Other Acquisition Costs: Insured?

Mergers and acquisitions (M&A) are a common occurrence in the insurance industry, with companies seeking to increase market share, reduce operating costs, or gain a foothold in new geographies or lines of business. During the M&A process, it is crucial to consider the insurance implications to ensure a smooth transition and mitigate risks. This includes aligning insurance plans, reviewing existing policies, and understanding the liabilities assumed by each party.

One important aspect of M&A insurance is representations and warranties (R&W) insurance, also known as merger and acquisition insurance. This type of coverage protects buyers and sellers against inaccuracies or breaches of agreements made during the merger or acquisition process. It provides indemnification, covers defence costs, and extends the time for identifying problems with the acquired business. Additionally, directors and officers (D&O) insurance is essential to protect company leaders from personal liability arising from their professional decisions and actions during M&As.

Another key consideration is workers' compensation insurance, as the premiums can be significantly impacted by the safety practices and claim history of the merging companies. Underwriters will take into account the experience modification rate (X-Mod) of both entities, which could result in higher premiums if one company has a poor safety record.

Overall, understanding the insurance implications of M&As is crucial to avoid unexpected liabilities and ensure a successful transition.

Directors & Officers Liability Insurance

Directors and Officers (D&O) Liability Insurance is a type of insurance coverage that protects individuals serving as directors or officers of a business or organisation from personal losses if they are sued as a result of their role in the company. It also covers the legal fees and other costs the organisation may incur as a result of such a lawsuit.

D&O insurance is intended to protect the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company. The insurance usually protects the company as well, covering legal fees, settlements, and other costs.

D&O insurance claims are paid to cover losses associated with the lawsuit, including legal defence fees. There are three types of D&O insurance coverage, known as Side A, Side B, and Side C.

Side A coverage protects directors and officers when the company refuses to pay or is financially unable to pay for indemnification. In this case, the individual officer is insured, and their personal assets are protected. Side B coverage reimburses the company for legal costs when it does grant indemnification to directors and officers. Under Side C coverage, also called "entity coverage", the corporate entity itself is protected when it is named in a lawsuit along with directors and officers.

D&O insurance is an important consideration for any company with a board of directors or advisory committee, including non-profit organisations. It can help attract and retain qualified directors and executives, as well as potential investors. The cost of D&O insurance varies depending on factors such as company size, industry, risk appetite, financial position, revenue, and claims history.

Representations and Warranties Insurance

R&W Insurance is designed to provide additional flexibility in addressing indemnification obligations. For example, it can reduce or eliminate the need for an escrow by the seller, allowing for a quicker distribution of proceeds and a cleaner exit with fewer contingent liabilities. The use of R&W Insurance has been increasing, with an estimated 20-25% of US private transactions now including it.

R&W Insurance can be purchased as either Seller Side or Buyer Side coverage. Seller Side coverage is a liability policy that covers the seller's liability for claims of breach of representation or warranty. On the other hand, Buyer Side coverage directly compensates the buyer for alleged breaches by the seller. A common variation of Buyer Side coverage also protects the seller by barring the insurance company from pursuing the seller after making a payment to the buyer for a breach.

The key structural elements of an R&W Insurance policy include policy limit or coverage, retention, survival, and exclusions. The pricing of the policy consists of two components: the premium and underwriting fees. The premium is typically 2-3% of the coverage limits, while the underwriting fees range from $15,000 to $50,000.

The process of obtaining R&W Insurance usually involves the buyer or seller approaching an insurance broker to solicit quotes from insurers and completing an application. The insurer will then review key information and documents, such as the parties involved, the coverage amount, the acquisition agreement, and the seller's online data room. The process typically consists of an initial non-binding indication of interest followed by an underwriting/due diligence process that requires an upfront fee. After the insurer's due diligence, specific policy terms, such as the scope of coverage and exclusions, are negotiated.

