Mergers and Acquisitions Due diligence
Due diligence is the heart of the M&A process. The failure to identify an exposure in the M&A process can result in significant financial harm to a client. While legal and financial analysis is critical to the M&A due diligence review, the insurance review is just as important. Issues uncovered during the insurance review can reveal operational exposures that can impact the parameters of the proposed transaction. To rely on a broker review even by a big letter broker is not enough. There is a certain level of sophistication that is needed in an M&A due diligence review that a broker can just not provide.
The following are examples of critical issues identified in M&A insurance reviews we have undertaken for our clients:
A review of the target company’s loss runs revealed a seemingly innocuous claim showing no payment or reserve. However, after bringing this to the attention of the M&A legal analysist it was determined that this was related to an action disclosed by the target company. Upon further investigation it was found that the loss run reflected no payment or reserve for the claim as the insurance carrier had reserved their rights as to coverage. This claim represented a potential $20mm uninsured post-close exposure to the acquiring company that would not have been discovered had the issue not been raised during the insurance review process.
A review of a target company’s coverage revealed a coverage gap created by a change in the retroactive date on a claims-made policy. This issue identified, M&A counsel was able to draft a warranty and indemnity as respects potential post-close claims.
A audit of a target company’s third-party contracts as respects its indemnity and insurance obligations revealed that in a number of instances the target company’s insurance did not satisfy the insurance obligations in the contract. Moreover, the target company had undertaken to indemnify for losses of the type for which it had no insurance at all. These contractual breaches and uninsured exposures were pointed out to M&A counsel.
In addition to providing pre-acquisition due diligence, we provide post-acquisition guidance on insurance issues such as insurance program integration, and tail coverage for claims made policies. We also have a number of partners that provide transactional representation and warranty coverage. We can assist the client with the underwriting process and provide comparisons on rep and warranty coverage options. Let our firm help your M&A clients with their pre-acquisition and provide post-acquisition needs.