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:
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.
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