DID WE BUY THAT?
When it comes to mergers and acquisitions, a stock purchase or a purchase of assets and liabilities is certainly riskier than an assets-only purchase. Assuming another organization's liabilities presents a much more complex set of exposures and concerns to the acquiring company. Assets-only purchases are often perceived as simple, routine and even risk free, but they deserve attention as well, and a brief checklist of issues to address is worthy of consideration.
In this article, we will examine some of the issues companies should look at when considering an assets-only purchase of another company.
Organizational involvement - Assets-only acquisitions are often considered to be so routine that those individuals in the acquiring firm responsible for insurance and risk management are frequently left out of the transaction process until the acquisition is a fait accompli. Your insurance and risk management team should be afforded the opportunity to review the target firm's insurance program and exposures to loss to help identify problem areas and to assist in updating the insurance/risk management budget. Involving the whole team will minimize surprises.
Identify information needs - Once the acquisition is complete is too late to gather information that is needed or desired. Needed data should be identified early in the process and a requirement for the target firm to provide such data should be set forth in the acquisition agreement. Getting cooperation after the fact cannot be relied upon.
Loss experience - Acquiring firms should obtain and evaluate at least five years of recently valued loss data for all lines of insurance. Of course, those coverages that are experience rated are of the most concern since you will want to know what you can expect in terms of future loss costs. You may have your own management systems and loss control programs ready to roll out, but knowing ahead of time what it is you have to deal with may prove invaluable.
New claims - It is not unusual for employees of acquired firms to become concerned with their employment status, as some cuts in employment may be inevitable. Their concerns can become the acquiring firm's concerns if these employees decide to seek workers' compensation or disability benefits in an effort to avoid a layoff. Of equal concern is the potential for lawsuits brought by disgruntled employees feeling they have been discriminated against in the event of a layoff.
Declaring the acquisition - In an assets-only acquisition, the acquired firm usually does not continue as separate entity. Instead, the acquiring firm merely adds the operations to its own and the acquiring firm simply increases its size and/or capabilities. In such cases, even though there may be no entity to add to your insurance policies, the new exposures will often need to be reported to your insurers. Clearly, new locations, new buildings, new vehicles, etc., will have to be added to your insurance program and this effort will need to be coordinated with the cancellation of the acquired firm's insurance program.
A Commercial General Liability policy automatically picks up coverage for new operations begun or acquired during the policy term. Some policies, on the other hand, such as those providing Employee Dishonesty, Product Recall and Directors & Officers Liability coverage, may have provisions requiring the acquisition to be declared so that the exposures can be underwritten. Acquiring companies will be well advised to thoroughly examine their own policies to be certain they are complying with any reporting provisions relating to acquisitions.
Contracts and leases - Many times, while not involving the assumption of liabilities, assets-only acquisitions may entail the assumption of contracts or leases that may be problematic for the acquiring firm. These documents should be identified and reviewed prior to the acquisition. Burdensome insurance requirements, one-sided hold-harmless provisions and poorly worded waivers of subrogation may cause problems.
Assets-only acquisitions deserve careful analysis and the lead time to develop the information that needs to be analyzed.
-- Charles H. Cox
Vol. XIV, No. 3
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We all seem to agree that the events of September 11 have permanently altered life in America. Nowhere is that more apparent than in the insurance industry where estimates of insured losses resulting from the terrorist attacks are as high as $70 billion. It sounds like a lot of money (to paraphrase the late Sen. Everett Dirkson) but the industry probably has the capital to deal with it. What the industry doesn't want to do, however, is deal with future losses from terrorism, so we are going to see exclusions added to new and renewal policies, together with possible Federal government assistance. We are also going to see an acceleration of the hard insurance market and, in fact, we have already started to see significant price increases in virtually all lines of insurance. And we can expect even further cost increases after January 1, 2002. There is one segment of the insurance industry, however, that is not necessarily sorry to see what is happening to insurance prices, and that is the agents and brokers. What was shaping up to be a normal cycle of the insurance market may turn into a veritable windfall for producers whose income is tied to premium levels. Perhaps now is an appropriate time to seriously consider fee-based compensation for these salespeople. In this issue, we discuss some of these matters and talk about some of the things you can do to minimize the impact of the inevitable premium increases. On a lighter note, we also conclude our 50th anniversary reminiscences with Mike Coyle's essay on snow. --- Ed.
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