PurchaseAgreement_Detail

How Can Asset Purchase Agreement Language Increase Insurance Risk?

09/13/2022 Written by: Matt McFall

When conducting insurance due diligence for an asset purchase, details such as the definition of Assumed Contracts, Assumed Liabilities, and Excluded Liabilities can impact the treatment of the pre-closing insurance policies. If the intent is for the Seller to retain all pre-closing operating liabilities, then all pre-closing insurance policies should also be retained by the Seller. This requires a new, fresh-start insurance program for the post-closing Newco.

However, some first draft APAs have the Seller retaining all pre-closing liabilities on one hand, but on the other hand, have the Buyer assuming the pre-closing insurance policies insuring those same liabilities. This structure is proposed because the Buyer perceives the insurance policy as an asset with value. There are potential pitfalls under this structure that may not have been considered. Two of these potential pitfalls are:

  1. Successor liability: Many insurance policies are “occurrence policies”, meaning the policy in force on the date of the occurrence shall respond. By assuming a policy that would respond to a claim for a pre-closing occurrence (e.g., workers’ compensation or general liability claim), it can be argued that the Buyer assumed that pre-closing liability being insured, thus opening the door to successor liability.
  2. Unintended assumption of accrued liabilities: Many large companies with a high frequency of low severity claims purchase insurance policies utilizing a large deductible or, “loss sensitive” structure. As claims come in, the Company must accrue for the expected loss within the deductible for known claims and an amount for claims incurred but not reported (IBNR). By assuming a policy that insures this pre-closing claims activity, the Buyer also assumes the associated accrual liability.

While the purchase of a new insurance program will incur a cost, that cost can be quantified and accounted for in a financial model. Assuming unknown and unquantified liabilities could be significantly more expensive.

Representations-and-Warranties-Insurance-Policies-on-the-Rise-as-MA-Activity-Gains-Momentum-in-2024
Representations and Warranties Insurance Policies on the Rise as M&A Activity Gains Momentum in 2024
Mergers & Acquisitions Insurance05/22/2024

As M&A activity picks up in 2024, the number of Representations and Warranties Insurance (“RWI”) policies placed in the market has increased in tandem. The uptick in activity is driven by the...

Case Study: GLP-1 Cost Effectiveness and Coverage for Employer-Sponsored Health Plans
Mergers & Acquisitions Insurance04/12/2024

GLP-1 receptor agonists, or GLP-1 RAs, are changing the game for people living with Type 2 diabetes and obesity. These powerful medications, such as Ozempic, Trulicity, and Wegovy, not only help...

Mergers & Acquisitions Insurance
Why D&O Tail Insurance is Important in a Stock Purchase (Even if the Seller Doesn’t Want it)
Mergers & Acquisitions Insurance03/15/2024

It is standard practice that stock purchases include language requiring the purchase of D&O tail insurance covering the Seller’s directors and officers. Seller’s counsel may push for the addition of...