Insurance Due Diligence - What You Need to Know

February 15, 2023

by an investor from University of Rochester in New York, NY, USA

Insurance Due Diligence is a core piece of diligence often missed by Searchers. Usually the case because Searchers have never heard of it or have no clear partner to help - leaving large risk unchecked. Sharing a quick overview today to scale understanding & awareness.

Core request to seller - if nothing else, you owe it to yourself to request and review all in force insurance policies and a 5 year loss run for each policy. The Seller can request this from their insurance broker and it requires little of their time (a big plus when you have several requests out to them at once.) This will show two key things: 1) if costs are appropriate 2) how the business has managed risk over a five year period.

What to review:

Policy Diligence
-Are their missing policies needed to run the business?
-Are coverage limits appropriate ? Are there any concerning coverage exclusions?
-Are the policies rated correctly (KEY) Check the rating of each policy, whether it be sales, payroll, building value, or vehicles###-###-#### listed. If the your policies are under-rated, you have hidden cost coming post close....

Loss Run Diligence
-Have there been past losses? Did the seller migrate the risk of a repeat loss?
-Are there any open or pending claims?

Employee Benefits Diligence
-Request copies of past monthly medical invoices. This will show cost and current enrollment
-Request a Summary of Benefits. This will show all employee benefits and any employer contributions

Stock or Asset Deal?
-If Stock, you can likely keep all insurance in place and optimize post close as needed
-If Asset, you will need new policies. You are intentionally severing past liability with your new entity.

Broker Partnership
-Like the rest of your deal team, find someone you can trust that has a process you align with.

Best effort to keep things "short," comment below what questions you have or additional detail you'd like.

Quick resource (25min mark) - Recorded Live Oak Due Diligence Session with ^redacted‌ ^redacted‌ ^redacted‌

https://liveoakbank.zoom.us/rec/play/5_HJdhMQ8So7FqC8MsCf2Pf3r-DGa0yswEP-wJEynm3qud_QmDbs0rn1GZXT9X9Ergz4l-r2TediH9og.Dk8UdJP67iK54E0N?continueMode=true&_x_zm_rtaid=QQpwY0RCRhqGoZ4Ic1HmDw###-###-#### 00d9b147286a4ed52a53441c2fa76c7c&_x_zm_rhtaid=719

Reply by a searcher
from IE Business School in Seattle, WA, USA

Nice post. My only comment would be on 2 separate deals I looked at, even if I had pursued a stock sale the incumbent insurers refused to allow the policies to transfer over. They weren't opposed to insuring me, they just wanted to re-underwrite it to determine if the policy would need to change (I took that writing on the wall to indicate they would charge me more premium regardless of the facts). Their "reasoning" was the Seller has been in the industry for decades & had a proven track record of good risk management, whereas a newcomer like me might be higher risk for them. Take that for what it's worth, but don't just assume the insurance will carry over in a stock purchase.

Reply by a searcher
from University of Pennsylvania in Philadelphia, PA, USA

Would just also add, that most searchers don't think about the costs in doing insurance switchover to include there may be some upfront payments due soon after start (e.g. 3 months of premiums due at start). Mapping out these costs after close will help prevent any unexpected cashflow issues.

+8 more replies.

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