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Some of the most important services we can offer you take place at times of major changes in your business. Mergers, acquisitions and divestitures are major transactions with many important details that must be attended to, in any size deal. Often overlooked is the way these transactions can affect your insurance program
The professionals you’ll work with most in these transactions are your attorneys, accountants and bankers. Remember, though, that insurance policies are a significant asset class, and they are usually poorly understood and often overlooked by these folks. Insurance professionals are an important professional resource, and we can help you protect yourself when making such deals.
When contemplating these transactions, and especially when considering an acquisition or merger with another organization, step one for us will be to ask your negotiating partners to provide current and historical insurance policies and loss history data. This can often be more complex than it might seem, especially when your target is or was a subsidiary or branch of a larger entity. In such cases applicable coverage might be provided under multiple insurance programs: its own program maintained by the subsidiary or branch that is your target, its parent’s program, and possibly those of additional companies that were previously part of its corporate history.
We’ll want to get as much of this information as soon as possible. Once in hand, we’ll start by analyzing the policies and information provided. There are a number of specific areas we’ll be looking into. The list is long, but some of the most important items we’ll look at would include:
• Are any liability policies claims-made or occurrence based? For any claims-made policies, have any notices of circumstances or potential claims been given? How much of an extended reporting period is included with each policy; will it be worthwhile or necessary to purchase an additional extended reporting period, extended discovery period, or even a special policy to cover new claims that arise from past pre-transaction activities?
• Are there any loss sensitive plans, retrospective premium programs, high deductibles or other alternative financing plans? Do we have the plan documents that should go along with the insurance policy itself for these plans?
• What has the claims experience been within these plans? Have any plans for any years made any progress toward reaching any applicable maximums on retrospective or deductible plans? Who will be responsible for future premium adjustments arising from these plans?
• Are there claims that have been made against any policies that might have eroded or exhausted limits?
• Are there any unusual or highly specialized policies in the program? Are there any policies written by excess or surplus lines (non admitted) insurance companies? Why?
• Do any policies have any unusual exclusions or limitations? These are sometimes added by insurance companies in response to extreme or unusual exposures or claims, and could be a red flag pointing to undisclosed liabilities.
• Is any part of the historical insurance program with insolvent insurance companies, or companies whose long-term financial viability is in doubt?
• What has the overall claims history been like? How does it compare to norms within that industry? What is the workers compensation experience modification? Poor experience can often be a reliable indicator of management inattention or indifference, which would be a clue to look for other problems elsewhere.
Other questions will likely arise from this work. Some examples:
• Do we have access to the seller’s insurance program for recent years? Who handles late arriving claims for years prior to the deal? If we ever makes claims under the seller’s policies, who pays any resulting deductibles or retrospective premiums?
• If the target’s insurance program was claims-made, should your company give notice of any potential claims before the end of the current policy period?
• Are there any premium refunds or adjustments due? Bear in mind that while it may be relatively easy to agree to pay or receive deductibles or retrospective premiums, as a stranger to the seller’s insurance program, we’ll probably never know with certainty whether any premium or cost allocation is fair or not.
The next challenge we’ll face is to see how the newly acquired organization will fit into your existing insurance program.
• Are you merging with or acquiring an entity with operations the same or similar to yours? That might be an easier insurance match and allow the target to fit easily into your insurance program. Is the target in a different field or business? That can present complications; it might be necessary to approach an entirely different set of underwriters to obtain coverage.
• Can we expect to obtain assignment of any policies currently in force at the target company? Will underwriters agree to continue their policies after the deal is done? When do those policies expire; how much time do we have to plan for renewal or replacement coverage?
• What kind of claims activity can we expect? Are we likely to see many nuisance claims with lots of defense costs but few claim payments, are we concerned with catastrophic or “bet the company” size risks, or something in the middle? What kind of impact will this have on our current insurance program?
• And related, what will happen to our workers compensation experience modification? Rating bureau rules generally require all of the target’s prior premium and claim experience be melded into our modification on the date the deal closes; will this be a good or bad thing for us?
• How well can we expect the target organization to fit into our existing loss prevention and claims management programs?
As you can see, handling the transition of an insurance program, even in relatively smaller transactions, can involve a lot of work. Its unfortunately not uncommon that we’ll learn of an acquisition close to closing or sometimes only after the deal is done.
When that happens we’ll need to take quick action to minimize any negative effects on your program and assure an orderly assumption of the new operation. One of the first things we’ll want to do is to find any longtime employees of the company you acquired who were involved in or knowledgeable about any relevant insurance programs. We’ll want to do this quickly, before any planned downsizing and before such individuals might leave of their own volition. Once such individuals are identified, we’ll want to debrief them on where any old policies, claims files or the like might be found, details of the history of the insurance program, names of prior brokers or insurers, and any other relevant questions. We’ll want to have the same types of conversations wherever possible with prior brokers and possibly prior insurance companies
Remember, unless you make any arrangements to the contrary, if you’re sued for any alleged pre-transaction liabilities of the company acquired, you’ll want to push those claims back to the seller. We must send notice to all of that company’s historic insurance companies that you have found. You should also send a letter to any prior owner of the company you acquired – not just the company that sold it to you – and demand that they put all of their relevant insurance companies on notice of these claims immediately. This can sometimes be an issue, since it might put your company in competition with the prior owners of the acquired company for insurance assets. Where two companies are claiming under the same policies, there may be no problem if the policies do not have aggregate limits applicable to the claims. However, where there are applicable aggregate limits, assume you are operating under a “first come, first served” rule.
To summarize, remember that the insurance program of any targeted acquisition or merger partner is an asset. You’ll want a knowledgeable team to perfect your interest in those assets; that’s where we can help you. Please involve us as early as possible.