Business Insurance Tips - Risks When Dealing with Merger & Acquisition

Business Insurance Tips - Risks When Dealing with Merger & Acquisition

Mergers and Acquisitions (M&A) can be complex, particularly for a small to medium-sized business where they may not be employing a specialist M&A firm to handle the transaction.

While the legal and contractual requirements are more obvious, an area often overlooked is the additional insurance risk, both for the entities themselves and the Directors and Officers of both firms. Both parties must review and update their insurance covers to ensure all risks are accounted for.

In this article, we will detail the steps your company should take to prepare for a merger or acquisition and define two types of insurance that may help your firm complete the deal with confidence.


Perform an Insurance Review

To make sure your company is not responsible for any surprise liabilities after a merger or acquisition transaction, we would suggest you perform the following review:

  • Ensure all of the seller’s existing insurance policies have sufficient limits and adequate cover for its main risks.
  • Determine whether the seller has any potential liabilities that are not insured. To do this, review the seller’s claims history and existing policies.
  • Take note of the seller’s existing contracts guaranteeing indemnification or agreeing to additional insured status for suppliers, customers or corporate affiliates of the seller.
  • Review existing contracts to look for any indemnities or cover that may have been presented to the seller from other parties.
  • Pinpoint new exposures that could reveal themselves if operations are added or moved to locations unfamiliar to your company. New covers may need to be purchased or old policies may need to be updated to make sure these operations are insured.
  • Address any circumstances or conditions that could generate claims that would fall under the seller’s cover.
  • Address any differences in the way the seller reported claims with the way the buyer reports claims.

It is common for uncovered liabilities to be discovered in the due diligence process and the purchase price can be adjusted accordingly or the buyer granted applicable indemnification to remove the risk.

Warranty and Indemnity Insurance

During a merger or acquisition, certain discrepancies may appear in the way each company has represented itself. These inaccuracies could cause significant liabilities after closing that may not be covered by existing insurance policies.

If the participating companies have not addressed this lingering liability and worked to reduce it, they should consider obtaining extra cover.


Warranty and indemnity insurance protects buyers or sellers of a company against breaches in representations and warranties. Insurers offer policies that are either ‘buyer-side’ or ‘seller-side’, referring, essentially, to which party is indemnified. This cover typically comes with the following advantages:

  • Enables buyers to ‘top up’ a seller’s capped liability
  • Removes the concern of not being able to collect on a seller’s promised indemnification
  • Hastens a business sale by eliminating the need for escrows and by covering the liabilities of future representations and warranties claims
  • Empowers buyers during an auction to place a bid with extra indemnification for the seller, making that bid stand out from the rest and thus look more attractive to the seller
  • Allows a seller to fully and completely leave a business, if desired
  • Makes it easier for the buyer to maintain a good relationship with the seller, who may become the buyer’s employee or business partner after the transaction

Directors and Officers (D&O) Run-off Cover

If you have a Directors and Officers Insurance (D&O) policy, you will know that it protects you from the costs associated with any legal actions, investigations or other claims brought against you.

In a merger or acquisition situation, the D&O cover of both entities needs to be examined carefully prior to the completion of the transaction in order to ensure gaps in cover will not exist.

D&O policies are normally arranged on a ‘claims made’ basis, which means the insurance does not cover the company after the policy expires.

Therefore, if a claim is made against the seller after the seller’s D&O policy expiry date, the seller will be responsible for paying any charges in full. Depending on the specific contract details, this could mean that the buyer is responsible for paying the fines.


Insurers can offer a ‘run-off’ policy, this will extend the D&O cover reporting period (for a selected time period) for any claims that arise after the seller’s policy expires. Firms should secure a run-off policy prior to the merger or acquisition completing.

Another factor to examine in D&O insurance is the ‘change in control’ provision. Many D&O policies include a ‘change in control’ provision that modifies or voids the cover if the company is merged into or acquired by another company.

Insurers will typically use a change in control provision to restrict cover to wrongful acts occurring before the change in control.

Pre-Planning Process

Merger and acquisition deals can be complicated. You must undertake extensive research and preparation prior to deals completing to ensure that there are no gaps in insurance cover.

When preparing for a merger or acquisition, it is crucial to understand how the buyer’s and seller’s policy will respond to a change in control and to secure run-off cover for any claims made following policy expiry dates.

In order to avoid saddling your combined company with uninsured liabilities, you must be knowledgeable about your insurance policies and how each might be modified in a merger and acquisition transaction.

Expert Review

A specialist Business Insurance Broker, such as Insync, can help you review your M&A Insurance risks to ensure you have the correct cover in place prior to the transaction being finalised.

Insurance professionals will be well versed in managing such processes, allowing you to focus on the core deal itself with peace of mind that the insurance risks have been adequately reviewed.

Contact Insync today on 0330 1240730, or book a free review online via our website.  If necessary we can arrange Directors and Officers or Management Liability Insurance for you as well as any specific Warranty or Indemnity Insurance cover.