What you should know about insurance before your next M&A deal

“When companies merge or when one company is acquired by another, it is imperative that both parties review and update their insurance coverages” says Chris Zito, president of Zito Insurance Agency, Inc.
Smart Business spoke with Zito about the do’s and don’ts of insurance for your next merger or acquisition.

From an insurance perspective, how should you prepare for a merger or acquisition?
M&A deals can be complicated. Extensive research and preparation must be completed prior to the deal’s closing to ensure there are no gaps in insurance coverage. It’s crucial to understand how the buyer’s policy and seller’s policy will respond to a change in control and to secure run-off coverage for any claims made following policy expiration dates. To avoid saddling your combined company with uninsured liabilities, you must be knowledgeable about your insurance policies and how each might be modified.

Are liabilities assumed in an acquisition?
In some cases, during a merger or acquisition, the buyer takes on the liabilities of the acquired company. The extent to which liabilities are taken on, however, is determined by the type of sale.
If the sale is an asset sale, the seller retains possession of the legal entity and its liabilities. In a stock sale, the buyer purchases the selling shareholders’ stock directly, and therefore obtains ownership of the seller’s complete legal entity and all of its accompanying liabilities.

What should be done to ensure your company isn’t blindsided by surprise liabilities after the deal closes?
It’s worth your time to do your due diligence and perform an insurance review. Through this process additional uncovered liabilities are frequently discovered. Here are some items to consider:
  Ensure all the seller’s existing policies have sufficient limits and adequate coverage.
  Determine whether the seller has any potential liabilities that aren’t insured. Review the seller’s claim history and existing policies.
  Take note of the seller’s existing contracts guaranteeing indemnification, or agreeing to additional insured status.
  Review existing contracts to look for any indemnities or insurance that was presented to the seller from other parties.
  Pinpoint new exposures that could pop up if operations are added or moved. New coverage may be needed or old policies may require updating.
  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.

Are there other coverage considerations?
If you have a directors and officers (D&O) policy, the coverage of both entities needs to be examined prior to the completion of the transaction. Run-off insurance to extend D&O coverage (for a selected time period) for any claims that arise after the seller’s policy expires should be secured prior to the merger or acquisition closing.

Another factor to examine is the ‘change in control’ provision, which can be included in many different policies. This clause modifies or voids the coverage if the company is merged into or acquired by another company.

Is there any insurance that should be purchased when a M&A deal takes place?
During a merger or acquisition, discrepancies may appear in the way each company has represented itself. These inaccuracies could cause significant liabilities after closing that may not be covered by general liability policies. If indemnification hasn’t been promised, representations and warranties insurance should be purchased. This type of insurance:
  Removes the worry of not being able to collect on a seller’s promised indemnification.
  Allows a seller to fully and completely leave a business, if desired.
  Helps speed up a business sale.
  Enables the buyer to maintain a good relationship with the seller.
Your agent can assist you in reviewing your policy language and whether you should consider buying representations and warranties insurance.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.