Mergers and acquisitions (M&A) in the construction industry can be complicated and come with unexpected risks that may affect the deal’s success. To handle these challenges well, it’s very important to conduct careful research, especially regarding insurance. Here are five critical considerations to keep in mind during your review.
- Claims History
A comprehensive analysis of the target company’s claims history is essential. Reviewing carrier loss runs for all coverage lines over the past five years will help identify significant or open claims and potential liabilities. Depending on the type of construction firm, 7-10 years of loss runs may be necessary. Understanding this history is crucial for assessing the risks associated with the acquisition. Post-close, consider engaging your safety team to address any identified issues and enhance risk management strategies. Work with your broker to evaluate certain liability claims to determine if your risk transfer management would have eliminated claims and use this data to positively impact your future loss projections. Your claims management process can also have the same impact.
- Change of Control Clauses / Portability
It’s vital to examine the target company’s insurance policies for change of control (COC) provisions. Some policies may need to be placed into run-off or replaced entirely. In certain cases, COC clauses can be waived with underwriter consent if there are no significant changes in operations or key management. Determine which policies can be assumed and which require replacement to ensure continuity of coverage. Additionally, evaluate the need for tail policies for claims-made coverages, such as Directors and Officers (D&O) and Employment Practices Liability (EPL). Securing these coverages before closing is essential to protect against prior acts exposure.
- Indemnification Agreements
Review indemnification clauses in the purchase agreement and any lease agreements that will transition post-close. Understanding these clauses is crucial for managing potential liabilities and facilitating proper risk control or transfer. Clear indemnification agreements can help mitigate risks associated with unforeseen liabilities that may arise after the acquisition.
- Environmental Liability
Assessing the target company’s current, past, and future operations from an environmental impact perspective is critical. You may need to secure additional liability insurance or consider a longer tail policy to address significant liabilities from past operations. This is especially important information for certain Representations and Warranties (R&W) carriers during a transaction, as they may require thorough environmental assessments.
- Surety
For private equity buyers, a target company with significant surety needs presents additional considerations. Private equity firms often engage in practices that surety underwriters view unfavorably, such as including goodwill on the balance sheet and using heavy debt leverage. It’s essential for a surety professional to analyze the anticipated post-close balance sheet and assess how the transaction may affect bonding potential. Understanding these impacts and making necessary adjustments will help ensure the continuity of vital surety relationships after the acquisition.
Navigating the complexities of insurance policies, claims history, and potential liabilities requires expertise. A knowledgeable insurance broker can provide invaluable assistance, ensuring you understand post-close risks and identify necessary coverage adjustments.
For tailored solutions and expert advice visit our construction industry page. For more information, contact your MMA broker or reach out to Brad Deghand with MMA Private Equity Services at 847-908-8723.
