Despite exhaustive due diligence and careful planning ahead of a merger or acquisition, unforeseen complications may emerge post-closing. Issues such as undetected environmental contamination, disgruntled shareholders, fraud and unpaid liabilities may surface later, some of which are uninsurable. Whether you’re the buyer or seller in the transaction, engage with an experienced insurance advisor before finalizing the purchase or sale agreement.
Many individuals sell their businesses to alleviate the considerable liabilities associated with ownership and management. Once the sale is finalized, some sellers may feel relieved and cancel the insurance policies, while others may assume a seamless transfer of policy rights to the new owner. However, such assumptions are seldom acceptable to insurance companies.
Closing Risks to Consider
Most insurance policies address merger & acquisition (M&A) activity. A common clause stipulates that if more than 25% of the stock shares are transferred, the policy is immediately canceled as of the transaction date. At a minimum, policies require the insured party to inform the carrier upon a triggering event, allowing the carrier to adjust premiums and modify policy terms. Providing a 60-day notice, your insurance broker can review and, if necessary, pre-negotiate terms with the carrier to facilitate a seamless transition.
As a seller, allowing policies to be canceled at closing poses significant risks. Consider a scenario where shareholders dispute the sale or merger, alleging unfair pricing, self-serving processes or unexplored opportunities. Such disputes can arise on both sides of the transaction table.
Directors & Officers (D&O) Liability
Liability for directors and officers typically carries a six-year statute of limitations. While the acquiring company is generally responsible for actions from the transaction date going forward, sellers often purchase a “run-off” or “tail” policy to protect their directors and officers from acts that occurred before the sale. Optimizing for a six-year run-off policy aligns with the statute of limitations duration.
For transactions on the horizon, negotiate the run-off well in advance to leverage the most favorable terms. Additionally, before any stock or M&A transaction, review your D&O insurance limits with an eye on the additional risk you’re undertaking.
We’re Here to Help
In all areas of M&A, meticulous planning is paramount, with insurance matters being no exception. Connect with a member of our team to ensure comprehensive coverage and proactive risk mitigation throughout the entire merger and acquisition process.