Article
Source: Risk Management
Article
By Joseph D. Jean,
06.01.17
Due diligence is a major part of any corporate transaction, whether it is a stock purchase, asset purchase or merger. A review of applicable insurance programs—and the liabilities they may or may not cover—should always be a part of that due diligence because insurance is an important corporate asset. But there is much more involved in due diligence than just figuring out what insurance policies exist. Careful consideration of frequently overlooked aspects of the insurance program can help the buyer properly determine the value of that asset and protect against post-transaction liabilities.
As with most issues involving insurance, the buyer should begin with the policies. That means collecting all of the seller’s insurance policies, such as commercial general liability, property, environmental, directors and officers, errors and omissions, cyber, excess, umbrella, and any others the entity may have. This also means gathering the policies dating as far back as possible, especially if the business is one that could be subject to liabilities that occurred decades ago, such as asbestos contamination.
Once the policies are collected, the review begins, which should include nine important questions:
1. Does the insurance cover the risks? The first objective in any insurance due diligence review is determining whether the seller bought the right policies in the first place. This is not a given. Careful scrutiny of the risks and the loss exposure is critical. This requires close consideration of, and inquiry into, the seller’s operations, products, countries in which it operates, and the like. Once that is complete, the risk profile must be compared against the insurance coverage in place.