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Presenting a live 90-minute webinar with interactive Q&A

Insurance Due Diligence in M&A

Deals: Evaluating Coverage and Gaps,

Mitigating Risks and Potential Liabilities

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, OCTOBER 29, 2015

B. Scott Burton, Partner, Sutherland Asbill & Brennan, Atlanta

Amy J. Fink, Partner, Jones Day, Los Angeles

Thomas S. Novak, Member, Sills Cummis & Gross, Newark, N.J.

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©2010 Sutherland Asbill & Brennan LLP

Introduction

This Presentation will:

• Provide an overview of best practices in evaluating risk exposure and

risk mitigation in the context of the acquisition of a target business

• Identify and analyze risk management and mitigation processes and

material insurance assets of the target and potential coverage gaps

• Discuss common insurance issues encountered in acquisitions

• Provide drafting tips related to key insurance oriented provisions of a

purchase agreement

• Discuss the potential utilization of other insurance solutions that may be

useful to produce a successful acquisition

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Transaction Structures and Corresponding

Risks

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• Merger

Liabilities of the target become liabilities of the combined entity

Change of control clause may terminate target’s policies

Possible merger of the two companies’ insurance programs

• Stock Purchase

Liabilities remain with the target, but may still impact consolidated

financial statements

Change of control clause may terminate target’s policies

Insurance programs may or may not be merged

• Asset Purchase

Target’s liabilities should not transfer with assets (excluding

contractual obligations or transferred contracts)

Use of additional insured coverage

Potential successor liability for product liability claims


Insurance Coverage Due Diligence

• Evaluate the target’s risk management and claim handling

infrastructure

In procuring insurance, does the target use a broker, a consultant

or both?

Is the target insured by a captive or risk retention group?

Is the captive reinsured? Does it use an intermediary?

Are claims handled by the carrier, a third party administrator, or in-

house by risk management?

Does the target rely on additional insured status under its

contractual counterparties’ policies?

Is the target obligated to provide additional insured coverage to its

contractual counterparties?

Does the target lease employees from a professional employer

organization (PEO)?

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• Identify the risk profile of the target

Products liability

Environmental liability

Mass tort liability

Professional liability

Premises or other bodily injury

Regulatory claims

Fiduciary liability for ERISA plans

Liability for employees of PEOs

Retrospective premium

Audit premium

Workers compensation audit premium

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• Must-See Documents

Current and prior insurance policies to confirm covered risks, limits,

retentions, whether cost inclusive, retro dates, exclusions

Schedule of historic insurance policies

Policy applications

Loss runs of the target and predecessor entities for the past 5-7

years to determine historical experience, possibly longer

Litigation reports and pleadings for major claims

Notices of circumstances

Premium agreements

Retrospective premium endorsements

Premium audit reports

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• Must-See Documents (Continued)

Third party administrator agreements

Reinsurance agreements

Contracts where the target is to be named an additional insured on

counterparties’ policies

Contracts where the target is obligated to name counterparties as

additional insureds

Declarations pages or certificates of insurance from

subcontractors, contractual counterparties and PEOs

PEO contracts

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• Assessing Adequacy of Coverage

Evaluate financial quality and size of insurers and reinsurers –

Review A.M. Best’s

Evaluate financials of any risk retention groups or captives

Evaluate current erosion of policy limits

Determine whether change in control provisions will terminate

current coverages

Determine whether to purchase tail coverage

Confirm implementation of additional insured status

Beware the ISO blanket additional insured endorsement

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• Identifying and Avoiding Gaps in Coverage

Compare target’s and acquirer’s insurance programs for quality,

cost and coverage, utilize acquirer’s broker or consultant

Identify claims-made policies for change in control, retro date and

tail coverage provisions

Review key exclusions of D&O, E&O and products liability

coverages, replace coverages

Integrate target into acquirer’s D&O coverage

Transfer or replace property, general liability, workers

compensation and auto policies

Consider increasing limits if existing policies are substantially

exhausted

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• Identifying and Avoiding Gaps in Coverage (Continued)

