E&O Insights: Do You Have Clients That Will Be Buying or Selling?
While most agents are aware that mergers and acquisitions are hot topics in the world of insurance agencies, insurance is not the only segment of our industry affected. In many communities, hospitals, accounting firms, real estate firms and law firms also look to acquire, merge or sell. If your insurance agency is “the agent” for one of the parties, there are key insurance issues that will need to be discussed and could come into play. For virtually all businesses with a professional liability exposure, the manner in which the professional liability coverage is handled could make a significant difference on whether a professional liability “error or omission” is covered. Whether your agency’s client is the buyer or the seller, proper planning and attention to detail are extremely important.
Tail Coverage
As most agents are aware from their own coverage, there are some potential considerable differences between various E&O policies. The same holds true for agency clients that have a professional liability exposure. One of the key differences involves the degree of the extended reporting period, also known as the tail coverage.
There are typically various issues that determine whether the tail coverage is available, for what periods of time and what the cost will ultimately be. Some policies are much broader than others. It could be troublesome for some clients to advise you that they are looking to sell, only to discover that the tail options of their current coverage are rather limited.
It is not uncommon to find professional liability policies that only provide tail coverage for a very limited period. This limitation could be a significant issue and will probably play a role in whether the buyer feels that he or she is adequately protected moving forward. For this reason, it is beneficial for the review of the professional liability coverage at renewal time to include a detailed discussion of that policy’s tail coverage. As you explain the tail coverage and when it is applicable, this may prompt the client to advise you of plans to sell his or her operation in the future.
If the client advises you of the desire to sell in the future, this may prompt exploring the market to find carriers with more extensive tail coverage. It is important for clients (and agents) to understand that this is only one of the issues. There are other significant factors when determining which professional liability is the best fit for that account.
Issues such as the coverage grant, the covered professional services and a host of key definitions (such as the definition of who is an insured) need to be explained and factored in. These all speak to the need for proper planning.
If your client is the seller, the policy should be reviewed for the proper handling of any potential claims that may arise. Typically, the current E&O carrier should be put “on notice” of potential claims as most E&O carriers will consider those claims covered regardless of when the actual claim is made. It essentially locks in the “date claim made.”
Does the Firm Being Bought Look Like the Buyer?
Most professional liability carriers have a certain appetite. This has the potential for the E&O carrier insuring the buyer to not have an appetite for the exposures of the firm being acquired.
Suppose a real estate firm is looking to buy a firm that is a licensed appraiser. Will that E&O carrier be willing to take on that additional exposure? Perhaps a law firm client is buying a firm that is heavy into SEC litigation. Will that E&O carrier be willing to insure that new exposure? If the firm being bought had some claim problems, this could throw a “monkey wrench” into the equation.
As the agent, be aware that these scenarios can and do occur, so you should advise your client of this possibility. Don’t hesitate to reach out to your client’s E&O carrier for its thoughts, guidance and direction on how best to manage this process.
Not all transactions look the same. The transaction could involve a purchase or it could be viewed as a merger. The E&O carrier may require additional paperwork, copies of the proposed transaction documents, applications, etc., to make this determination. E&O policies are not assignable. Therefore, having your client give his or her E&O policy to the buyer and requesting that he or she keeps making the payments is not the solution. If a problem developed, this approach could very well leave both the buyer and seller with no coverage.
When Your Client Is the Buyer
If your client is the buyer, the traditional approach is to have the E&O policy endorsed to provide coverage for the “new” exposure. The coverage typically will provide protection against errors made by the “new” professional liability client starting with the effective date of the acquisition. Be sure to inquire whether any premium adjustments are necessary.
If you have a client that is looking to buy or sell, it’s critical to address the key issues in advance. This will play an important role in ensuring that the transaction is handled smoothly and that the proper protection is in place.