April 22, 2019

Due Diligence: Preserving Insurance Assets

This Hunton Andrews Kurth memo (pg. 26) says that insurance assets are sometimes overlooked during the due diligence process, and that parties often neglect to take the steps necessary to ensure their continued availability to the successor entity post-closing.

The memo says that the availability of insurance rights to a surviving entity is a fact-specific issue & depends the nature of the underlying claim, the relevant policy language, the way in which the deal is structured under state corporate law, and any applicable state statutes addressing the transfer of insurance assets in corporate transactions. Potential pitfalls are not always addressed by statute, by “change in control” provisions, or by specific insurance asset transfer provisions in the transaction documents. This excerpt reviews the questions that parties should ask about insurance assets during the due diligence process:

– What types and amounts of insurance are at issue?

– In addition to its own insurance, is the merging entity an additional insured under the insurance of others (e.g., parent, subsidiary, or partner entities) and does it consider that coverage to be an asset material to the transaction?

– What kind of wrongful acts, entities, losses, and time periods are impacted by a change in control? – Do insurance policies differentiate between different kinds of transactions, such as “inside” transactions resulting in surviving entities that may retain the same characteristics as the old company?

– Is “tail” or run-off coverage available or appropriate to address any possible coverage gaps?

– Have the transactional lawyers considered insurance issues at all stages of the deal process?

– Have the parties considered representations and warranties insurance, which can provide protection for both buyers and sellers for breaches of representations and warranties in M&A transaction?

The memo recommends consulting with experienced coverage counsel early in the deal process. Appropriate advance planning can help to maximize the availability of insurance assets by ensuring necessary structures are in place and that all proper notifications have been made.

John Jenkins