Insurance when you're merging or acquiring

After a challenging few years, the UK tech and fintech sector is again buzzing with mergers and acquisition (M&A) activity. With improving macroeconomic conditions and a more favourable IPO market, 2024 is set to see both investment and M&A back on track.

While M&A growth presents exciting opportunities, it can also bring complexities — especially in managing insurance. For fintech founders, it's crucial to review insurance policies with your broker during these transactions to mitigate potential risks and ensure seamless coverage.

For both buyers and sellers, here are key points to consider.

The impact of M&A on existing cover

Insurance policies often have “change in control” provisions that restrict your coverage. These provisions are generally triggered when ownership or control of a company has changed, whether as a result of a merger, asset acquisition or change in voting control.

When a triggering event occurs, the cover immediately changes. Most insurance policies require policyholders to notify the broker or insurer of significant changes, such as a change in control. Failure to do so could potentially jeopardise your cover.

If you’re going through the M&A process, you may need to pay additional premiums or convert your Directors & Officers (D&O) insurance to "run-off" coverage. Run-off cover is insurance designed for claims made against a company after it has stopped doing business — such as when they’ve been merged or acquired.

Acquiring a new company often means increased risks, which could lead to higher insurance premiums. It's essential to discuss these potential changes with your broker to avoid surprises and ensure your insurance is fit for purpose throughout the process.

Run-off and tail cover

D&O policies typically convert to "run-off" cover when a change of control occurs in a company. This means the policy only covers claims arising before the change of control and only if claims are filed before the end of the current policy period.

To protect against future claims related to past actions, companies can get what’s known as "tail" coverage. This is an extension often added to the existing policy and ensures that claims made years after the change of control — or transaction — are still covered.

After an M&A transaction is completed, the company should either purchase a new D&O policy or integrate into the parent company's policy for future claims. This dual approach ensures comprehensive protection for directors and officers. It’s also possible to waive the change of control provision under certain circumstances.

Exposure assessment

As an acquirer, it's vital to review a target company’s current and past insurance policies. This will help identify any gaps in cover and will assess whether the insurance is fit for purpose.

When going through an M&A transaction, some companies can be involved in ongoing litigation or face potential long-term liabilities. In cases like this, the buyer should determine if historical liability policies are in place and if these will be affected by the M&A.

This includes understanding how these policies will respond to long-term claims that may arise post-acquisition. By speaking with your broker, you can formulate a plan to ensure you have the appropriate coverage.

The statute of limitations

In the UK, the statute of limitations for many claims is six years. This means that an insurance claim can be made up to six years after an incident occurs. As a founder, it’s important you’re aware of this time frame, as it can significantly impact your insurance needs and the handling of potential claims.

If you’ve ever made a business insurance claim you’ll know that there can often be a lag between when an incident occurs and when a claim is issued. This lag period can complicate insurance, especially during and after an M&A transaction. Ensuring that your cover is maintained for such delayed claims can be critical and often requires careful planning and discussion with your broker.

Management reshuffles

When a company is merged or acquired by another, new teams are formed. These staff may be covered under both the buyer’s and the seller's D&O policies. Understanding the interplay between these policies is essential to avoid coverage gaps and ensure clarity on which policy responds to specific claims.

Multiple indemnification sources may be available and determining which indemnity applies can depend on the specifics of the claim. Reviewing these provisions in advance helps align with the parties' intentions and provides clear guidance in the event of a claim.

Transactional liability

Representation and warranty insurance is designed to cover breaches of representations and warranties made by the seller. It can offer flexibility in handling compensation obligations.

It can be particularly useful for mitigating risks associated with an M&A transaction and can be a critical tool in negotiations, providing buyers and sellers with a safety net.

Warranty and indemnity insurance is available to both buyers and sellers in private M&A transactions but is most often purchased by the buyer.

Some final thoughts

As the UK fintech market looks to be a space where M&A is starting to flourish in 2024, founders need to be on top of their insurance, including their broker in their discussions.

Having open conversations can ensure that potential risks are addressed, gaps in cover are closed and the company is fully protected throughout the transaction process, allowing founders to confidently navigate M&A transactions and secure their company’s future.

If you’re going through this process, reach out to your account manager to see how we can help.