Risk Transfer – We Have You Covered.
In a situation where one company merges with another to become a single entity, or when one company is acquired by another, it is imperative that both parties review and update their insurance coverages to ensure all risks are accounted for. BIG details the steps your company should take to prepare for a merger or acquisition and defines two types of insurance that may help your company close the deal with confidence.
Perform an Insurance Review
To make sure your company is not blindsided by surprise liabilities after a merger or acquisition transaction, perform the following review:
- Ensure all of the seller’s existing policies have sufficient limits and adequate coverage for its main risks.
- Determine whether the seller has any potential liabilities that are not insured. To do this, review the seller’s claims history and existing policies.
- Take note of the seller’s existing contracts guaranteeing indemnification, or agreeing to additional insured status for suppliers, customers or corporate affiliates of the seller.
- Review existing contracts to look for any indemnities or insurance that may have been presented to the seller from other parties.
- Pinpoint new exposures that could pop up if operations are added or moved to locations unfamiliar to your company. New coverages may need to be purchased or old policies may need to be updated to make sure these operations are covered.
- Address any circumstances or conditions that could generate claims that would fall under the seller’s coverage.
- Address any differences in the way the seller reported claims with the way the buyer reports claims.
Additional uncovered liabilities are often discovered in the due diligence process, and the purchase price can be adjusted accordingly or the buyer granted applicable indemnification.
Representations and Warranties Insurance
During a merger or acquisition, certain discrepancies may appear in the way each company has represented itself. These inaccuracies could cause significant liabilities after closing, and those liabilities may not be covered by general liability policies. If indemnification hasn’t been promised, specialty insurance should be considered to cover these potential risks. Representations and warranties insurance protects buyers and sellers of a company against any inaccuracies made in representations and warranties.
D&O Run-off Coverage
If you have a directors and officers (D&O) policy, you know that it protects you from the costs associated with any lawsuits, investigations or other claims brought against you. In a merger or acquisition scenario, the D&O coverage of both entities needs to be examined prior to the completion of the transaction to ensure gaps in coverage will not exist.
D&O policies are typically structured as “claims made,” which means the insurance does not cover the company after the policy expires. This means that if a claim is filed against the seller after the seller’s D&O policy expiration date, the seller will be responsible for paying any charges in full. Depending on the specific contract details, this could mean that the buyer is responsible for footing the bill.
Run-off insurance provides extended D&O coverage (for a selected time period) for any claims that arise after the seller’s policy expires. It should be secured prior to the merger or acquisition transaction closing.
Contact your Bellwether Insurance Group representative at (954) 800-6400 to discuss how you can implement a program to assist you in managing risk transfer.