Everyone who has participated in a merger or an acquisition (M&A) knows that the due diligence part of the deal is quite a process. There are innumerable information requests from a team of folks responsible for spending hours upon hours perusing important documents. As with many business transactions, there are a lot of risks inherent in joining up with another firm, as both sides are bound to bring along a bit of baggage. Thus, identifying those risks and determining whether and to what extent they can be mitigated is all part of the due diligence phase. One of many matters that must be examined relates to the target company’s liabilities and the insurance available to cover those. Here are key things to consider with respect to insurance due diligence:
Identify Existing Liabilities and Potential Exposures
This is obviously the most important step and an ongoing facet throughout the due diligence investigation. Some of a company’s liabilities may be glaringly obvious, but others may not be as readily apparent and are only discovered with adequate digging. Companies subjected to due diligence must be forthcoming with regard to existing liabilities and help the due diligence team identify any potential exposures as well. In some cases, insurance coverage may be in place to cover these existing or potential issues, but if not, this could create a big problem preventing the deal from going forward.
Evaluate Coverage or Lack Thereof
As mentioned, there may already be insurance coverage in place for any risky aspects of a business. However, just because insurance coverage has been obtained, this does not mean that the policy will be completely satisfactory. During due diligence, the policy and any related documentation will need to be reviewed to ensure the premiums are fair and the extent of coverage is adequate. Unfortunately, many company leaders do not read the fine print in the insurance policies, and they may not even realize that there are a ton of exceptions that would not be covered as anticipated.
Review Prior and Pending Insurance Claims
In addition to examining liability and insurance coverage, the due diligence team will want to review any prior and pending insurance claims. This will help the team to understand the sort of issues that have popped up that necessitated insurance. And, this will also give some insight into how the insurance company handled the particular issues, or perhaps did not handle them. Plus, the claims processes will reveal potential sources of litigation and can help the team to understand other possible costs and expenditures.
Examine the Impact of the Transaction on Insurance Coverage
In some cases, a company’s insurance coverage will be modified or even canceled when there are certain significant changes to the company or some other situation occurs. Sometimes, a change in the ownership or company structure may be the type of change that triggers these insurance coverage modifications. This is one of several reasons that the policy must be closely reviewed prior to the closing of the deal. It may be necessary to obtain an entirely new policy or risk not being covered once everything closes.
