Overview and key points
When buying a business there’s always legal and financial due diligence by respective advisers, but why should insurance due diligence take place too?
From the vendor’s perspective, ensuring that the business has all the necessary policies, warranties and indemnities, D&O (director and officers) where required, key person or shareholder protection in place, could protect the value of a transaction. Doing so helps to avoid the unnecessary risk of any value being chipped away by the acquirer.
From the acquirer’s perspective, carrying out insurance due diligence on an acquisition target is essential for ensuring that the business being considered for purchase is financially sound and free from unexpected risks.
Key takeaways
Top three reasons to conduct insurance due diligence:
- Risk identification and mitigation: Acquiring a company without assessing its insurance cover can expose the buyer to unforeseen liabilities. Due diligence helps identify gaps in cover, underinsured assets, or potential claims that may arise post-acquisition. By understanding these risks, the buyer can negotiate better terms or ensure that adequate cover is in place to protect the acquired entity and its assets.
- Assessing historical claims and liabilities: Reviewing the target company’s insurance history, including past claims and liabilities, provides insight into potential ongoing risks and how they’ve been managed. This can reveal patterns of operational or safety issues, pending lawsuits, or other financial liabilities that may carry over post-acquisition, affecting the long-term profitability of the deal.
- Ensuring compliance with legal and contractual obligations: Certain industries require specific insurance cover to be in place in order to comply with regulatory standards, industry best practices, or contractual agreements. Due diligence ensures that the target company is compliant with these obligations, preventing legal complications or penalties that could arise if cover is insufficient or non-compliant post-acquisition.
Overall, buyers or investors will want to know the business is robust and futureproof.
What does an insurance due diligence report look like?
An insurance due diligence report is essentially an independent health check of the target business for the buyers or investors; a review of how well protected it is currently and recommendations going forward.
The Partners& M&A team specialise in providing pre-acquisition insurance due diligence services to private equity, trade and alternative buyers and investors.
A typical insurance due diligence report will focus on the gaps, overlaps or structural issues in cover that could have a material impact on the investment – as well as outlining possible solutions and their impact on cost.
Insurance Due Diligence can give buyers and investors comfort there are no hidden risks or related costs when agreeing terms on a transaction.
Common issues we uncover during the due diligence process:
- Undervaluation of assets
- Cyber policy not fit for purpose as the company has grown (or not in place at all)
- No key person cover in place
- Unresolved claims, often HR (with hefty pay-outs looming)
- Significant pricing changes in policies – especially in carve out situations where new policies need to be placed & economies of group scale are no longer there
- Whether D&O is in place going forward from day one
- Errors & omissions in the detail of policy wordings.(including subsidiaries, shareholders & top co)
Our qualified team can produce an independent report as part of your transaction under NDA – contact us to find out more.
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