Laying the groundwork for international acquisitions
Acquiring a company overseas is a complex undertaking that requires careful planning across multiple disciplines, including legal, financial, operational, and, importantly, insurance.
Ensuring that risks are properly transferred and covered is essential to protect the acquiring entity from unexpected liabilities.
Below, we outline the key insurance considerations for companies evaluating international acquisitions and the steps to take for a smooth integration of insurance programs.
1. Information checklist for the target entity
For each entity under consideration, it’s important to gather a comprehensive set of information to assess the insurance implications. At a minimum, ensure you obtain:
Full legal name.
Revenues and number of employees.
Asset and liability details.
Shareholding and corporate structure.
Business activities and operational jurisdictions – are they a departure from your core services? Current insurance arrangements (insurer, policy periods, coverage limits, deductibles).
Any compulsory insurance requirements, i.e. certain provinces in Canada.
Any exposure to the U.S.
Intended assumption of historical liabilities (note: this is generally not recommended).
Confirmation that the target will become a formal subsidiary.
Claims history for the past five years.
Note: Insurers may request additional details and charge an adjusted premium based on risk exposure.
2. Key insurance considerations
(a) Coverage start date:
“Claims Made” insurance policies typically respond only to claims that arise from professional services or wrongful acts occurring after the acquisition date. Therefore, if historical liabilities are a concern, run-off coverage should be arranged for the selling entity. This is particularly important for:
Directors & Officers Liability (D&O)
Professional Indemnity (PI)
Run-off cover helps ensure that claims related to pre-acquisition periods are managed separately and don’t impact the buyer’s current policy.
(b) Automatic coverage for new subsidiaries:
Many corporate insurance policies automatically extend to cover newly acquired subsidiaries, but this is subject to limitations and insurer review.
If coverage is not automatic, coverage usually applies for a temporary window, allowing time for underwriting to assess the new risk.
Key areas which are outside of automatic coverage are:
Revenue of the target company is greater than 20% of the buyer’s revenue.
Gross assets > 25%.
US-listed securities.
Professional services of the target company differ from the buying company.
Poor claims history.
Important: Automatic coverage provisions only apply to future claims where professional services or a wrongful act occurred post-acquisition. Past liabilities remain the seller's responsibility unless explicitly assumed.
3. Critical action points
To avoid insurance gaps and help ensure a seamless transition, acquiring companies should:
Engage early in the due diligence process with insurance advisers to assess and prepare necessary changes.
Promptly notify insurers of any acquisitions, providing full and accurate information as set out above.
Confirm whether the selling party will arrange run-off coverage for legacy liabilities. This can be ringfenced as part of the acquisition deal, and your insurance adviser can assist.
Integrating risk into your deal
When acquiring a company, especially across borders, it’s essential not to overlook insurance.
Early engagement, thorough disclosure, and strategic planning can help ensure that both current and legacy risks are adequately addressed.
Warranty and Indemnity (W&I) insurance, a specialised insurance product used in mergers and acquisitions transactions, can also be arranged. It provides financial protection to either the buyer or the seller against potential losses arising from breaches of warranties or claims made under indemnities in the sale agreement.
Consideration of these factors can not only help protect your organisation but also facilitate smoother post-deal integration and compliance with regulatory and contractual obligations.
If you're considering or currently evaluating an overseas acquisition, speak with your insurance broker or advisor early to map out a tailored risk transfer plan.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action based on the content in this publication.
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