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Avoiding M&A Insurance Problems
Risk Management | June 01, 2009 | Gold, Joshua
Regardless
of the economic cycle, corporate transactions are always
taking place, whether through mergers, acquisitions, going
private, or, in a recent trend, marriages between financial
institutions arranged by the Treasury and the Federal Reserve.
These transactions often have at least one common complication:
insurance.
For
a long time, scant attention was paid to insurance assets
in even some of the larger M&A deals. Over the past
decade or so that has changed with insurance taking up a
more prominent piece of the due diligence checklist. The
insurance review, however, usually does little more than
scratch the surface. There are a number of reasons for this,
including the fact that insurance is typically not a major
driving force to consummating a deal and often the attorneys
and investment bankers spearheading the deal have little
real-world appreciation for the nuances and land mines that
inhabit the insurance claims world. Given that, there are
some important steps to take to help avoid insurance problems
in the M&A process.
1.
Determine ownership of insurance. One of the most important
starting points is to arrive at an express written agreement
as to what insurance policies will be part of the acquisition
(i.e., who will own the insurance policies?). Creating an
inventory of policies starting with the present and going
back as far as possible is a good way to determine what
insurance assets will be transferred. It is not unheard
of for one or more former corporate subsidiaries sold to
different buyers to later stake competing claims on insurance
that may have protected them originally on a consolidated
basis. Even the former parent may lay claim.
2.
Account for insurance in the purchase price. Although there
are numerous variations on how parties to a merger or acquisition
may handle insurance, on occasion policyholders who are
selling off a division, subsidiary or operating unit may
opt to keep the insurance rights to a pending insurance
claim even though they are selling off the business unit
that was implicated in generating that claim.
A few
issues arise with such a scenario. First, the fact that
the insurance coverage right is being retained and not transferred
should be set forth in the operative deal documents. Second,
it would follow that the purchaser of the business unit
would adjust the acquisition price to reflect the asset
being acquired minus the insurance recovery. Third, some
agreement should be made over future cooperative efforts
to recover on the insurance policy should the insurance
company seek further claim information
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