R&W Insurance offers benefits to both buyers and sellers in a transaction. For sellers, it can reduce or eliminate the need for a traditional indemnity for breach of representations and warranties, lower the amount held in escrow or retained as holdbacks, and provide a cleaner exit with fewer contingent liabilities. Buyers benefit from enhanced protection beyond the negotiated indemnity cap and survival limitations in a purchase agreement. It also distinguishes their bid in a competitive auction process and provides an alternative recourse in public-to-private transactions.

In summary, Representations and Warranties Insurance is a valuable tool in M&A deals, providing financial protection and facilitating a smoother transaction process for both buyers and sellers.

Employee Health & Benefits

Mergers and acquisitions (M&A) are a common occurrence in the insurance industry. Companies may seek to merge with or acquire other businesses to increase their market share, reduce operating costs, or expand their reach. During this process, it is crucial to conduct due diligence on employee benefits to avoid potential pitfalls and ensure a smooth transition.

When one company acquires another, the acquiring company, also known as the parent company, gains control by purchasing more than 50% of the acquired company's business. This process can be voluntary or involuntary, and it often involves integrating the employee benefit programs of both companies. A careful examination of the benefits offered by each company is essential to identify any issues or discrepancies that may arise.

The due diligence process typically begins with the buyer requesting information from the seller, which may include a listing of all employee benefit plans. This covers a range of plans, such as retirement plans, profit-sharing plans, employee stock ownership plans, and welfare benefit plans like accidental death and dismemberment plans, long-term disability plans, and life insurance plans. It is important to review these plans for compliance with laws and regulations, as well as to assess their financial impact on the buyer.

One critical aspect to consider is the seller's group health insurance contracts. The buyer should ensure that these contracts are assignable and compatible with their existing health insurance carrier. Absorbing employees with significant health problems into the buyer's plan can result in serious cost increases. Additionally, it is important to review self-insured medical plans to ensure that existing stop-loss insurance covers all benefits provided under the plan.

Pension plans also require special attention. Due diligence should include an analysis of assets, liabilities, the funded ratio, and fiduciary compliance. In recent years, there has been a trend toward terminating or "de-risking" pensions to protect plan sponsors from market volatility. Defined benefit (DB) pension plans, in particular, come with associated market risks that may deter companies from offering them.

When harmonizing employee benefits during an M&A process, it is essential to start the due diligence process early, engage specialized expertise, and create a benefits timeline that aligns with the overall deal structure. This proactive approach can help identify and mitigate risks, ensuring a smoother transition and a more stable foundation for the newly merged company.

Employment Practices Liability Insurance

EPLI provides protection against employee lawsuits, including claims of wrongful termination, breach of employment contract, negligent evaluation, failure to employ or promote, deprivation of career opportunity, wrongful infliction of emotional distress, mismanagement of employee benefit plans, and more. The policies cover directors and officers, management personnel, and employees as insured.

The cost of EPLI coverage depends on the type of business, the number of employees, and various risk factors such as whether the company has been sued over employment practices in the past. EPLI is typically offered as an endorsement to a Businessowners Policy (BOP) or as stand-alone coverage.

To prevent employee lawsuits, businesses can implement measures such as creating effective hiring and screening programs, educating employees and supervisors on policies and unacceptable behaviours, and documenting steps taken to prevent and resolve employee disputes.

EPLI is becoming more common as employment lawsuits increase, and it is an important consideration for businesses of all sizes to protect themselves from financial and reputational damage.

Workers' Compensation Insurance

In Texas, for instance, workers' compensation insurance is not mandatory for most private employers. However, private employers who contract with government entities are required to provide this coverage for employees working on those projects. Additionally, some contractors may require their subcontractors and independent contractors to have workers' compensation insurance.

Employers who have workers' compensation insurance gain a significant legal protection. This type of insurance shields them from most lawsuits filed by injured employees. Without this insurance, an injured employee can sue their employer over a workplace injury or illness, and the employer cannot argue in court that the employee's or another employee's negligence caused the injury.

There are several ways employers can provide workers' compensation for their employees. They can purchase a workers' compensation policy from a licensed insurance company, self-insure their claims, or join a self-insurance group. It is important to note that buying workers' compensation insurance is only possible if there is at least one employee, who may even be part-time.

Frequently asked questions