Many are the details surrounding the closing of a company sale or acquisition. Some details seem more important than others. Insurance fine points fall into a special class and deserve particular attention and care. In the hustle and bustle leading up to a closing, CEO’s and CFO’s should not succumb to a default stance of “let the insurance agents handle it.” Insurance is simply too important.
Coordinating coverage at a time of transition, such as a sale, is often like fitting the pieces of an elaborate puzzle together. It takes great care by the parties’ management/ownership, insurance agents and underwriters to make sure that no puzzle pieces fail to fit, or even worse, “turn up missing” when they are needed most.
Insurance details matter whether a sale is a stock sale or merger (either of which may trigger “change of control” termination provisions in the sold company’s policies), or an asset sale (where property and rights transfer from one entity to another).
Fitting the puzzle pieces together can involve careful consideration of many aspects. A company’s management/ownership should seek answers to the following questions well before closing, among others:
- Time Period. Are there any time period gaps, of even a minute, between buyer’s and seller’s coverage?
- Coverage Nature. Have the respective policy natures been taken into account by the insurance advisors? This question becomes especially important when buyer and seller have fundamentally different liability coverage types (“claims made” vs. “occurrence based”). Is a “tail” policy necessary or recommended for the seller’s claims made policy?
- Policy Rights. Should the other party(ies) be named an “additional insured” or “additional named insured” on a party’s policies? Should the other party(ies) receive a certificate of insurance with its ongoing rights to reasonable notice before policy change or termination?
- Automatic Coverage. Sometimes acquiring companies engaged in frequent acquisitions have master policies that automatically include acquisitions, subject to meeting various requirements. Should the acquirer rely on these policies, or tailor coverage to the particular risks of the target and the sale structure?
- Policy Exclusions. What policy exclusions apply to the seller’s and buyer’s policies, respectively, as relate to coverage both pre- and post-closing, and therefore to the target’s risk profile and the acquirer’s risk assumption?
- Communication. Has there been good communication and coordination well in advance, not only between each party and their insurance agents, but also between the seller’s and buyer’s agents? For example, a conference call among all parties’ insurance agents and those at the buyer and seller responsible for insurance matters?
Answers to the above questions – and many additional questions that fall outside the scope of this brief introduction to the topic – deserve answers in advance of closing, and ideally during due diligence. — Laurance D. Pless
Copyright© 2015 Spell Pless Sauro, PC
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