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Extended Reporting relating to Mergers and Acquistions

When purchasing a professional services company it is important to understand the risks associated with the prior services provided by the company being acquired.  This risk is mitigated with the purchase of an extended reporting endorsement or Tail Policy for the company being acquired.  There are several issues to consider when purchasing a tail policy.

1.  The current carrier may not offer a bi lateral tail and thus you would have to obtain coverage in the non standard market.

2.  The current policy may only allow for a tail policy for a 12 month period of time. Most acquistions look for a 5 year tail.

3.  The company being acquired may have outstanding claims that can erode the limit of the coverage.  For example, if the insured has a $1M policy and they have an outstanding claim, it is possible that if the claim breached the $1M policy limit, there would be no coverage available for future claims.  This can sometimes be resolved by purchasing a standalone tail with refreshed limits.

4.  The current policy may become paid up and the unearned premium may not be available to offset the cost of purchasing a tail policy.

These are just a few issues that are important in purchasing an extended reporting endorsement during an acquistion.

Please feel free to contact Mike Smith at Axis Insurance Services LLC for more information.  msmith@axisins.com or 201-847-9175

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Blogged on: May 6, 2011 by Mike Smith
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