Business insurance and considerations with Mergers and Acquisitions

Business Mergers and Acquisitions (M&A) are when two businesses become one entity, operating as the same company. M&As happen for several reasons such as business growth and changes, competition, synergies or for tax purposes.

There are many risks involved with M&As, and if you aren't using a specialist M&A firm to manage the transaction and are managing the transition yourself, you will need to understand the risks and complications that come with this. 

As well as looking at the legalities and contractual agreements, you must review the business insurance to see where the gaps and exposures are. This will help determine whether you need to update or purchase new insurance to make sure your business and Directors are protected from any risks.

What are the risks with Mergers and Acquisitions?

To understand where and what the risks are, you will need to perform a due diligence process by reviewing yours and the seller's existing cover. This will help you to understand where the risks are and what insurances you will need to update or purchase to mitigate this. 

The most important areas you will need to check are:

• Review the seller's claims history; this gives you important insight into how the business has been operating and where potential gaps are

• Ensure all of the seller's existing insurance policies have suitable cover to protect from its main risks

• Check all existing business insurance policies haven't expired and are up to date

• Review existing contracts to look for any indemnities or cover that may have been presented to the seller from other parties

• Check any new operations that have been added or moved to new locations are protected. You may need to purchase new cover or old policies updated to make sure these operations are insured

• Address any differences in the way the seller reported claims with the way your business reports claims

• Address any circumstances where any claims raised would fall under the seller's cover

The importance of Directors and Officers Insurance

Some insurance covers are more crucial than others, it's not just the business insurance you need to cover, you will also need to check what insurances you have in place that protect your Directors and Officers of the business.

You will need to take extra care around the Directors and Officers cover (D&O). Your D&O cover must be valid to protect you from the costs associates with any legal action, investigation or other claims against you. The D&O policy needs to be thoroughly examined before the completion of the merger or acquisition.

D&O policies are usually arranged on a ‘claims made’ basis, this means the insurance does not cover the company after the policy expires. If a claim is made against the seller after the seller’s D&O policy expires, the seller will be responsible for paying any charges. 

Insurers can offer a run-off policy; this can extend the D&O cover reporting period for any claims that arise after the seller's policy expires. 

The cover will protect the present, past and future Executives of the company, some policies even cover non-executive directors which means when the transition is over, the Directors will be covered.

You can find out how our Directors and Officers insurance can protect you here.

How to tackle the risks

Once you have completed the due diligence process, you will have established where the risks, gaps and the uncovered liabilities are that will require purchasing or updating business insurances. You will need to check when these insurances expire to ensure you're covered at all times to mitigate any risks.

Leave plenty of time for the insurers to update or put together a new policy to protect your business before existing cover expires and to ensure that new insurances are in place before the M&A is complete. 

Although reviewing the insurances can be stressful and complicated, there are lots of business insurance options available to your business to protect it from any of the risks mentioned. 

If you need any further advice or would like a review of your insurances, speak to one of our experts by contacting us here.