M&A, Bankruptcy, and Insurance (Part 1)

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Acquisition risk exposures When looking at acquisition risk exposures, most areas affect both buyer and seller. Evaluate and manage risk There are several ways to evaluate and manage acquisition risk. Assess known liabilities An example of a known liability could be worker's compensation losses under self-insured or retrospective rating plans. Assess possible unknown liabilities Unknown liabilities could include items such as the following: Long-tail claims over years or decades after the acquisition or merger Existing products liability and completed operations Incurred but not reported worker's compensation losses D&O litigation Consider who might bring suits against directors and officers, such as: Shareholders Class action or derivative Customers / clients Government regulatory authorities Consider what are the anti-trust exposures with the acquisition. Transfer of intellectual property rights Don't forget about intellectual property rights. Who is the legal owner? Who is the registered owner? Have the rights of use been assigned? The issue of intellectual property and use of patents and registered marks is reviewed in some audits. In one audit that comes to mind, it was discovered that the actual registered legal owners of three patents was not the insured corporation, but rather one stockholder of the closely held corporation and one officer (non-shareholder). The broker had offered patent infringement coverage and obtained the quote in the name of the corporation (declined by the shareholder), but was unaware of the legal exposure of risk to the "employee" and no sign off was ever documented due to this lack of knowledge. In any circumstance of a patent, always determine the registered and legal owner so that coverage offers are made appropriately. Ask to look at any "right of use" document. Go to the uspto.gov web site and look up the registered owners of the patent. Tax liabilities What are the tax liabilities? Are there taxes incurred by the acquired company but not yet paid? Employee dishonesty There may have been an instance of employee dishonesty that incurred previously and will be discovered post-acquisition. In the area of employee dishonesty, the buyer would be well advised to require selling the company to maintain employee dishonesty insurance beyond the selling date to transfer risk back to the seller's insurance rather than solely into their own crime insurance program. If the selling company had an employee theft situation it often becomes apparent only later when the acquiring company is now in control of the books, record keeping, inventory values, etc. Not only would the seller's employee dishonesty insurance be looked upon to respond, but also the theft may have reduced assets that were previously not disclosed. Therefore, the acquiring company may claim they overpaid for the company due to the failure to disclose, which becomes a D&O suit, for which the selling company should have coverage continuing as well. Employee dishonesty insurance as well as D&O and liability insurance should be required to be maintained for a period of time beyond point of sale. That should be at least 5 years for D&O, liability (including pollution), and at least 3 years for employee dishonesty insurance. Employees There may have been wrongful termination or discrimination when there was a reduction of staff. Also, relocation of staff might have created some lingering issues. Fiduciary liability Was there proper roll over and funding of ERISA benefit plans? Was there proper explanation of benefits and black out periods to employees? Employment Practices Liability Insurance (EPLI) as a claims-made and reported form should also be required to be maintained for at least 2 years beyond selling date. The succeeding company could be held accountable as well as the selling company. Environmental Environmental considerations for acquisition and mergers includes the following: On-site environmental issues - the acquired location(s) Off-site environmental issues- adjacent properties / job sites Known contamination: Is there uncertainty surrounding the cost to clean up a known contaminated site? Unknown contamination: The seller should be required to test for contamination prior to the sale of the company. The buyer should be buying the property and assets, not any contamination that might come with it. Known and unknown contamination: Indemnification should be required from the seller for known and unknown environmental liabilities. This should include personal indemnification from stockholders (private company) and executive officers (both private and public). Review coverage Review current coverage. Review long term insurance history including any past acquisitions. Identify gaps in coverage while still negotiating terms of acquisition or sale. Note that while some courts have upheld the transferability of insurance coverage without such explicit assignment, insurance companies often attempt to deny coverage on the grounds that such assignment is missing. Getting the assignment in the buyer's hands can forestall a costly court battle. Possible problems with coverage are: High deductibles or retentions Aggregate limits that may have been exhausted or reduced Endorsements removing coverage Insolvent carriers at any level of coverage Consider the need for a specific business contract assignment and transfer of insurance polices in negotiating the purchase and sales agreement. Make certain insurance records are recovered, preserved, integrated, and organized. Historical reconstruction over prior decades requires a set of best practices known as "insurance archeology". Setting up a proper system may require hiring an insurance archeologist. Reestablishing insurance information Possible methods of discovering or recovering insurance information includes the following: Purchase escrow closing documents: These may contain schedules of insurance. Find references to third party claims or civil lawsuits Interview former employees Information from former owners internal records Broker information Information on contracts that may have required evidence of insurance Interview additional insureds M&A complicating factors Here are some other factors that may be at play in liability issues in mergers and acquisitions: Consolidation of various computer systems Difference in corporate cultures Management changes - loss of key employees prior to evaluation Loss of key employees Corporate records may have been destroyed As you can see, successor liability is a serious issue and one that must be addressed prior to the sale.

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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.