New business owners may be exposed to potential insurance claims after an acquisition which are not covered by existing policies, Acacia Insurance warns.

Acacia recommends acquirers consult with their insurance brokers to fully understand the ramifications of buy and sell transactions and ensure all necessary insurances are in place.

In the case of a share acquisition, “it’s sensible to inform insurers of the acquisition and seek their confirmation that the newly acquired company will be covered under existing policies held by the acquirer,” Acacia says in a blog post.

“It’s probably also sensible to get the newly acquired company added as an insured in the schedule to those policies.”

In an asset sale, the acquirer should make sure it has insurance in place that covers the new business.

Acacia says that the liability of a vendor in an asset sale will not be covered by the insurance policies of the acquirer and, if the vendor’s own policies lapse, the vendor may be uninsured for its actions pre-sale. An example might include a product sold by the vendor prior to the acquisition which causes an injury after the acquisition.

“It’s possible that claims will incorrectly be made against the acquiring entity after the acquisition in relation to the actions of the previous owner,” the blog says.

These claims are unlikely to be covered by policies of the acquiring entity, as the claims will not concern the actions of the acquiring entity but rather the previous owner.

When the shares of a target company are acquired, insurance policies taken out by the target normally remain effective, though some policies - in particular management liability and directors’ & officers’ policies - often have acquisition or merger conditions that exclude claims for acts, errors or omissions occurring after an acquisition is completed.

With these sorts of policies, existing cover taken out by the acquirer will only provide limited cover to the acquired company going forward, Acacia warns. Cover going forward will depend upon the definition of ‘Insured’ in the policy and the wording of any ‘new subsidiary’ clauses, which sometimes impose a retroactive date for the newly acquired subsidiary.

“Again, it is necessary to review all relevant policies to see if they cover the newly acquired subsidiary and, if so, if coverage is restricted in any way.”

Acacia says asking the vendor to take out run-off cover may also be sensible. In the case of an asset acquisition, run-off cover may encourage claimants to discontinue claims against the acquirer, avoiding legal costs. Run-off cover will also provide protection to acquirers in a share acquisition:

“Even though any claim might be covered by insurances in place, the acquiring entity (through ownership) will ultimately be impacted by things like deductibles paid and increased premiums going forward,” it says.

Suitable warranties and indemnities should also be sought from the vendor in the sale agreement, which Acacia says provides a “first line of protection” to the buyer for liabilities arising from the activities of the acquired business.