Consider whether target has uninsured risks

Confirm notices of claim timely sent on new claims

Consider whether to send a Notice of Circumstances on target’s

expiring claims-made policies

Look for adverse loss development/possible retrospective premium

liability

Compare pro forma premium estimates with actual premium

Amend contracts and leases to implement additional insured

provisions of contracts

Confirm workers compensation coverage of subcontractors, PEOs

and contractual counterparties

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• Special Issues with acquisition of assets of manufacturing

companies

Negotiate additional insured provisions with the seller to protect

against legacy liabilities

Where seller will terminate operations post transaction, obtain

discontinued products insurance to insure successor liability

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Impact upon the Purchase

Agreement Provisions

• The representations and warranties along with the covenants

contained in a negotiated purchase agreement should be used to

confirm your insurance diligence efforts and to ensure that the

anticipated insurance coverage will be available until and after

the closing.

• With respect to representations and warranties, the buyer should

consider requiring assurance regarding the following:

The seller has provided copies of all relevant insurance policies and current

pending insurance applications

The seller has provided accurate descriptions of any self-insurance,

retention arrangement or captive insurer facilities used to manage liabilities

The seller has provided accurate information regarding claim history and

experience under its insurance policies

That all insurance policies are valid and enforceable against the insurer

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Agreement Provisions (cont.)

The insurance policies were issued by financially sound insurers

The insurance coverage is adequate (perhaps by comparison with

companies in the same business as the target)

The insurance policies will continue in full force and effect following the

closing (and listing any consents or notices that may be needed to assure

such continuation)

That all required premiums to be paid with respect to such insurance have

been paid and other obligations by the insured have been performed

The target/seller has given proper notice to the insurer of all insured claims

The target/seller has not been notified of any cancellation of coverage, any

material change in coverage or policy terms or of a material increase in

future premiums

That all information provided to any insurer in connection with coverage,

including the application for insurance, was accurate and that the

target/seller has not provided any other information to any insurance

company that could likely result in the cancellation of an insurance policy or

the denial of coverage for a specific risk/claim

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Agreement Provisions (cont.)

• Likewise, the buyer should request a number of covenants from

the seller/target. For example, the buyer should consider

requiring:

The seller/target manage its insurance program through the closing in a

manner consistent with past practices

The seller/target continue to pay all required premiums and otherwise

continue to maintain its insurance coverage

The seller/target continue to timely file all relevant claims that arise prior to

the closing

The seller/target cooperate with the buyer to transfer all insurance

coverage to the buyer/target following closing

The seller/target cooperate with the buyer in the event that the buyer

wishes to procure tail or other coverage on the target post-closing

The seller/target will provide the buyer with the historical records (or access

thereto) so that potential future claims can be adequately managed

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Transferring Insurance Coverage

• Assignment

• Change of Control

• Bifurcation of Coverage

• Tail Policies

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Additional Insurance Solutions

• Representations and Warranties Insurance What is it?

Most commonly known and widely used type of transactional insurance.

Covers financial losses resulting from any defects or deficiencies in the due

diligence process.

Covers loss resulting from breach of representations and warranties made in

purchase agreement.

Either Buyer or Seller may be the “Insured.”

Two types of R&W policies

“Buy-Side” policy

“Sell-Side” policy

Different functions and coverage triggers.

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Additional Insurance Solutions (Cont.)

Why Purchase Buy-Side R&W Insurance?

• Buyer wants to enhance protection for breaches of representations and

warranties.

• Can be Buyer’s sole remedy for breaches or recourse for limited breaches.

• Additional protection beyond the indemnity cap in the purchase agreement.

• Can replace indemnification obligations of Seller.

• Can extend the duration of indemnification.

• Public company deals.

• Distinguish bid in auction.

• May be easier to recover losses from insurer than the Seller. Examples: Seller

financial status is an issue.

Logistics of locating numerous Sellers or geographically dispersed Sellers.

Seller may not exist post-closing.

