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UPDATE: As Insurance M&As Rise, Be Sure E&O Coverage Is in Order


Managing Your Insurance Agency E&O Coverage During an M&AManaging Your Insurance Agency E&O Coverage During an M&A

A 2014 report by Deloitte earlier this year indicates that the momentum for mergers and acquisitions is building in the insurance industry on a year-to-year basis with a 30% increase measured by deal volume, particularly in the brokerage and the property/casualty industry. In an interview with World Risk and News TV, Boris Lukan, principal in Deloitte’s U.S. Property & Casualty Insurance Consulting practice, said: “New capital has definitely had a significant effect on the sector; it’s been a noteworthy stimulant…There were a number of deals that I don’t think would have been done if not for the presence of financial buyer…Businesses like insurance brokerage firms, consolidating blocks of life and annuity business, as well as organizations that provide outsourcing services to the insurance industry have been attractive targets.”

This M&A insurance momentum is underscored by recent numbers released by Optis Partners L.L.C, a Chicago-based investment banking and financial consulting firm that serves the insurance industry. According to Optis, the first half of 2014 saw 165 mergers and acquisitions of insurance agents and brokers in the U.S. and Canada. This represents the most active first half since 2000 and the second-most active six-month period since the second half of 2008.

That’s good news for the agencies and brokers looking to expand, perpetuate and grow their business. And while there are many factors that go into a successful merger or acquisition, one issue that cannot be overlooked when dotting your “i’s” and crossing your “t’s” is how your insurance agency Errors & Omissions (E&O) insurance will be affected.  A change in the definition provision of the policy over control of the business varies from plan to plan, and could affect your E&O coverage. On average, if the change is between 25-50% of the voting stock, change in control provisions will apply in most insurance policies. In some cases, depending on the policy, this change may terminate completely; or a policy may remain active but not respond to any claims after the date of ownership exchange.

What’s more, depending on how the policy is written, you may only have a certain amount of time to advise your E&O carrier of a merger or acquisition. If an insurer is not advised of the change in ownership within the allotted time period, you could also run the risk of not being covered for any claims reported in the future that occurred while your policy was active. You may also need to pay an additional premium for an extended reporting endorsement within 30 days.

In addition, you must ensure that all your insurance licensing is up to date so you don’t run into any potential E&O problems down the road. Depending on the state’s licensing requirements, you need to notify the insurance department of any changes resulting from a merger or acquisition. Some states have timeframes for change notifications. In addition, if your producers are now writing business in additional states (outside your home state) as a result of a merger or acquisition, depending on the state requirements, non-resident insurance licenses must be obtained.

These are just some of the E&O issues to consider when contemplating a merger or acquisition. To learn more detail about the professional liability issues that can arise with an M&A, please take a look at our white paper, “Managing E&O Insurance Coverage During Mergers & Acquisitions”. Axis Insurance Services specializes in errors and omissions insurance coverage and can provide you with guidance and a comprehensive and competitive E&O insurance program for your insurance agency. Give us a call at (877) 787-5258.

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Blogged on: September 16, 2014 by Mike Smith
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