purchase agreement's indemnity provisions would allocate risk from the gap. The draft agreement's indemnity language needed to be checked against this specific exposure, since general indemnities do not always catch a gap this particular. We found the draft would have left Stavros exposed for claims tied to the lapsed period, which reframed the gap from a disclosure issue into a live drafting problem.
3. Raised the gap formally with Yan's counsel, attaching the underlying policy language. Rather than a verbal flag that could be minimized, we put the specific exclusion and its dates in writing, along with our assessment of how it interacted with the proposed indemnities. This made the issue concrete and difficult to negotiate around informally, and it started the cost conversation from a documented fact rather than a disputed impression.
4. Used the earlier proposal to skip the insurance review as context, not as an accusation. We did not frame Yan's side as having tried to hide anything, since nothing suggested bad faith. We simply noted that the shortcut they had proposed was what would have missed the gap, which made their position on cost-sharing harder to hold without ever turning the conversation into one about concealment.
5. Negotiated a dedicated run-off policy priced specifically to cover the lapsed period. A standard tail policy would not have addressed the exclusion. We worked with Stavros's broker to source a policy underwritten with the gap period specifically in mind, closing the exposure directly rather than papering over it with a generic product that looked sufficient on the surface but would not have responded to a claim tied to that specific six-month window.
6. Reached a cost-sharing compromise rather than pushing for a full price reduction. Stavros's initial instinct was to demand the full cost of the new policy come off the purchase price. We advised a split instead, reflecting that the gap was a shared oversight rather than deliberate concealment, which preserved goodwill going into closing without leaving the exposure unaddressed or turning a fixable problem into a standoff.
7. Documented the resolution inside the purchase agreement rather than as a side letter. A side arrangement outside the main agreement can get lost or disputed later. Building the run-off policy requirement and its cost split directly into the closing conditions made it enforceable and visible to both sides' counsel through to signing, rather than resting on an understanding that lived only in correspondence.
8. Confirmed the new policy's effective date lined up exactly with closing, with no second gap in between. A run-off policy that starts a day or a week after the prior coverage ends recreates the same problem it is meant to solve. We required proof of bound coverage effective on closing before releasing funds, rather than accepting a broker's assurance that a policy was in progress.

The outcome

The parties agreed to split the cost of the specially underwritten run-off policy roughly down the middle, with Yan's side covering slightly more given that the gap originated on their watch. Neither side got everything it wanted. Stavros did not get the full price reduction he initially sought, and Yan's side paid more than they had hoped to for a problem they had tried to avoid investigating in the first place. The split was documented as a closing adjustment rather than a separate side payment, which kept it visible in the deal's final accounting instead of becoming a private arrangement that could be disputed later.

The compromise held because it was proportionate to what actually happened. Nobody had acted in bad faith, and treating the gap as a discovered oversight rather than a concealment claim kept the negotiation from becoming adversarial in a way that could have delayed or derailed the closing entirely. Yan's counsel, once the exclusion was laid out in writing, did not seriously contest the finding, which suggested they had reached the same conclusion privately once someone finally looked at the full policy wording rather than the summary.

The acquisition closed on schedule with the new run-off coverage in place. Ming, who was still an officer for part of the gap period before stepping back, is now protected by a policy underwritten specifically to cover that window, closing an exposure that could otherwise have followed a person who had already left any active role in the business. Stavros completed his first acquisition with a coverage issue resolved before it ever became a live claim, and he has since told us he now asks for a full insurance history review, not a summary schedule, on every deal his clinic group considers.

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