Managing Insurance Coverage During Mergers & Acquisitions

Below is an excerpt from a white paper discussing managing errors & omissions liability insurance during mergers & acquisitions. Written by Axis Insurance Services Principal and CEO Mike W. Smith, he specializes in harder to place business and in mergers and acquisitions. As a former practicing CPA with Coopers & Lybrand and then Price Waterhouse, he audited many of the country’s largest insurance companies and was actively involved in the M&A business.

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In today’s business environment, corporate America has experienced much consolidation. Merger and acquisition activity is at an all-time high. With each instance, there’s always some level of company due diligence which takes place prior to and during a corporate merger or acquisition. However, there are important facets other than EBITDA or Cash Flow, like insurance coverage, which tend to be overlooked. This paper addresses specifically Professional and Management Liability issues to consider in a merger or acquisition. For any business or professional services firm with a professional or management liability insurance policy in place, not being aware of the coverage implications during a merger or acquisition can impact both companies as they move forward and could lead to disastrous results.

M&A activity is rampant today in almost every sector. As companies are performing their due diligence, evaluating their EBITDA and cash flows, they often omit the insurance discussion until it is too late. For any business or professional services firm with a professional or management liability insurance policy in place, not being aware of the coverage implications during a merger or acquisition can impact both companies as they move forward. Lack of proper insurance can lead to uncovered claims and uncovered indemnifications that were not contemplated in the original merger transaction. In this document we have highlighted several issues that need to be considered when evaluating insurance issues in an M&A transaction.

M&A TRANSITION INSURANCE CHECKLIST
When a merger or acquisition is in progress, both companies involved in the transaction should consider reviewing or updating the following:

Schedule of Insurance – You should prepare a schedule of insurance outlining all insurances, effective dates, expiration dates, limits, deductibles, premium and who is/is not insured under the policies. This will help both parties understand what is currently covered and not covered.

Adequacy of Limits and Coverages – When merging two entities, often there are philosophical differences on insurance. It is important to determine if the limits, deductibles and annual costs of separate limits are still appropriate for a larger combined entity. Further, the systems and controls of a new entity might be different than the separate entities and therefore in need of evaluation. You should be prepared to see higher deductibles for larger consolidated companies.

Contracts and Agreements – A schedule of all third party contracts should be prepared. This should include, at a minimum, contracts with vendors, third parties, cloud providers, independent contractors, employees or others.
The contracts or agreements which exist in both companies must be investigated and updated to reflect the compliance standards of the new entity. Each party may be subject to third party agreements which may have terms and conditions that can cause issues, such as non-transferability, extended reporting and contractual liability, additional insured status and even ownership of client lists.These contracts can be between vendors, third parties, independent contractors, employees or others. Most contracts are not transferable. Additionally, both companies may have contracts with the same third party vendors and therefore will need to be evaluated.

Employment Practices and Contracts – In most cases, both the old and new company will have different policies and procedures as it relates to employment related matters. Certain employees…

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