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Inside E&O Coverage When Buying or Selling An Insurance Agency

Inside-EO-Coverage-When-Buying-or-Selling-An-Insurance-Agency-300x188Reviewing Errors & Omissions Insurance Critical During M&A Process

In the last several years, we have seen a significant amount of activity in insurance agency mergers and acquisitions (M&As). In fact, 2012 was a banner year for M&As with about 325 deals made with the majority of buyers independent agents. Deals were made across the country, particularly in heavily populated regions, such as California, Florida, New York, Texas, Illinois, New Jersey, Ohio, and Indiana. Part of the reason for the high activity was the change in the capital gains tax from 15% to 20% in 2013. The number of deals in 2013 were fewer with 248 deals, which is slightly more than the average number of 245 U.S. and Canadian mergers and acquisitions transactions per year from 2008 through 2012.

Moreover, as we begin to look at the M&A landscape for 2014, brokerage deal activity seems to be strong. According to a recent article in Business Insurance, “there are many active buyers with plenty of capital to spend and/or invest, coupled with a large number of baby boomer agency principals who need an exit and are ready to avail themselves of that pool of capital. In addition, it appears January 2014 was the most active January for deals in the past seven years.”

That’s good news for insurance agencies looking to buy or sell. When doing so, however, there are many factors to consider during the acquisition process, including an insurance agency’s Errors & Omissions (E&O) coverage. We have covered this important issue in the past, including in a white paper entitled “Managing E&O Insurance Coverage During Merger & Acquisitions”. Here are just some of the issues you should be aware of.

Be sure to inform your insurance carriers of any merger or acquisition well in advance. With most carriers, failure to provide such notice may void and/or limit the acquiring company’s coverages. Generally, policies have a 30-60 day grace period for notification of mergers/ acquisitions. Insurers typically take the position that an insurance policy is a contract and the new company is not the party with which they contracted. Similarly, many policies issued to the merged and acquired companies are voided when they are merged/acquired. Check the provision in your E&O policy that stipulates how your agency’s insurance will be impacted should a change in control or management occur. To avoid gaps in coverage, the purchase of nose and/or tail coverage should be considered. At Axis Insurance Services, we have seen cases where claims-made polices have been terminated and the acquired company needed to purchase a tail policy, which was not contemplated in the acquisition cost.

Typically, an acquiring company will add E&O coverage for the acquired entity on its own policy. It’s critical that the acquiring company work closely with an insurance broker to ensure that the policy provisions, named insureds and covered professional services are properly stipulated on the new policy. Often companies acquired or sold in the past are not listed on the new policy, which results in uncovered claims down the road. All companies, DBAs, and previous companies should be provided to the new company and broker.

As a seller, be sure the acquirer’s E&O policy has broad enough coverage and will respond to the professional services you provide. Not all Errors & Omissions insurance policies are the same and you want to ensure that coverage is comprehensive to include your activities. If you are a buyer and the seller is involved in any activities other than those usual to an insurance agency, you also need to know. These activities may require a separate coverage endorsement or policy.

These are but a few of the issues that need to be addressed during a merger or acquisition – there are many others. At Axis Insurance Services, we can help you with your E&O insurance needs, including coverage implications involving an M&A. We provide flexible, intelligent and customized Errors & Omissions solutions for a broad range of professionals, including for insurance agents and brokers, wholesalers, MGAs and MGUs. Please give us a call at: (877) 787-5258.

Sources: MarshBerry, Business Insurance, Axis Insurance Services

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Blogged on: May 6, 2014 by Mike Smith
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