In recent years we have seen a tremendous amount of merger and acquisition (M&A) activity. 2021 delivered historical highs for middle-market private equity firms in the U.S., when 4,121 deals — valued at more than $602.6 billion — were closed. As companies continue to unlock revenue synergies, gain stronger market power, and drive greater growth, the end-to-end M&A process remains thorough.

From developing an acquisition strategy and setting the search criteria, to performing the valuation analysis and ultimately closing the acquisition, it may take six or more months from start to finish. That’s because these transactions continue to grow in value and volume, thus triggering increased complexities to ensure the integrity of the deal-making process.

The Importance of Insurance Due Diligence

Effectively assessing risk factors associated with investing in a target business involves understanding a company’s insurance program — and the liabilities and exposures that it may or may not cover. This is an essential part of a transaction that should receive the appropriate attention.

This process is necessary to prevent any insurance coverage vulnerabilities and to ensure all entities, executives, and management personnel are covered properly. As part of a comprehensive risk management approach, it’s important to understand a company’s insurance program to evaluate the risk exposure that is associated with investing in that company.

How Doeren Mayhew Insurance Group Can Benefit the M&A Process

At Doeren Mayhew Insurance Group, the insurance due diligence work that we do serves to complement the accounting and legal due diligence. The due diligence report can help concisely document a target company’s current and projected risk issues.

This essential information benefits the buyer by giving them the information they need to make decisions during the M&A process. If they decide to proceed, the due diligence report can also help validate the purchase price, optimize insurance protection in the final sale agreement, and mitigate insurance-related exposures.

Additionally, this process assists in understanding how EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) reflects the operating profitability of a company that can be used as a comparison tool during business valuations.

The Insurance Due Diligence Process

Understand the Target Business

We obtain and review all business profiles, financial statements, market reports, and insurance policies to understand the current insurance program against the industry-specific insurance coverage needs.

Identify Potential Issues & Opportunities

In reviewing all coverage terms, conditions, and exclusions, it’s important to document any potential issues or gaps in coverage. Peer-focused benchmarking can also expose notable comparisons or trends that offer invaluable insights.

Assess Claims Exposure Profile

Pending claims must be analyzed to identify if existing coverage can offset potential exposures. Assessing future claim risk factors is also a significant part of the insurance due diligence process.

Assess Agent & Broker Arrangements

Our team of experts identify and evaluate all agent or broker relationships and other relevant professionals that play a role in leading risk or claim management efforts.

Review Directors & Officers (D&O) Insurance Policy

We must understand if the seller has D&O insurance and how the policy may be impacted by change-in-control provisions. It’s also important to find out if tail coverage is needed or if cost-saving opportunities may be available if both companies harmonize their insurance programs.

Consider Other Insurance Products

By way of warranty insurance, tax liability insurance, cost cap insurance, and litigation insurance, we often make recommendations to secure additional insurance products to facilitate transactions with a greater sense of risk control.

Insurance Due Diligence Partners

At Doeren Mayhew Insurance Group, our team of reliable insurance agents work with buyers to ensure the right questions are being asked, which include — but are not limited to — the following:

  • Do the current insurance policies cover all company exposures?
  • Are all of the entities properly insured, including subsidiaries, banks, lenders, executives and all management involved with the group?
  • Are there any risk transfer agreements that benefit or bind the seller?
  • Are the deductibles or retentions appropriate?
  • Does the policy mention “assignments”?
  • Do any of the policies include any unique exclusions?
  • Are there any retroactive premiums connected to the policies?
  • Is tail coverage available?

How We Can Help

We deliver focused assessments of a potential seller’s liability exposures and insurance coverage. Work with us to safeguard your company against acquiring uninsured liabilities that will negatively impact your long-term business value. Contact us today to learn how we can deliver peace of mind by disclosing uncovered liabilities that may significantly impact your next transaction.