An often overlooked area of insurance counseling is the tremendous value that insurance — both old and new—can add to transactions, including mergers and acquisitions. Insurance is, or should be, a key concern whenever companies merge, one company acquires another company or one company acquires another’s assets. How both current and historical insurance coverage programs for the two companies fit together to provide the going concern the maximum protection from known and unknown risks should be considered an integral part of every deal.
Unfortunately, in many instances the insurance aspects of the deal are almost an after thought. Acquiring companies frequently lack the experience to assess the target company's risk exposures and gauge the adequacy of the insurance coverage provided by unfamiliar insurance programs. M&A transactions may include indemnities for which coverage is assumed without adequate investigation. Such provisions may trigger concerns about the survival of coverage, access to such coverage and the need to report circumstances to preserve coverage under expiring policies.
Reed Smith possesses expertise in the insurance aspects of transactions that no other firm doing this kind of deal can match. Our insurance lawyers understand the risks of liability and loss confronted by our clients in many industries, notably life sciences and financial services, enabling Reed Smith to analyze liabilities and available insurance coverage in depth.
Insurance Reviews/Insurance Due Diligence
The first step in this process is a thorough insurance review or due diligence, which should include:
- Analysis of the available insurance policies, both current and historic. With decades of experience, we are adept at not only analyzing policies but also finding missing policies. In addition to the client's or target’s own policies, coverage may be available as an additional insured under policies issued by others. The client may have contractual rights to indemnity from others, and a comprehensive review may include not only an assessment of those rights, but inquiry into whether those obligations are backed up by insurance.
- Analysis of the potential liabilities that may come with the acquisition. Reed Smith lawyers have experience in performing risk assessments for clients, which can be especially valuable for a client acquiring unfamiliar operations. Exposures include both first-party loss and third-party liability. We can look at common risks associated with the new operations, where those operations are located, risks particular to the client's industry and operations, the client's own loss experience, and emerging liability issues. Again, the broad scope of experience and practice of Reed Smith lawyers is a resource possessed by few — if any — firms with a policyholder coverage practice. The client's operations may also involve contractual obligations to indemnify and/or insure others.
- Matching of the available insurance policies with the potential liabilities to identify gaps in coverage--uncovered and under-insured exposures. In this connection, it is critical to be cognizant of the effects of “Assignment” clauses, which are present in most insurance policies and frequently can become a trap for the unwary
With this information, the transaction may need to be modified by, for example, adding indemnities or purchasing additional insurance. Particular attention must be paid to ensure the access to insurance is protected. In some cases, the structure of the deal may have to be changed in order to ensure that access to the insurance policies is preserved. Fundamental changes in a business can impact not only whether coverage continues going forward, but whether coverage will exist under pre-transaction policies for claims first made after the transaction.