11 October 2019
The insurance pitfalls of Mergers and Acquisitions
‘CAVEAT EMPTOR’ or ‘Let the buyer beware’ is a doctrine of British Sales Contracts.
It is no different when it comes to mergers and acquisitions. Yet, while we carefully carry out due diligence with our accountants, lawyers and other professionals, all too often, we leave the insurance and risk management discussion with our broker until the last minute.
This is a big mistake. Insurance has a habit of being that seemingly low priority item which causes a major problem down the line. A problem which, had it been tackled earlier, would have been entirely preventable. Insurance can also be the hero that unblocks a faltering deal.
Clearly identify the risks
Whatever the time pressures – and often they are intense – don’t short cut due diligence with your broker. Getting it right takes time – weeks rather than days. The imperative must be to avoid liabilities surfacing after a sale or merger, which are not covered by adequate insurance.
To achieve this, there needs to be a rigorous assessment of the seller or partner’s liability exposures and insurance cover. Review both their current and historic policies to ensure key risks are covered and excesses, liability limits and sums insured are adequate. Check contracts for indemnities on risk transfer that may have been conceded in negotiation with suppliers and customers. Equally, look for concessions that may be available to the company.
What claims do they have in the pipeline and have their insurers been informed? Will their policies terminate immediately the deal is signed, or is there a ‘run-off’ period where claims related to the period prior to the deal will still be accepted? If so, for how long? This is particularly important for D&O, Employment Practice Liability, Fiduciary Liability, Errors & Omissions, Cyber, Product and Environmental Liability, etc.
Specialist insurance to mitigate deal-breaking issues
At the same time talk to your broker about insuring the risks that may arise as a result of the deal. Many of these are likely to fall outside typical business insurance terms.
Warranty & Indemnity insurance can cover either the buyer or the seller for a loss arising from a breach of the deal agreement. It means sellers can get a clean exit, avoiding the need for an escrow account. While buyers can be shielded if the seller is reluctant to give a guarantee, or if there is doubt over the seller’s ability to fulfil a promise.
Tax Liability Insurance can protect against potential tax risks unearthed by the due diligence. For example, uncertainty over the application of tax law which might lead to a large tax bill possibly with interest and penalties.
Litigation Buyout Insurance enables liabilities which may arise from current or anticipated litigation to be ring-fenced and crystallised as a quantifiable insurance cost. It is particularly useful where an unresolved dispute might otherwise prevent the deal proceeding or would have a significant impact on the purchase price. This principle can be adapted to cover matters ranging from employment issues through to intellectual property disputes.
Yvette Payne, Commercial Division Manager, comments:
“The risk management issues in mergers or acquisitions can be both complex and crucial. They need to be tackled with your broker at an early stage in the process to avoid nasty surprises when it’s too late. Centor has a specialist team who can offer expert advice and help guide you safely through the pitfalls.”
For more information, get in touch with:
020 7330 8735