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Is Business Insurance Coverage Important in an M&A Transaction?

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Mergers and acquisitions (M&As) have become a major strategy for business growth and expansion in the past decade. In fact, U.S. companies have announced over $10 trillion worth of M&A deals since 2013. While M&As offer great opportunities, they also come with a set of challenges, and one of the most important things to consider during the process is business insurance coverage.

Getting the right insurance policies in place is critical. If the coverage isn’t properly aligned, it could lead to gaps or unexpected liabilities that could create big headaches down the road.

Why Aligning Insurance Is Key in M&As

When we talk about “insurance alignment” in M&As, we’re referring to reviewing and adjusting the merging companies’ insurance policies to make sure they match up correctly. This is important because, without alignment, a company could be exposed to risks that lead to lawsuits or unexpected costs.

Several types of insurance need to be aligned during an M&A, including:

  • Directors and Officers (D&O) Insurance
  • Representation and Warranties (R&W) Insurance
  • Workers’ Compensation Insurance

Let’s break these down a bit further to show why they matter.

D&O Insurance: Protecting Your Management Team

D&O insurance serves to protect directors and officers. This policy covers these team members if they are named as individual defendants in lawsuits, for acts taken in their professional roles at the company. 

What Does Directors and Operators Insurance Cover?

D&O insurance protects the directors and operators in the event of lawsuits from:

  • Employees
  • Shareholders
  • Competitors
  • Vendors
  • Investors 
  • Customers
  • Other parties

D&O policies typically provide coverage for costs associated with lawsuits, such as legal fees, settlements, and more. Additionally, some D&O policies may also provide some form of coverage for the company.

Advantages of Directors and Operators Insurance in M&A

D&O insurance policies typically insure against certain “Wrongful Acts” as defined by the policy that the company or other parties allegedly commit.  

According to American Bar, these policies commonly contain a “change in control” provision that “limits the available coverage for these ‘Wrongful Acts’ if there is a change in company ownership.”

Before any M&A, participating parties should understand any change in control provisions and invest in coverage for their leaders with  D&O insurance.

Additionally, some directors and officers may be entitled to indemnification from the company through employment contracts or company bylaws. If so, those indemnity obligations are typically backed financially by a D&O policy.

R&W Insurance: Minimizing Legal Risks Post-Acquisition

First things first, what are representations and warranties? This term, of course, can be broken into two sections: representations and warranties.

Representations are assertions as to a fact that is given to another party. These representations are given to induce another party into taking a particular action, such as entering a contract.

Warranties are promises of indemnity if the assertions are false or wrong. Therefore, if the representation is false, it’s “inaccurate,” but if a warranty is false, it’s “breached.”

In simple terms, representations and warranties provide sellers with the opportunity to provide accurate information and disclose any issues about their company. From this information, the buyer can correctly estimate the value of the company and know what they are getting into.

Representations and warranties insurance, also called reps and warranties insurance or RWI, is a policy purchased for corporate transactions. 

Workers’ Compensation Insurance: Getting It Right for a Smooth Transition

One often overlooked aspect of M&As is workers’ compensation insurance. When two companies merge, their workers’ comp policies need to match up. If they don’t, you could end up facing premium increases or coverage gaps.

For instance, if one company has a high safety risk and a poor claims history, it could increase premiums for the newly merged business. To avoid surprises, it’s important to review both companies’ workers’ comp policies and prepare for any necessary changes in premiums or coverage.

Interested in learning more? Check out our guide to workers’ comp, here.

Liability Coverage: Who’s Responsible?

Liability coverage is another crucial consideration, especially because it can change depending on the type of sale. In an asset sale, the buyer typically only takes on the company’s assets and not its liabilities. In a stock sale, however, the buyer assumes both the assets and liabilities, and their general liability policy will cover any claims related to those liabilities.

Before finalizing the deal, both parties should thoroughly discuss liability coverage to avoid confusion or unexpected costs down the line.

Conclusion: Don’t Skip Insurance in M&A Transactions

M&As can be complicated, but getting the insurance right doesn’t have to be. Aligning policies between the buyer and seller is essential to avoiding coverage gaps and reducing the risk of legal disputes. By ensuring that key policies like D&O insurance, R&W insurance, and workers’ comp insurance are aligned, businesses can help smooth out the transition.

If you’re involved in an M&A, it’s important to work with insurance professionals who can help guide you through these complexities and ensure your coverage is on point. 

Undergoing an M&A?

Your business changes regularly, and so should your understanding of your insurance coverage. You run a business with complexity; at Apex Risk & Insurance Services, we provide custom solutions to meet your insurance needs.

Read on to learn more about who we work with or contact us for more information on how to protect your business and how to experience an efficient transition when you partner with us.Lastly, read on if you’re interested in our executive protection policies.