Patrick J. McDonough Insurance Recovery Group mcdonoughp@howrey.

com RISK MANAGEMENT MERGER AND ACQUISITION CHECKLIST Before acquisition is consi ere ! Estab ish po icy statement when risk manager shou d become invo ved and !unctions to be per!ormed. Estab ish a management directive or a check ist which can be used by ac"uisition team.

"#ase I $Before an% &a&ers are si'ne ( #. Items to consider$ %. &. Review coverages in e!!ect. 'here products are invo ved( identi!y product ines( inc uding o d and discontinued products that may give rise to c aims. Review o d annua reports( %)*s( and other documents. Eva uate e,posure to product iabi ity c aims under successor iabi ity ru es. #ssess ways o! minimi-ing e,posures. Eva uate oss e,perience. Determine impact on !uture premium costs. Pay particu ar attention to products( workers/ compensation( and pro!essiona iabi ity c aims that cou d have ong payout periods. Review reserves to see i! 0s eepers0 e,ist which cou d resu t in ma1or 1udgments. Estimate an I23R !igure. 5eri!y open c aims !or su!!iciency o! coverage and eva uation o! deductib es or 6IR7s. 'hat are tota insurance costs9 'i they be higher or ower a!ter ac"uisition9 Eva uate e,posure to asbestos and po ution c aims( inc uding c aims that may arise !rom discontinued operations. #ssess methods o! minimi-ing e,posures.

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E ements to be incorporated into merger agreement$

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#ssign responsibi ity to the ac"uiring or to;be ac"uired !irm during the interim period !or damage or oss o! property being conveyed( or !or c aims arising out o! the ac"uisition. Re"uire that the ac"uired !irm keep a insurance po icies in !orce unti noti!ied otherwise. 6tipu ate that a broad;!orm named insured c ause be added !or the new y merged or ac"uired entities. 6peci!y that any insurance po icies o! the ac"uired !irm that come up !or renewa during the interim period wi be reviewed by the ac"uiring company be!ore renewa . I! the ac"uisition is by purchase o! assets( speci!y that the insurance po icies o! the se ing company are not a part o! the assets to be purchased. <he ac"uired company does not immediate y cease to e,ist. It ives unti a assets have been distributed and disso ution is accomp ished. It continues to have emp oyees( and can be sued even i! it has no other assets than proceeds o! sa e. Even a!ter disso ution( distributed assets can be ega y attached !or some period o! time. I! continuation o! insurance is desired( i.e.( property or auto( contact the broker or carrier and have new po icies issued e!!ective at the time o! the trans!er o! tit e o! the assets. # cance ations( audits( etc.( re ating to the po icies owned by the se ing company then become the responsibi ity o! the se er rather than the buyer. 6tipu ate( i! possib e( that the se er continue iabi ity insurance !or a number o! years a!ter the date o! sa e( particu ar y i! c aim;sensitive products are invo ved. It is not unusua to re"uire the se ing company to continue coverage in !orce beyond the date o! sa e in order to cover any occurrences re ating to products manu!actured prior to a merger. '#<=> ?@< A?R =B#IM6 M#DE P?BI=IE6C #void coverage gaps by providing specia wording in the purchase contract so that the ac"uiring !irm has the bene!it o! the ac"uired company/s insurance. <his is crucia !or any c aims based on occurrences prior to the date o! ac"uisition ;; it is high y un ike y that the iabi ity carrier o! the ac"uiring company wou d cover such c aims. 'ith recent successor iabi ity decisions( this is becoming more and more important. #ssign respective responsibi ities !or iabi ity that may arise or be discovered a!ter the signing o! the contract Finade"uate insurance( retroactive coverage( product reca ( etc.G.

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"#ase II $Ti)e *et+een si'nin' acquisition a'ree)ent an actua, effecti-e ate(

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I! key individua s invo ved( key person i!e and disabi ity coverages may be needed. =ustomer ists or other va uab e documents may need protection. # va uab e items identi!ied( inc uding insurance documents( shou d be protected. #. P>H6I=#B D#M#GE %. ?btain a comp ete schedu e o! property va ues inc uding aircra!t( watercra!t( automobi es showing owned( eased( and property in custody !or which the !irm is responsib e. 6chedu es may show book or actua cash va ue( whi e you may want to insure some !or rep acement cost. Identi!y critica e"uipment and determine positive ownership o! arge power trans!ormers and other ma1or e"uipment. @se a ! ow chart to ana y-e conse"uentia oss e,posures and pinpoint e,tensive business interruption potentia s.

