A Risky Game of Hide and Seek
Finding Hidden Risks during Mergers and Acquisitions
Are you looking to buy or merge with another construction company in 2015 or 2016? Mergers and acquisitions have a more condensed timeline than they used to, which can lead to less time for performing a due diligence review. A rushed due diligence process increases the number of risks that could slide under the buyer’s radar when reviewing a seller’s past and current liabilities.
The reason hidden liabilities are such an issue is that the buyer’s insurance typically doesn’t cover them. Usually, when a company is acquired, its liability coverages are terminated or turned into run-off coverage, which expires after a set period of time, depending how the policy language is written. If these potential liabilities aren’t considered when the purchase price is decided and the contract drawn up, the buyer could find itself questioning the transaction down the road—when it’s too late to take any corrective action.
Examples of Hidden Liability
- A selling company purchased several other organizations in the past few years, all of which the buyer must now track down, whether they still exist or not, in order to identify all their associated liabilities.
- A selling company has legacy exposures, which are ongoing legal claims that arose against the acquired company many years ago. The buyer must research the past cases and determine possible financial implications as well as their impact on its reputation and the possibility that similar cases could arise in the future.
Perform an Insurance Review
To make sure your company is not blindsided by surprise liabilities after a merger or acquisition transaction, perform the following review:
- Ensure all of the seller’s existing policies have sufficient limits and adequate coverage for its main risks.
- Determine whether the seller has any potential liabilities that are not insured. To do this, review the seller’s claims history and existing policies.
- Take note of the seller’s existing contracts guaranteeing indemnification, or agreeing to additional insured status for suppliers, customers or corporate affiliates of the seller.
- Review existing contracts to look for any indemnities or insurance that may have been presented to the seller from other parties.
- Pinpoint new exposures that could pop up if operations are added or moved to locations unfamiliar to your company. New coverages may need to be purchased or old policies may need to be updated to make sure these operations are covered.
- Address any circumstances or conditions that could generate claims that would fall under the seller’s coverage.
- Address any differences in the way the seller reported claims with the way the buyer reports claims.
- Understand the terms and conditions in the D&O policy of the acquired company; does it have any statue-of-limitation clauses?
Managing the hidden risks during a merger or acquisition may seem like a daunting task, but with the right information and support from both your legal advisor and insurance broker, it can be done smoothly and thoroughly.
ABOUT THE AUTHOR