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Insurance Concerns in Mergers and Acquisitions

As architects continue to face economic challenges in the architectural and broader economic community, merger and acquisition activity is again increasing in the design firm world.  Unfortunately, concerned more about clients and culture, too many firms wait until the last minute to consult with their insurance advisor. This is a bad mistake that can cost the buyer and the seller money, time and unneeded headaches.

Here are some key issues that should be on any short list for firms considering merging, acquiring or being acquired:

  • After deciding on the legal format of the sale/purchase/consolidation, make sure that prior acts for both firms are covered under the on-going policy or “run-off” policies (offered by some but not all carriers).  Although it is usually cheaper to name the acquired firms on the purchaser’s policy and combine prior acts under the on-going policy, the purchaser/new firm may be assuming liabilities for which they hadn’t bargained.  Insurance counsel advice is needed.
  • Merger and acquisition activity is again increasing in the design firm world.Check the named insureds on the new policy carefully—this is one of your primary coverage triggers. This is also a good time to check other features of your policies.  As firms grow, mandatory deductibles often increase. Limits of liability may need to be raised.  A good broker can help you insure the new firm appropriately.
  • The new firm should review the combined claims experience of the predecessor firms and make sure that there are no surprises about their own coverage, deductibles, or price at renewal.  Poor claims experience from an acquired firm can impact the premium of the buyer.  A good broker can help you predict what to expect from your carrier.
  • Monetary and time obligations for open claims and circumstances should be acknowledged.  Open claims may require deductible payments and senior principals’ time.  Reserves should be set aside from the assets of the old firm.
  • Inquire about existing circumstances or claims that may not have been reported.  Ask your broker what to do if you find any.  You can negate coverage if you don’t report claims before switching policies.
  • Check to see if there are any outstanding incidents on projects where the firms worked together on either on-going projects or in the past.  There may be insurance exclusions about making covered claims against each other after the merger/acquisition.  Report any potential conflicts to your broker.
  • If the purchaser is acquiring only the assets of a firm, the status of each active project should be reviewed and noted in writing.  Find a way to describe the state of completion of each job by saving a set of plans or initialing papers.  Decide where the job will be covered.  Make sure your insurance policy includes coverage for the remainder of the jobs in progress after the acquisition.
  • Review your professional service contracts, client selection process, quality assurance, quality control, training, and other risk management related activities to be sure consistent procedures are being used.

Check all your insurance policies.  You will probably need to obtain MVRs from new drivers, schedule vehicles, list additional locations and property, resolve indemnity and additional insured issues on certificates, and make sure that any new types of operations or payrolls are reported to your carriers.  A good insurance broker can simplify the process.

A little consultation before a merger or acquisition can save you a lot of time and money afterward.  Make sure your insurance broker and company are in the loop.

Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability, Business Owners, and Cyber Liability Insurance Programs to address the challenges that architects face today and in the future. Detailed information about both these programs may be found on the AIA Trust website, www.TheAIATrust.com.