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'?R*ER6 =?MPE36#<I?3 %. =overage considerations a. Aor various reasons( Risk Manager wi want to review the '.=. insurer o! a new entity #6#P prior to the merger. Items to be inc uded in this study inc ude$ i =overage is app icab e on y in states isted on dec arations page o! po icy. I! ac"uiring !irm/s po icy wi become e!!ective on the new !irm when ac"uisition is comp ete( this must be modi!ied. #n a states endorsement wi temporari y remedy the prob em in FiG but wi not cover operations in monopo istic states. =ertain c asses o! emp oyees may not come under '.=. aws o! a particu ar state or may have too !ew emp oyees in a state to come under compensation statutes. <his can be remedied with a 5o untary =ompensation endorsement written to cover a emp oyees. Book into need !or @6BI>( maritime( !oreign comp( Jones #ct( etc. coverage.

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=ost =onsiderations 6hou d 'orkers/ =ompensation insurance a!ter a merger I ac"uisition be combined9 # possib e e,change o! emp oyees ;; or interchange o! emp oyees ;; between parent and subsidiary may suggest the desirabi ity o! a sing e insurer. In the !ina ana ysis( decision as to what to do with compensation insurance a!ter a merger or ac"uisition wi be in! uenced primari y by cost considerations.

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E,perience Modi!ication a. 2ackground$ Ru es that app y to various combinations o! entities !or e,perience rating purposes$ i I! same person( group o! persons( or corporation owns a ma1ority interest in more than one entity( the entities must be combined !or rating purposes. !irm ac"uires ownership o! second !irm( e,perience modi!ication o! parent becomes app icab e to the subsidiary as o! the e!!ective date o! the takeover and prior e,perience o! the subsidiary is discarded. I! two or more entities are merged so that ownership interests o! a such entities are combined in the surviving entity( the incurred e,perience o! a such merged entities must be used !or e,perience rating o! the surviving entity. i.e.( >ow ru es can work !or or against$ Airm #( E,p. Mod %.&) Airm 2( E,p. Mod .D4 Airm # buys !irm 2( I! 27s manua premium is J+))())) and Kru esL app ied( Airm 27s premium increases J%)4())). <o get around this( 2 cou d go se !;insured or e ect a retro rating p an. Ru es can a so be reversed and work to your advantage.

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#na y-e E,perience Modi!ication i E,perience modi!ications shou d not be taken !or granted. # thorough review o! the worksheet and oss in!ormation can provide va uab e in!ormation. 6ubstantia debit may indicate inade"uate !aci ities( overcrowding( inade"uate working capita ( substandard abor( or a,ity o! management may be a contributing !actor. I! de!iciencies can be overcome( proposed ac"uisition may be even more attractive. ?therwise( this shou d be recogni-ed prior to the purchase. E,perience debit may a so be the resu t o! a misc assi!ication !or rating purposes or no c assi!ication that accurate y !its the operation. Debit may have been caused by a !ew ma1or accidents ;; or a ot o! minor accidents. Remember( !re"uency o! osses is o!ten o! greater signi!icance than severity when ana y-ing the e,perience o! any company. Imp ementation o! oss contro measures can very o!ten reduce !re"uency prob ems. Debit cou d a so indicate de!iciencies in an insurance company/s sa!ety or c aim service ;; or both. I! company coverage is combined( make sure that one insurer you se ect has the capabi ity o! providing the services you wi need in the territories in which you operate. May e,pect an increase in '.=. c aims i! workers anticipate the c osing o! a p ant.

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GE3ER#B BI#2IBI<H %. 'e structured program shou d not create any prob ems during merger or ac"uisition. 'e structured program means$ a. b. c. d. G=B po icy 2roadened to e iminate many troub esome e,c usions o! 0standard0 coverage. Reasonab e imits o! iabi ity capped with @mbre a po icy. 'ritten to cover new or additiona entities.

