insurance implications of buying a business

The insurance implications of buying a business

An increase in mergers and acquisition (M&A) activity is one noticeable trend1 throughout the year of the pandemic (and forecasted to continue in the year ahead).

At Acacia, we’re frequently asked to advise clients on the insurance ramifications of acquiring a new business, both from the point of view of the acquiring entity and the business being acquired.

What are some of the key insurance considerations when buying a business?

The first point to note is that the type of acquisition will affect the impact on insurance, with a share acquisition raising some different issues to those associated with an acquisition of the assets of a business.

Share acquisitions

In a share acquisition, the shares of the target company are acquired, with the acquirer obtaining control of the assets indirectly by becoming the owner of the target company.

Insurance policies taken out by the acquired company normally remain effective, subject to the terms and conditions of the policy.

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 the acquirer needs to be aware that the existing cover taken out by the acquired company will only provide limited cover to the acquired company going forward. The acquirer needs to ensure that other adequate insurance is in place for post-acquisition events.

Should the acquiring entity have similar insurance policies in place, they may cover the acts, errors or omissions of the newly acquired company. This will depend upon the definition of ‘Insured’ in the policy and the wording of any ‘new subsidiary’ clauses. In some instances the latter will automatically include newly acquired subsidiaries provided they comply with certain criteria but, sometimes, they will 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.

As a matter of prudence, 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 It’s probably also sensible to get the newly acquired company added as an insured in the schedule to those policies.

Asset acquisitions

The other option is for the acquirer to buy the assets of the target company, as opposed to shares in the target company.

Generally speaking, the activities of the business prior to the acquisition will be the responsibility of the vendor. Post-acquisition, the business will be conducted by the acquiring entity and the responsibilities for the activities of the business will lay with that entity.

The conduct of the business by the acquirer will not be covered by the insurance policies taken out by the target company and the acquiring company needs to ensure that it has the necessary insurances in place. This may be achieved through existing policies or require the acquiring entity to take out new policies.

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 of the business prior to the acquisition, particularly if the trading name of the business remains the same. These claims might not 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.

Run-off cover

Whilst run-off cover is primarily designed to protect entities that cease conducting a business (e.g., an asset sale), it can also provide protection to acquiring entities.

As noted above, claims might mistakenly be made against an entity that acquires the assets of a business for the actions of the vendor prior to the acquisition. Whilst the liability for any such claims should fall upon the vendor, indemnity may not be available to the vendor under policies taken out by it for claims made after the acquisition if those policies have been cancelled or expired. Examples of such claims might include a post-sale incident involving a product sold by the vendor prior to the acquisition or, more generally, claims that fall within a claims-made policy. Appropriate run-off cover would not only protect the vendor from such claims but could encourage claimants to discontinue claims against the acquirer, thereby avoiding the incurring of considerable legal costs by the acquiring entity (which may be uninsured).

Asking the vendor to take out run-off cover may also be sensible in a share acquisition scenario because 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. The importance of run-off cover will be even more significant if the other insurances maintained by the acquirer do not respond (eg, because of a retroactive date imposed on the acquired entity).

For the above reasons, acquiring entities should consider asking vendors to take out run-off cover.

Warranties and indemnities

Suitable warranties and indemnities should also be sought from the vendor in the sale agreement to provide a first line of protection to the acquirer for liabilities arising from the activities of the vendor prior to the acquisition completing. These should be discussed with your lawyers.


Businesses involved in M&A activity, whether by way of share or asset acquisition, need to be aware that such transactions can impact upon the various insurances held by both the acquired business and acquiring party.

Acquirers should consult with their insurance brokers to fully understand the insurance ramifications of such transactions and to ensure that all necessary insurances are or remain in place.

Questions about the insurance implications of buying a business (or selling)?

Contact us to talk about your specific M&A situation or for questions about your insurance solution.

The information in this article is general only, it doesn’t take into account your business or situation. You should speak to your insurance adviser or insurance broker about your needs before making any changes or decision. As insurance advisers, we are not authorised to and unable to provide you with legal advice and this article does not purport to do so. We recommend you seek independent legal advice on any matters in this article that might concern legal matters.

1 Source: PWC Global M&A Industry Trends