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Looking to Purchase an Insurance Agency? These 5 Mistakes Could Ruin Your Acquisition.

While mergers & acquisitions offer scale and expanded reach to brokers battling a competitive market, overlooked professional liability risk could blow up any deal.
By: | October 31, 2018 • 7 min read

2017 was a record-breaking year for insurance broker mergers and acquisitions. At 537 total transactions, there were 25 percent more deals compared to 2016, and seven of them were valued at $1 billion or more, according to the Deloitte report, “2018 Insurance M&A Outlook.” The report also states that activity will abate somewhat in 2018, but not by much. The first quarter of 2018 still produced the third-highest number of M&A transactions.

A number of trends are driving the ongoing consolidation in the broker market, most prominent among them is the continuing soft market due largely to excess private equity capital that shows no signs of dissipating. For brokers, consolidation has offered an opportunity to bring a greater breadth of services to clients and diversify books of business to insulate themselves from shrinking profit margins.

However, every merger or acquisition presents risk.

Blending two sets of operational policies and procedures, two distinct workflows, two information technology systems — and sometimes most importantly — two different cultures, creates plenty of opportunity for errors and omissions. Ultimately, this exposure impacts both the buyer’s and seller’s insurance agents’ professional liability (IAE&O) policies.

“With so much to focus on, one critical aspect that gets frequently overlooked is the impact of purchase and sale of IAE&S policies,” said Michelle Girardin Freimuth, Insurance Agent E&O Practice Lead, Allied World North American E&O Division. “Insurance agency buyers that fail to properly vet the structure of another broker’s IAE&O policies could find themselves lacking coverage when they need it most.”

Before closing the deal on an acquisition, here are five key professional liability coverage points brokers should review:

1. Exceeding an E&O policy’s acquisition threshold could result in additional premium charges.

Michelle Freimuth, Insurance Agent E&O Practice Lead, Allied World North American E&O Division

Many policies establish an acquisition threshold of 15 to 20 percent of the buyer’s revenue per their most recent financial statements.  Under this threshold, acquisitions generally are covered by the policy without any changes in the terms and conditions. Above the threshold, however, carriers take on additional risk that warrants adjustments to the underwriting and could result either in a premium increase or more restricted coverage.

Checking the threshold proactively can avoid unpleasant surprises later in the due diligence phase or even after the acquisition is completed.

2. Failure to identify all of an acquired company’s professional services could preclude coverage.

Brokers typically provide additional services beyond binding policies, including everything from risk consulting, data and analytics capabilities, captive management and custom program development. Insurance agents’ E&O policies specifically name which individual professional services are covered.

In order for all exposures related to these services to be covered under a buyer’s going-forward policy, they must be explicitly named. Again, adding services could require changes to coverage that result in premium increases. The acquiring broker should consider whether they want to retain all the services offered by the acquired company, and how any additional services impact their risk profile.

3. Assuming additional liabilities impacts coverage needs.

An acquired company’s E&O policy might include coverage for their subsidiaries or other additional insureds. If the purchasing organization chooses not to take on those subsidiaries in the transaction, it should ensure its own policies are not providing coverage for those entities’ exposures.

“It is imperative that the purchase agreement is specific as to which entities’ liabilities will be the responsibility of the buyer versus the seller going forward,” Freimuth said.

4. Not checking coverage for prior acts can lead to unexpected claims.

Errors or omissions committed by a company prior to acquisition could come back to the buyer if the seller has not purchased an extended reporting period (ERP) on their IAE&O policy. The purchase agreement should state who will be held liable for prior acts before and after the acquisition date.

“Most policies offer an automatic extended reporting period for 60 days after the acquisition, with additional options for purchase. The terms can extend anywhere from one year to six years,” Freimuth said. “The coverage provided and the length of the ERP can have a direct impact on the buyer’s IAE&O exposure.”

Most IAE&O policies are written on a claims-made basis, so if a claim is made against the seller after the ERP has expired, the buyer will ultimately be held responsible for acts it did not commit because it will be the only entity with applicable coverage at the time.

Buyers should ask the acquisition target to purchase an ERP, and conduct a thorough review of the seller’s claims history to gain a sense of their exposure to future E&O claims. A high frequency or severity of claims could impact the buyer’s IAE&O exposure going forward and negatively impact an underwriter’s view of its professional liability risk.

5. Inattentiveness to cultural differences in risk management approaches could increase liability exposure.

A successful acquisition hinges on a seamless integration of cultures. A buyer should consider the seller’s policies and procedures around hiring, firing and workplace conduct, how it approaches cyber security, how diligently it maintains its records and how thoroughly it trains employees.

An acquired entity that was lax about its risk management controls increases exposure for the buyer that, if not addressed quickly, could lead to costly claims.

“During the transitional period when the acquired entity is integrating with the buyer and adopting its risk management behaviors, the buyer needs to pay careful attention to how the acquired staff is reacting and how well they comply,” Freimuth said. “Once they become more comfortable, that oversight can relax a little bit, but companies should still be doing periodic audits to make sure policies are being followed.”

Securing Comprehensive Professional Liability Protection

Both buyers and sellers have much to gain from a smooth and successful transaction, however, buyers bear significant exposure to E&O claims.  Failure to address how this exposure will be distributed and insured can completely derail a deal.

Proactively addressing changing liabilities and coverage needs is critical to minimizing a buyer’s or seller’s risk exposure.

“Every M&A transaction is different. Any time you enter into a sale, either as a buyer or a seller, it’s paramount to reach out to your carrier as early as possible to involve them in the process,” Freimuth said.

Allied World’s underwriters are experienced with the unique challenges of brokerage mergers and acquisitions. Says Freimuth: “They combine consistency with reliability in order to eliminate the hurdles and provide comprehensive coverage to ensure that our policyholders are protected against risks endemic to their profession.”

To learn more, visit https://www.alliedworldinsurance.com/usa-professional-liability-insurance-agents.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, GmbH, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. FrameWRXSM services are provided by third-party vendors via a platform maintained in Farmington, CT by Allied World Insurance Company, a member company of Allied World. © 2018 Allied World Assurance Company Holdings, GmbH. All rights reserved.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Allied World. The editorial staff of Risk & Insurance had no role in its preparation.




Allied World is a global provider of innovative property, casualty and specialty insurance and reinsurance solutions.

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]