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Recommended that the 3amed Insured wording on po icy be broadened to inc ude anguage such as this$ K . . . and a subsidiary( a!!i iated( associated( or a ied companies( corporations( !irms( or organi-ations( as now or herea!ter constituted !or which the 3amed Insured has the responsibi ity o! p acing insurance and !or which coverage is not otherwise speci!ica y provided.0

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=orporate counse shou d be consu ted as to the e,act anguage to be incorporated in the 3amed. Insured wording. It shou d bring any new ac"uisition under your =GB automatica y. I! ac"uired companyFiesG keeps separate iabi ity po icyFiesG( parent shou d be inc uded as 3amed Insured as re ates to the activities o! the a!!i iate.

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@mbre a Po icies a. b. 3amed Insured wording shou d be broad enough to cover new y ac"uired entities Fsimi ar to G.B. wordingG. Make certain that under ying imits o! new y ac"uired company/s po icies are consistent with that o! parent.

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=onso idate =overage9 a. Eva uate service o! parent/s insurer ;; #re they e"uipped to hand e necessary c aims service at a ocations where operations o! new !irm conducted9 Does it have e,perience in dea ing with operations o! the new !irm9 Does it have capabi ity to hand e the e,panded operations to which the merger or ac"uisition may ead9

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Deductib es Deductib es !or one !irm may be appropriate whi e !or others tota y unsuitab e.

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# ocating Premium =osts I! necessary and a potentia prob em( separate programs may be best.

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Review # =ontracts #s soon as you can( you may want to review with counse ( a eases and other contracts into which the new ac"uisition has entered. Hou wi want to know to what e,tent the ac"uired !irm has assumed iabi ity through ho d harm ess agreements( ... etc. 'ant some type o! program set up which re"uires subsidiaries and a!!i iates to !i e with the parent evidence o! any assumed iabi ity.

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Imputed and #ssumed Biabi ity 2e aware when dea ing with insurers to di!!erentiate between imputed and assumed iabi ity. I! iabi ities are imputed to the buying company( then the prior insurers o! the se ing company shou d sti provide coverage without the need !or an accepted assignment o! interest in those prior po icies. >owever( i! the prior iabi ities o! the se ing company are assumed by the buying company( then it is probab e that the prior insurance o! the se ing company wi not be avai ab e to the buying company without an assignment o! interest agreed to by the prior insurers.

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Po ution Biabi ity 'i want to eva uate past and potentia iabi ity !rom this e,posure i! app icab e. I! premiums based on gross sa es( make sure that inter;company sa es are e,c uded especia y i! ac"uired company is supp ier o! a key item in your !inished product.

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DI? BI#2IBI<H %. &. I! po icy in !orce( shou d be reviewed to determine po icy provisions concerning addition o! new positions( ... additiona DI?/s ... new entities( etc. >ave to !ami iari-e new D I ?/s o! do/s and don/t/s regarding po icy e,c usions( company by aws( and their responsibi ities. I! ac"uired company has DI? po icy( po icy may have to be cance ed ;; 6ome insurers won/t assign po icies.

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=RIME %. 2e certain that no apse in !ide ity coverage deve ops( otherwise coverage !or a previous occurrences beyond the discovery period o! the o d bond becomes void. # so be sure that any new !ide ity po icy wi pick up prior osses.

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=rime packages under which most Aide ity coverage is written do provide automatic coverage !or +) days. &. Determine whether any payro s are made by cash or i! any substantia money or security e,posures e,ist. Aind out what the ma,imum cash is on the premises at any one time. 6ome !irms keep as much as J%)())) petty cash on the premises at a times. +. ?ther property9 6ecurities( stamps( merchandise. 3ew !irm may have raw stock or !inished goods particu ar y vu nerab e to the!t( i.e.( e ectrica products( portab e products with high va ue( precious meta s( etc. Don/t assume that insurance !or the mergedMac"uired company was designed to cover them. Hour own insurance may simp y not be broad enough to hand e these new ha-ards. Review crime insurance with the needs o! the new entity in mind. .. =heck whether the !irm emp oys persons who are not de!ined as emp oyees in the !ide ity bond. I! so( they shou d be inc uded in the ac"uiring !irm/s bond. <his does not prec ude the possibi ity that the ac"uired !irm/s bond may be better and be continued instead. Eventua y( a emp oyees shou d be brought under one bond. 3ew a!!i iate may have business re ationships with individua s not c assi!ied as emp oyees Fsuch as brokers( !actors( commission merchants( consignees( contractors( or other agents or representativesG who wou d be c ose enough to the operation to cause serious oss. 6o ution$ #sk a!!i iate/s insurer to e,tend coverage to these peop e or have them or emp oyers provide you with a bond. <erminated Emp oyees ;; #s a resu t o! a merger or ac"uisition( some emp oyees may be terminated. Aind out i! your emp oyees or those o! new subsidiary covered whi e in your Kregu ar serviceL and !or K+) days therea!terL. 6hou d try to e,tend to 8) or E) days. Book !or evidence o! prior !raud on the part o! an emp oyee. <he parent7s bond may imit coverage( particu ar y i! an o!!icer o! the ac"uired !irm had prior know edge o! the incident and the bond underwriter agreed to continue coverage. <he parent7s bond wou d not norma y provide coverage !or prior !raud. =are!u y review security procedures and oss contro . ;D;