• Protection of key relationships with business partners as well as employees of

acquired entity.

• Obviates need for continuing relationship with difficult Seller.

• Can supplement due diligence efforts.

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Why Purchase Sell-Side R&W Insurance?

• Acts as backstop to Seller’s indemnification obligations.

• Can reduce Seller’s negotiated indemnity obligation and escrow.

• Protects “passive” sellers.

• Financially distressed sellers can use sale proceeds to pay down existing debt.

• May attract better offers by ability to provide more indemnity.

• Allows a “clean exit” to a business or industry.

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• Process and Timing – Will it Slow/Delay the Deal?

Selection of insurer and due diligence fees.

Dedicated broking and underwriting teams, ex-M&A lawyers.

Can move very quickly.

• Cost – Is it Prohibitively Expensive?

Premium 2-4% of coverage limits purchased; party responsible for premium

is negotiated.

Deductible 1-3% of purchase price. Buyer-side policies may use the

holdback as a deductible.

• Value – What is covered?

Blanket Policies v. Single Issue Policies.

Purchase agreement is made part of policy application and policy itself.

Insurer’s obligations limited to the insured representations and warranties.

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• What are the Potential Pitfalls?

R&W Policies ≠ One Size Fits All

Be aware of exclusions and coverage limitations.

Terms may not mirror the terms of the R&W in the agreement; watch out

for gaps in coverage and retention issues.

Can provide extension of the survival periods for many representations but

for “fundamental representations,” where survival period is indefinite, policy

will not cover the entire survival period.

Policy limits generally higher than indemnity cap for breaches of certain

R&W under the sale and purchase agreement, “fundamental

representations” may not be covered in their entirety since indemnification

for breaches of such R&W is generally capped.

Watch out for privilege and disclosure issues.

Timing of notice is critical because they are claims made and reported

policies.

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• Other Transactional Insurance Products Tax Indemnity Insurance (aka Tax Opinion Insurance): Covers taxes,

interest, penalties, legal costs, and a gross up on insurance payments if the

relevant tax authorities – federal, state or local or foreign – do not respect

the insured tax positions.

Loss Mitigation Insurance (aka Contingent Liability Insurance): Insures

known but not yet quantifiable risks.

Pollution Legal Liability Insurance: Stand-alone pollution coverage. Can be

modified to insure the representations, warranties and indemnities in a

transaction that relate to unknown environmental liabilities.

Loss Portfolio Transfer Insurance: Allows a Buyer or Seller to bundle up a

company’s Workers’ Compensation, Directors & Officers and General

Liability claims incurred before a transaction and transfer those claims to an

insurer at a fixed cost.

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Speaker Information

B. Scott Burton, Partner, Sutherland Asbill & Brennan LLP, Atlanta, GA

Scott focuses on corporate mergers and acquisitions, corporate finance and securities, and general corporate and securities matters. He heads the firm’s Financial Services Industry Transactional Practice Group. His experience includes representing buyers and sellers in acquisitions and dispositions of private and publicly held life and property and casualty insurance companies, blocks of insurance business, broker-dealers and investment advisers. [email protected]

Amy J. Fink, Partner, Jones Day, Los Angeles, CA

Amy is a partner in Jones Day’s Insurance Recovery Practice. She represents clients on a wide range of insurance-related issues, including providing advice on insurance issues in the context of corporate transactions as well as a wide variety of claims including professional liability, product liability, environmental, asbestos, intellectual property, construction, product recall, directors' and officers', toxic tort, employment practices, and securities-related claims.

[email protected]

Thomas S. Novak, Member, Sills Cummis & Gross, Newark, NJ

Tom chairs the Insurance and Reinsurance Practice Group at Sills Cummis where he has practiced for 35 years. He served as Special Counsel to the New Jersey Department of Insurance for 20 years in connection with various insurer liquidations. He litigates insurance and reinsurance coverage disputes, and acts as a consultant to M&A attorneys on insurance issues arising from such transactions. He also assists clients in the design and placement of insurance programs.

[email protected]

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