M&A, Bankruptcy, and Insurance (Part 2)

Page 5 of 8

Other M&A insurance coverage issues

Who is an insured (CGL)
The insured under a Commercial General Liability policy could be:

Your insured client

Anyone in the Who is Insured section of the policy

A newly acquired or formed company, other than a partnership, joint venture, or LLC: Automatic coverage stops on the 90th day from the acquisition date. Note that confusion could exist as to the actual acquisition date.

Who is an insured (BAP)
The Business Auto policy does not contain any automatic coverage for newly acquired organizations. If vehicles are acquired due to the entity acquisition and cars are not re-titled prior to actual acquisition date, the BAP will not respond.

The old policy may not respond to the physical damage issues if ownership has changed as there is no more insurable interest.

Who is an insured (EPL)
The insured under an Employment Practices Liability policy may be:

Newly acquired companies if the Entity owns 50% or more of the acquired companies

Newly created subsidiaries (automatic coverage)

Make sure there is a time period (at least 30 days, though 60 or 90 days is preferred) where automatic coverage is provided and information is forwarded to underwriters for addition to the policy.

Other EPL coverage issues include:

Exclusions

Change of control limitation: This is almost always included with similar language as the D&O policy

Foreign acquisition: This may not be covered so check definition in that territory

Change in operations: Coverage may cease when there is financial inability to pay, such as in bankruptcy, insolvency, receivership, or liquidation

Plant / facility closure exclusion

Downsizing / reorganization: Percentage of all employees or just one operation? Over what period of time?

Management buyout exclusion
Many policies do not contain an exclusion for management buyout by stockholders claiming financial injury due to sale of the company or substantial assets to the directors and officers.
If it is included, try to negotiate an exception if stock is purchased at or above the prevailing market price, based on independent evaluation by an investment banking organization.

Fiduciary liability issues
Fiduciary liability is treated much the same way as D&O coverage, as run-off coverage from the selling company for a minimum of 5 years.

You should check the acquiring company's coverage terms and conditions for applicable exclusions and conditions of coverage. Immediately add plans that are rolled into the acquiring company's control. Broadening the language may be negotiated prior to the acquisition date.

Crime coverage issues
Most employee dishonesty policies contain language that provides extremely limited coverage for newly acquired organizations. Thirty days is often the maximum automatic coverage.

An ERISA bond may need to be reviewed for plan name and adequacy of limit to comply with the 10% / $500,000 maximum rule per plan.

Attempt to obtain at least a 90-day automatic coverage area.

Environmental coverage issues
Who can be held liable for environmental damage or loss under EPA laws? The liable parties may include the:

Owner / operator of site from which release took place

Owner / operator of site at time disposal took place

Owner / operator of site at time the environmental impairment occurred

Person or organization who arranged disposal

And these are losses that can be incurred:

Any governmental agency's cost to repair the environmental impairment

Damages to third parties - bodily injury and physical disability

Defense costs

Damage to natural resources

Federal environmental laws (from cradle to grave) require current owner / operator to seek prior owner / operator and obtain any assets possible from old owner / operator so these can be added to the incurred costs list.

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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.