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6@==E66?R BI#2IBI<H %. 2ackground$ # de!unct !irm7s iabi ity used to be imited( but this is changing. <oday( a company may be he d iab e !or the products o! a !irm ac"uired twenty or thirty years ago and ong de!unct. Most states have speci!ic common aw ru es on successor iabi ityN these ru es are broadening on a case;by;case basis &. 6teps to take$ 'eigh products iabi ity e,posure o! the ac"uired !irm in ight o! recent court decisions. I! e,posure e,its( consider the !o owing action$ a. b. c. d. =hange the product as we as personne and management o! the ac"uired !irm( and i! possib e( the physica ocation. 2uy assets rather than company stock and disso ve the !irm. =ontractua y e,press re!usa o! accepting iabi ity !or the ac"uired !irm7s previous deeds in order to avoid imp ied acceptance. Make it c ear to everyone that the o d !irm no onger e,ists( and that you do not provide services !or the predecessor7s products. Do not take over e,isting service contracts. #dd an indemni!ication c ause to the contract o! purchase that the ac"uiring !irm wi be he d harm ess.

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<he need !or and avai abi ity o! successor iabi ity insurance shou d be determined. 6uch insurance wi not avoid iabi ity but it wi he p de!ray ega and c aims costs i! iabi ity were imposed. <ake care that such a po icy e,press y covers iabi ity !or the de!unct !irm/s products without imitation as to the date o! manu!acture.

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>I6<?RI=#B D?=@ME3<6 %. Provide sa!ekeeping !or a important documents as respects the transaction. # so need emp oyee records( ab testing( O.= records( o d contracts Fespecia y insurance contracts as !ar back as possib eG

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#GE3=HM2R?*ER REB#<I?36>IP Bong standing( !avorab e agentMbroker re ationships may e,ist which might be continued. #ssess broker competency.

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RI6* M#3#GEME3< 6<#AA Review e,isting sta!! to see how they can be incorporated into surviving organi-ation. Aami iarity with oca scene may o!ten prove use!u . =orporate risk management manua s shou d be reviewed so they agree in Risk Management phi osophy.

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RE<E3<I?3 PR?GR#M6 Reserves on se !;insured programs need specia attention because o! potentia iabi ity and ta, imp ications. I! !irm has captive( specia ana ysis o! !unction and potentia is essentia .

"#ase III $After Mer'er is Co)&,ete (

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#!ter the merger is accomp ished( !inancia priorities may have shi!ted( working capita may be strained( and there!ore( eve s o! se !;assumption o! risk may need to be owered. ?n the other hand( the arger !inancia structure may ca !or higher retentions. #ccumu ation o! va ues may need reeva uation( as do the e,tra e,pense and business interruption e,posures( particu ar y( i! a c ose interdependence o! operations between the ac"uired and ac"uiring !irm is e,pected. Po icies may need to be brought back into the risk manager/s !i e so that he or she is prepared !or divestitures and spin;o!!s. 6ome o! the subsidiaries or p ants o! the ac"uired !irms may not !it into the corporate p an( and( by being spun o!!( ease the corporate debt burden. Aina success !rom the standpoint o! the risk manager means the !o owing$

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# we conceived and e!!ective program o! communications to assure smooth cooperation between the risk manager and the personne o! the ac"uired !irm. <he basis wi be a redrawn corporate po icy and risk management manua . #ppropriate and we understood c aims procedures. #ctive iaison between the ac"uiring !irm/s brokers and insurance carriers and the ac"uired !irm. # great dea o! tact to achieve active cooperation rather than resigned acceptance throughout a phases o! the ac"uisition period.

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