No matter how exhaustive the due diligence and planning performed ahead of a merger or acquisition, post-closing complications can arise. Undetected environmental contamination, disgruntled shareholders, fraud and unpaid liabilities may surface at a later date. Some of these risks are insurable and some are not. Regardless of which side of the transaction you are on, this article addresses key insurance issues that you should be aware of.

1. S T R A T E G I E S
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Article reprinted from Winter 2018
Directors & Officers (D&O) Liability
Liability for directors and officers is typically a six-year
statute of limitations. Normally the acquiring company is only
responsible for actions from the date of the transaction going
forward. So, sellers will often buy a “run-off” or “tail” policy to
protect their directors and officers for acts that occurred prior
to the sale. While run-off policies are available for one, three
or six years, it is advisable to purchase six years to cover
the duration of the statute of limitations. If you know that a
transaction is on the horizon, negotiate the run-off well in
advance when you have the most leverage; do not wait until
the transaction is imminent. Also, prior to any stock or M&A
transaction, consider reviewing your D&O insurance limits
with an eye to the added risk that you are undertaking.
In all areas of M&A, planning is paramount; insurance
matters are no exception. Be sure to consult with a trusted
insurance professional to ensure you have all your bases
covered.
BY KRIS ST. MARTIN
N
o matter how exhaustive the due diligence and
planning performed ahead of a merger or acquisition,
post-closing complications can arise. Undetected
environmental contamination, disgruntled shareholders, fraud
and unpaid liabilities may surface at a later date. Some of
these risks are insurable and some are not. Regardless of
which side of the transaction you are on, you should sit down
with an experienced insurance advisor prior to the signing of a
purchase or sale agreement.
Part of the motivation to sell may be to eliminate the
considerable liability of owning and managing a business.
At closing, the seller may breathe a big sigh of relief and
then call their agent to cancel the insurance policies. In
other cases, the parties may assume they can just pass the
insurance policy rights from one to the other, but this type
of assumption is nearly never acceptable to the insurance
company.
Nearly all insurance policies address Merger &
Acquisition (M&A) activity. A common clause says that if
more than 25% of the stock changes hands, the policy is
immediately cancelled as of the date of the transaction.
At a minimum, policies will require that upon a triggering
event, the insured will be required to notify the carrier, and
the carrier will have the opportunity to charge additional
premiums and change the terms of the policy. Before any
stock transaction or M&A activity, this section of your
policies should be closely reviewed. With a 60-day advance
warning, your insurance representative should be able to
review and, if needed, pre-negotiate terms with the carrier
that will allow a smooth transition.
As a seller, what is the risk in letting your policies cancel at
closing?
Here is an example of a post-closing complication:
Shareholders take issue with the sale or merger. The
shareholders may believe the price was not fair, the process
was self-serving or other opportunities should have been
explored. These disputes can happen on both the buying and
selling side of the table.
KRIS ST. MARTIN
CBIZ Insurance Services, Inc. • Minneapolis, MN
763.549.2267 • kstmartin@cbiz.com
@kstmartin2