M&A Insurance Due Diligence: the Insurance issues M&A clients need to fix post-completion – Q2/22

We asked our Insurance Due Diligence report writing team to highlight the common factors that reoccur for our M&A clients when we are completing insurance due diligence (IDD) on transactions. Our experienced in-house insurance specialists draw upon detailed knowledge of a company’s sector and market conditions to deliver a totally independent, transparent IDD report that provides a full technical review and assessment.

The top 5 most common insurance issues that our team identified that will need to be fixed post-completion are:

1. Warranties and Conditions Precedent

Where a policy contains a warranty or condition precedent extra vigilance is required on the part of the insured to ensure that these are complied with at all times. Insurers have the undernoted rights in the event of a breach.

A Warranty is a written pledge by the insured that a specific statement is true.

A Condition Precedent is either imposed at the pre-contract stage and provides that the insurer will not come on risk until certain conditions have been satisfied (e.g. premium payment) or a condition that must be satisfied for the insurer to accept liability to pay a claim (e.g. notifying the insurer of a claim within a certain time period).

Conditions must be complied with, at all times, however, Conditions are less onerous as insurers are unable to avoid a claim unless the breach had an impact on the loss.

2. Change of Control Clause

Many Insurance Policies can include ‘Change of Control’ clauses, which when certain conditions are met will restrict insurance coverage or remove it all together. A key example of this is the Management Liability policy, which we often recommend is placed into run-off with a new Management Liability Policy to be placed with effect from completion to provide cover in respect of ongoing acts.

3. No common insurance programme renewal date

It is good practice for a commercial insurance programme to have a common policy renewal date. This allows the insurance programme to be focused on by management, at least once a year and can prevent any issues regarding coverage issues or business changes that will impact the insurance programme, from being overlooked.

4. Premium Financing

Often Target companies utilise premium financing in respect of insurance premiums payable. Parties must be made aware that if payments are not made in accordance with the conditions applicable, the credit companies often have the option of cancelling cover completely (at very short notice!).

5. No protection to the Target in respect of Death / Critical Illness of senior Directors

If there are any individuals with strategic importance to the business going forwards then Key Person insurance should be considered, this type of insurance is designed to help the company survive the loss of any person who is key to making the business work. There are different types of Key Person cover available, with cover arranged in the UK tending to offer the widest scope. Cover placed in the UK can be arranged on the basis that the full benefit is payable in respect of a critical illness as soon as it is diagnosed.

The above examples are typical of changes that are required post-completion which illustrates the importance of the insurance due diligence process, however, checking these 5 items in no way should be viewed as completing any kind of insurance due diligence. The IDD process our report writers deploy is far more detailed and complex. To that end, our next piece on insurance due diligence will highlight some of the more esoteric Clauses and Conditions our specialists have identified whilst completing IDD for our M&A clients.

Broker vs Matrix?

Most (if not all) insurance brokers provide IDD for free. However, as we are not an insurance broker and have no interest in acquiring the target’s insurance business post-completion, our role is simple: to provide a highly professional and impartial, technical assessment and competitively priced, IDD report, supported by the requisite insurance knowledge, advice and back-up from our specialists during the deal process. A typical IDD report will include:

• A comprehensive technical review of the company’s insurance programme addressing cover service and premium
• A detailed examination of all technical and operational documentation
• Clearly identifies and flags issues to be addressed pre- and post-completion to correctly protect the investment
• Provides a strategic analysis of the options available to optimise the programme.

By choosing Matrix for this critically important work-stream you can be confident that you are receiving an in-depth and totally impartial assessment of the issues associated with the insurance programme of the business you are buying.

We undertake IDD and provide associated deal services and products to a diverse range of PE/M&A houses, ranging from small, “boutique” operations to some of the largest firms in the world; all of whom value the benefits that the in-depth knowledge of our specialists, the wide-range of market connections we are able to call upon and our totally independent perspective, can drive additional deal value and identify value-added deal opportunities within the transaction process.

” Our experienced in-house insurance specialists draw upon detailed knowledge of a company’s sector and employ the widest range of support and advice from our extensive market connections to enable us to deliver a totally independent, transparent IDD report that provides a full technical review and assessment. “

Matrix Capabilities and Experience

Matrix are a specialist independent insurance and financial consultancy, for over 20 years we have been delivering successful projects for our Clients across a broad spectrum of industry, commercial and financial sectors on both a national and global basis.

Our team members are experts in a variety of financial disciplines which enables our scope of services to include innovative financial and insurance structuring solutions for businesses, financial institutions and the global M&A community.

We have specifically positioned Matrix so that we do not actually handle or transact business as a broker. Consequently, we can provide a wholly independent viewpoint for our clients without being impacted by the vested interests that are normally involved in insurance market transactions.

We focus on insurance 24/7 which gives us an in-depth perspective of the capabilities and resources of the broker and Insurer community.

Matrix are fully authorised and regulated by the Financial Conduct Authority.