Mergers and Acquisitions Coverage: How To Play It Safe
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If you are looking to grow or expand your organization, merging with or acquiring a competitor may present a unique opportunity. From balance sheets to sales forecasts to inventory and human resources, you’ll be looking at the fine print before you make a decision. During the negotiation phase, certain discrepancies or concerns may arise in the way each company represents itself.
Mergers and Acquisitions Coverage Tips
To safeguard your company against unforeseen post-transaction liabilities, consider the following before you close a merger or acquisition:
- Ensure all of the seller’s existing insurance policies have sufficient limits and adequate coverage for the main risks
- Determine whether the seller has any uninsured potential liabilities
- Take note of the seller’s existing third-party contracts, guarantees, indemnities and agreements
- Address any circumstances or conditions that could generate claims if operations are added or moved to locations unfamiliar to your company
- Address any differences in the way the organization you are merging with or acquiring reports claims with the way your company reports claims
- Review the change of control provisions that are found in various types of insurance policies to ensure the transaction doesn’t automatically trigger cancellation of any insurance coverage
Additional uncovered liabilities are often discovered in the merger and acquisition due diligence process. As a result, the purchase price can be adjusted accordingly or the buyer can be granted applicable indemnification.
Mergers and Acquisitions Coverage aka R&W Coverage
Representations and warranties insurance is also insurance-speak for M&A coverage. According to the International Risk Management Institute (IRMI), it’s a “form of coverage designed to guarantee the contractual representations made by sellers associated with corporate mergers and acquisitions. For example, the seller of a company may represent that the company’s underground storage tanks are in good repair. If a serious leak is discovered following the purchase, the buyer can seek recovery for repair and clean-up costs from the seller’s representations and warranties insurance policy. The key benefit of the policies is that they provide a viable alternative to escrow funds, which have traditionally used to satisfy claims associated with representations and warranties contained in merger and acquisition documents.”1
Related Matters: Representations and Warranties Insurance Q&A
Essentially, mergers and acquisitions coverage protects buyers and sellers of a company against any inaccuracies made in representations and warranties during mergers and acquisitions by:
- Extending the time for representations and warranties / merger and acquisition insurance, which gives buyers more room to spot any existing problems with the recently purchased business
- Removing the worry of not being able to collect on a seller’s promised indemnification
- Speeding up a business sale by covering the liabilities of future representations and warranties claims
- Allowing the buyer to place a distinguishing, lower, stand-out bid during an auction
- Letting the seller to fully and completely leave a business and any responsibilities, if desired
- Enabling the buyer to maintain a good relationship with the seller, who may become the buyer’s employee or business partner after the transaction
Looking for more information? Visit alignedinsurance.com for more details about our representations and warranties (R&W) insurance product as well as other services.
Contact an ALIGNED Insurance Advocate today to learn more about R&W / M&A coverage and how our experts can help protect your organization during a corporate merger or acquisition.
|ALIGNED Across Canada 100% Canadian owned, ALIGNED is a premiere insurance brokerage that serves more than 1,400 clients across the country. ALIGNED’s offices in Toronto, Calgary and Vancouver are supported by a national operations centre in Cambridge, Ontario. Uniquely within the industry, ALIGNED creates, negotiates and delivers the best business insurance and risk management strategies/solutions to organizations like yours.|
Other posts related to Mergers and Acquisitions Coverage
- Merger and Acquisition Insurance 101
- Reps and Warranties Insurance Explained
- Representations and Warranties Insurance Q&A