Brokerage Ops the May 2023 issue

Merging Companies, Cultures and Coverage

Successfully integrating brokerages that are merging likely includes restructuring all entities’ insurance coverage.
By Nick Maletta Posted on April 30, 2023

As such, the needs that coincide with adapting to a new work culture and/or management configuration deserve significant consideration. The fact that no two mergers are alike can present challenges for communication strategy, needed training, and the firm’s insurance program structure. Raising the stakes even more is the fact that there is often little leeway in the time frame of these transitions.

Firms should be guided by two foundational questions as a baseline for planning: how exactly the new firm will intermix into the current firm’s practice, culture and structure; and what insurance coverages need to be set in place to align with the liability of the newly formed structure and entity. 

Communication Is Key

From a company culture perspective, it is necessary to remember that employees will have many questions involving the merger. Employers should be diligent and remain a resource for their team throughout the entire process, as they will inevitably want to know how this affects them on an individual level.

From a management perspective, even simple actions such as working with key leadership on a carefully thought-out communication plan, which accounts for how and when the news will be brought to employees, can make a world of difference. If handled correctly (and communicated well), a merger can drive engagement, productivity and job satisfaction. Also, the feedback from employees can ultimately give an indication as to whether the acquisition will thrive or fail.

Other factors that should not be excluded from merger and acquisition planning include aspects that affect the overall practice and procedures of the business, such as the merging of IT and cyber-security practices, the duplication of existing key roles like human resources and other management policies.

Evaluating Insurance Programs

While a smooth transition is the obvious goal, brokerages specifically must be ever conscious of the intricate nature of their insurance policies and ensure they are handled in a way that will best serve all parties involved. Thus, an imperative first step in the acquisition process is establishing and understanding the acquisition structure and goals. Whether it’s a merger that accounts for the transfer of assets only or both assets and liabilities or it’s another structural acquisition that involves new or different stakeholders, establishing the structure will be a first step in determining the best course of action for the current insurance program or the need for additional insurance.

Perhaps most pressing from the brokerage perspective is that the insurance programs for each merging entity need to be thoroughly evaluated and possibly consolidated. Assuming this is the target path of the acquirer, this process should be done by an insurance broker who understands the insurance and risk management issues at stake for both firms and can coordinate the corrective actions of both sets of coverages. More often than not, the language crafted by attorneys (which shapes the legality of the merger) does not follow the necessary practices and protocols required to properly manage insurance policies through the transaction. This further solidifies the importance of the broker’s role and further establishes the need for a dedicated insurance professional to safeguard benefits for the future of the company and its employees. 

A comprehensive list of representations and warranties provided by the seller is also usually required during this process. This should include the state of affairs of the business or assets that are sold. These “reps and warranties,” as they’re known, can touch on just about anything from accounts receivable to tax treatments, physical assets, work-in-progress details, copies of standard contracts, large client contracts, and more.

Firms should be guided by two foundational questions as a baseline for planning: how exactly the new firm will intermix into the current firm’s practice, culture and structure; and what insurance coverages need to be set in place to align with the liability of the newly formed structure and entity.

Some commonplace options to mitigate insurance liabilities (which may carry tail liabilities extending past the closing date) involve a few different policy models. One is a model where the acquiree purchases an extended reporting period, or tail coverage, from its current insurance carrier. In this case, any work in progress (WIP) would get rewritten or assigned to a new contract with the acquirer and endorsed to the acquirer’s policy. Another option is when the acquirer adds the acquiree and all named insureds to its current policy, effectively folding in all past liabilities and work.

It is also important to note, however, that, while there are several ways that coverage can be handled, it will ultimately be controlled by the final buy/sell agreement, which is determined by a handful of factors, top of mind being the associated cost. As with any deal, it is crucial that the available options assist in determining how the buy/sell agreement will be modified to fit everyone’s budget or how creative negotiating may take place to share in these expenses.

In the long run, the resulting end product of a merger can be a single, cohesive program for the combined entity that picks up the prior liabilities of both firms or a structure in which all moving parts are assigned to help mitigate risk across all entities. It should also involve the cancellation of unnecessary policies in the most favorable manner.

No matter the circumstances, all options and new policies should be carefully vetted so the plan fits everyone’s needs and is customized to the organization. All changes carry a significant consideration for past and future liabilities.

Nick Maletta Client Executive for Property/Casualty, Holmes Murphy Read More

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