E04: Why and How to Undertake Insurance Due Diligence on your M&A Deal

In this episode of the Merge with Caution Podcast, Rob Cant (Co-Founder and CEO of SingleSource Technologies) welcomes insurance industry veteran, Simon Dodsworth (Head of Specialties, Senior Vice President at Lockton), to get to the heart of the “how?”, the “why?” and the value of undertaking insurance due diligence on M&A deals.

Key Takeaways:

• The change of control / ownership of a target company will usually have an impact on the insurance profile of that business. Both in terms of the availability (and terms of) cover and its cost, particularly if a target is being disentangled from a corporate group with a mature / sophisticated insurance program that the target will no longer benefit from
• Any such changes can result in a material change to:

1. the cost of insuring the target business;
2. the extent to which coverage will be available; and/or
3. the steps to be taken (and associated costs to be incurred) to maintain the required level of insurance.

• The typical cost of an insurance program to a mature business represents a material proportion of a company’s operating expenses. As a result, changes to the cost of procuring insurance will usually result in a significant impact on the enterprise value of the company
• These business critical implications are only likely to be picked-up by undertaking due diligence by expert insurance advisors. While legal due diligence can sometimes cover the review of policy documents, it will not cover the commercial implications of the deal on the terms of the prospective cover
• The cost of undertaking insurance due diligence by an insurance broker can be surprisingly low relative to its value (often subsidised by the other business lines provided by the broker)Insurance diligence can serve as a proxy for evaluating the target company’s management’s approach to risk and operations, uncovering additional useful datapoints to assess a target’s risk profile.