- Some insurance policies require the policyholder company to provide the insurance carrier with notice of any corporate transaction that will result in a change in ownership or control. If a company is contemplating a merger, acquisition or divestiture, it is important that all insurance policies be reviewed to make sure that requirements in the insurance policy are met and determine if the contemplated corporate transaction impacts the coverage in the policies.
- In an acquisition, the buyer should review all of the seller’s insurance policies, both historic and current. That review should include the amount of limits, the exhaustion of limits, solvency of the coverage, scope of coverage and policy provisions that may impact the availability of coverage. Historic policies, particularly those written on an occurrence basis, are valuable for providing coverage for long-tail claims. Similarly, the buyer should thoroughly review the seller’s liabilities, as well as review the seller’s historic and pending claims, and fully understand the seller’s risk profile. Loss runs should be obtained from either the seller, the seller’s broker and/or the seller’s insurers.
- When dealing with an acquisition or divestiture, the buyer and seller should consider purchasing Representation and Warranty insurance to protect themselves from losses resulting from unintentional and unknown breaches of any representations and warranties that the seller provided as a part of the deal.
- In an acquisition, buyers should review the seller’s historic insurance policies to determine whether those policies contain anti-assignment provisions. In most states, insurance policies automatically transfer from the seller to the buyer by operation of law in a state’s merger statute. However, in a few states (Hawaii and Oregon), consent from an insurance carrier is necessary to transfer a policy. Also, the buyer should obtain complete copies of all of the seller’s insurance policies and preserve them by scanning and saving them electronically, as well as preserving the originals in a fire-proof cabinet.
- In negotiating contracts, one party often asks to be named as an “additional insured” or the other party’s insurance. Those parties added as an additional insured should review the policies and determine the scope of the coverage available.
- With a merger, acquisition or other transaction event, policyholders should consider providing a “Notice of Circumstance” to those insurance carriers whose policies are about to expire. Policyholders should also consider purchases a “Tail Policy” which is an insurance policy that provides the policyholder with coverage for claims involving wrongful acts that occurred before the transaction, but are not made until several years after the transaction.
Companies that understand and appreciate the value of insurance in the corporate transaction are better protected in the long run.