I recently read a National Underwriter article dealing with Mergers and Acquisitions. The primary focus of the story dealt with the record year for M&A activity of insurance agencies. In fact, the new record broke the old record (just set the prior year) so it certainly appears that M&A activity is extremely active.
While there are many issues related to mergers and acquisitions to consider, there is one that doesn’t seem to get the attention it deserves: how does the typical E&O policy address potential liability issues that can make a good deal a “nightmare” without the proper attention. While this is not an overly complex matter, it is also not all that simple. Proper planning and appropriate attention to detail are extremely important.
A good time to become educated on some of the significant coverage issues is as soon as you start thinking about buying or selling. Any good E&O carrier “worth its weight” can provide guidance and direction based on your specific scenario. They should be contacted.
Both the buyer and the seller should allow sufficient time for the development and providing of additional paperwork, copies of the proposed transaction documents, applications, etc., the E&O carriers may require.
When you’re the buyer, it is best to consider “asset-only” purchases, and not purchases of any liabilities of the agency going out of business. This is one of the many areas where an attorney is needed to ensure the buyer is fully protected. The traditional approach is to have your E&O policy endorsed to provide coverage for the “new” agency for errors made by the “new” agency starting with the effective date of the acquisition.
If you are selling your agency, contact your E&O carrier and advise them of your plans. Don’t hesitate to ask questions regarding cost, options, timeframes, etc. This is an important decision and should be carefully planned. One of the many important issues is to understand the “known loss provision” in the E&O policy. If you are selling your agency and are aware of any actual unreported claims or situations that could lead to a claim, it is vital these are reported to your E&O carrier to lock in coverage. Failure to report these real or potential claims has significant potential to result in a lack of coverage.
The seller should secure an optional extended-reporting-period endorsement (a/k/a “tail”). Even after a sale, the now-defunct agency is still at risk of being sued. The purpose of this optional tail is to provide an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. Be aware there is a tremendous lack of consistency as to the available options. Some carriers only allow an additional 1-year “tail” while others offer options much longer. The charge for this additional coverage comes with a hefty premium charge, so plan for this expense. You also only have one time to make the decision.
Thinking about buying an agency or selling yours? Now is the time to start understanding the E&O issues.