Mergers and Acquisitions: Uncovered Liabilities

Due to our firm's business model, we deal with mergers and acquistions quite frequently. Therefore, I wanted to touch on the topic that needs some attention:

Acquisition of Liabilities: A company that acquires another company's assets and liabilities may face the liabilities without the benefits of the acquired company's insurance policies. Therefore, it is important to analyze the acquired company's insurance. For example, does the acquired company have sufficient proof of its historic insurance coverage? Has any of that insurance coverage been exhausted? Have any rights under those insurance policies been released? Furthermore, it is important to analyze the retrospective dates on all claims-made policies to ensure that they are correct when replacing coverage. For example, if a company is acquiring a piece of property that was exposed to remediation efforts in the past it is important to ensure that the pollution policy's retrospective date is correct.

Another creative approach to mitigate accrued liabilities from a merger or acquistion is through a "Loss Portfoloio Transfer/Buyout Program". This will transfer accrued liabilities resulting from past or ongoing operations. This will elimate the uncertainty of adverse loss development, reduce previously established reserves, and increase debt capacity.

Contingent Liabilities: This liability comes into play when a company is trying to acquire another company that is currently in litigation with a third party, and the buyer is concerned about potential successor liability presented by this litigation. Contingent liability insurance can insure the company against this potential successor liability if the target company loses the lawsuit, the selling shareholders of the target company do not satisfy the judgment, and the buyer is held liable as successor to the sellers. This type of coverage is normally underwritten on a case by case basis.

There are other concerns that come into play while dealing with a merger or acquistion situation, but acquired and contingent liabilities are the two most common to keep in mind.