Insurance-related issues are a critical aspect of any merger or acquisition and should be addressed early in the deal process. The insurance-related issues that may arise in deal contexts are too many to address here, but companies entering a potential deal should keep the following considerations in mind.
Evaluate liabilities, exposures, and insurance program. Evaluating a target company’s insurance program frequently sheds light on the company’s overall operations and quality of the company being purchased. A target company that presents a poor insurance risk relative to its loss history may also be a poor business risk. Accordingly, a party to a potential deal will be well-served to evaluate the target company’s operations to determine current liabilities and exposure to loss, and thoroughly examine the target company’s insurance portfolio to determine if existing insurance is likely to cover the liabilities. The analysis may also inform decisions regarding the need for future insurance purchases to fill any gaps in coverage for potential loss exposures. To conduct these evaluations and examinations, the company and its insurance coverage counsel should obtain the target company’s current and historical insurance policies, any coverage charts that may exist, pleadings from any litigation in which the target is involved, and loss history reports. Also, if possible, interviewing the target company’s internal legal and risk management teams and outside insurance coverage counsel frequently provides an efficient means to obtaining key information and answering questions.
Consider how liabilities and insurance coverages will transfer. Typically, a constituent company’s rights to insurance coverage automatically vest in the surviving company by operation of the relevant state merger statute, without implicating the anti-assignment clauses in the insurance policies. Absent statutory transfer, courts are split over whether anti-assignment provisions are enforceable. The (overwhelming) majority rule is that anti-assignment clauses do not apply to injuries or occurrences that occur prior to the assignment. The rationale for this approach is that pre-assignment injuries or occurrences do not increase the insurer’s risk profile. The scope of coverage under the policies, however, will not expand due to a corporate transaction. The surviving company, for instance, will not be able to obtain coverage under the constituent company’s policies for any liabilities the surviving company might possess prior to the deal.
Representation and warranty insurance. Representation and warranty insurance (RWI) reached the market more than 15 years ago and is designed to protect the insured against unintentional and unknown breaches of a party’s representations and warranties made in the acquisition or merger agreement. Buy-side and sell-side RWI policies can help maintain deal value by shifting potential liability for unintentional and unknown breaches of representations and warranties to insurers for a ﬁxed cost. An important up-front consideration is whether parties prefer to pay a fixed premium cost for RWI to reduce the need for collateral, accruals, or reserves to offset contingent liabilities. Parties to a deal and their counsel should carefully review the RWI policy and make sure that proper funding is reserved for liabilities not contemplated in the policy.
For public companies, consider D&O coverage for shareholder litigation. Recent trends illustrate that it almost is inevitable nowadays that litigation will follow a merger or going private acquisition announcement with approximately five lawsuits being filed per transaction, on average. In 2012, shareholders challenged 93 percent of all merger and acquisition (M&A) transactions with a value greater than $100 million involving U.S. public company targets and 96 percent of M&A transactions involving U.S. public company targets with a value greater than $500 million. Throughout 2013, merger and going private announcements have continued at an accelerated pace and many such transactions have been valued at more than $5 billion. In fact, this year’s top deals were valued at more than $6.5 billion, including, $24.4 billion for Dell, Inc. and $23.3 billion for Virgin Media. These deals spawned significant shareholder derivative lawsuits. For example, on February 5, 2013, Dell announced that it entered into a definitive merger agreement and by March 8, 2013, there were already 21 lawsuits pending in Delaware Court of Chancery, and three more pending in Texas state court. Addressing a disgruntled shareholder’s demand to remedy alleged damages done to the corporation by wayward directors and officers is frequently an expensive process. To protect against losses incurred relative to a shareholder’s allegation of wrongful conduct, corporations typically maintain Directors and Officers (D&O) liability insurance coverage. When entering into a merger or acquisition involving a public company, all parties should anticipate shareholder pushback and be well-versed in their D&O policies to maximize coverage for any claims stemming from the deal.