Acquiring a business is an exciting and potentially lucrative venture, but it comes with inherent risks. Amid the myriad of considerations during this process, insurance due diligence is often neglected. Nevertheless, it is a critical aspect that can significantly impact the success of your acquisition.

Insurance due diligence entails a comprehensive evaluation of the target company's insurance policies, claims history, and risk management practices. Overlooking this step can leave you vulnerable to unexpected financial liabilities and operational disruptions. I've witnessed pro-formas turn from green to red at the last minute once insurance was properly analyzed and forecasted. There are many independent insurance brokers, like myself, who specialize in risk management and can assist with much of the heavy lifting in conducting proper insurance and risk management due diligence..

Here are the steps you and your insurance broker should follow:

Review Existing Policies: Start by obtaining copies of all the target company's insurance policies. Scrutinize the terms, coverage limits, deductibles, and exclusions. Be vigilant for coverage gaps that could leave your new business exposed.
Claims History Analysis: Assess the target company's claims history to identify recurring issues or patterns. Frequent or substantial claims may indicate underlying problems that need attention post-acquisition.
Compliance and Regulatory Check: Ensure that the target company complies with all relevant insurance regulations, both at the state and federal levels. Non-compliance can result in fines or policy invalidation.
Assess Risk Management Practices: Evaluate the target company's risk management strategies, safety protocols, and loss prevention measures. Strong risk management practices can lead to lower insurance premiums and a reduced likelihood of claims.
Employee Benefit Plans: Examine the terms and funding of any employee benefit plans offered by the target company. Ensuring adequate coverage for employees is vital for retaining talent and maintaining productivity.
Contracts and Agreements: Review all contracts and agreements that may have insurance implications, such as vendor agreements, leases, and customer contracts requiring specific insurance coverage.
Evaluate Long-Tail Liabilities: Identify potential long-term liabilities, such as environmental risks, product liability claims, or pending litigation, which could impact the business's financial health in the future.
Post-Acquisition Integration: Develop a plan for integrating the target company's insurance policies into your existing insurance program. Determine whether merging policies or maintaining separate coverage for a specific period is more cost-effective. If separate coverage makes more sense, ascertain if policies will transfer to new ownership or require rewriting. Calculate the true cost of these policies by extracting exposures and rates, then update your pro forma accordingly.

Insurance due diligence is a crucial component of the business acquisition process that should never be underestimated. Failing to adequately assess insurance policies, claims history, and risk management practices can lead to costly surprises and hinder the success of your acquisition. By following the steps outlined in this article, you can make informed decisions, mitigate risks, and ensure a smoother transition during the acquisition process. Remember, in the realm of business acquisitions, knowledge is power, and thorough due diligence is your greatest asset.