Dangers in dealmaking: more M&A means more liability, too. Here are insurance issues to consider well in advance of closing a transaction.

• Author: Meyer, Scott
• Position: RISK MATTERS

WHILE M&A ACTIVITY appears to be returning to historic norms, the regulatory and legal landscape has changed. New laws like Dodd-Frank make M&A transactions ever more complex and challenging from a due diligence standpoint. There is a greater potential for unseen or under-appreciated risks that can endanger an otherwise sound merger or acquisition.

In the face of these liabilities, insurance is critical to mitigating the risks. The following is a summary of what to consider, well in advance of the closing.

Directors and Officers Liability Insurance: M&A activity is one of the most significant drivers of suits against directors and officers. Allegations may include improper resistance to hostile takeovers, acceptance of a friendly bid without due diligence, mismanagement of the target company, nondisclosure of material information in connection with the acquisition, and mismanagement of the acquisition process itself. Directors and officers (D&O) liability insurance is critical to mitigate these exposures.

D&O policies may be purchased to cover claims reported during the policy period or any extension thereof. As such, it is incumbent on the insureds to be aware of the policy term and to provide prompt, timely notice. The policies may also provide for notice to the insurer of issues that could result in claims, which may also arise in the event of an acquisition. Further, when the closing takes place, the acquired company's insurance policy may be placed automatically in run off. Often the company purchases run off coverage to continue to provide liability protection that is coterminous with statutes of limitations typically running from four to six years. These and other issues mandate careful review of D&O coverage well before any closing.

Loss Portfolio Transfers: Understanding self-insured/deductible obligations, accruals and collateral requirements of the target company is essential. Are there any allocation issues where separate companies will now share the same historical policy? Acquirers should consider retaining an independent actuarial firm to assess potential workers compensation, general and automobile liabilities. If desired, retroactive limits of liability may be purchased in order to bolster the financial protection afforded by the target company's insurance policies. This may include a loss portfolio transfer--a retrospective insurance program transferring uncertain future payment obligations related to past known...