Insurance is not usually at the forefront of the minds of those in the business of closing deals. Furthermore, pressure to close a deal can cause companies to overlook or dismiss insurance issues. However, it may be important for both sides of a transaction to consider insurance coverage issues that could harm or protect both buyers and sellers. Insurance issues can have a significant impact on financial considerations that may be relevant to a deal. On the one hand, insufficient insurance can break a deal or lead to unpleasant surprises after a deal has closed; on the other hand, insurance can be used as a tool to help save a deal and protect the valuable consideration paid in conjunction with a transaction.
The Deal Structure Can Have a Profound Impact on the Transfer of Insurance
A fundamental consideration is the impact of the deal structure on the availability of insurance coverage post-closing. There are three frequently employed structures for a transaction: (1) a merger, (2) a stock purchase, and (3) an asset purchase. In mergers, generally the surviving corporation assumes the merged company’s liabilities and obligations.[1] In contrast, in stock purchases, the target company generally remains the same and its liabilities generally remain with the target, but they may still affect the consolidated financial statements.[2] Further, in asset purchases, the buyer company generally is not liable for the seller company’s debts and liabilities, with exceptions, however, such as the following: when the buyer agrees to assume the debts or liabilities; where the sale is in reality a merger of the two businesses, known as a “de facto” merger; when the sale is fraudulent; when the buyer is merely a “continuation” of the seller; and when the buyer does not comply with the state’s laws requiring the buyer to notify the seller’s creditors within a specified period before it takes possession of the assets or pays for them.[3]