It’s a familiar tale: An agency has enjoyed great success, so its principals decide the time is right to expand their business and acquire another agency. After finding one that will blend in perfectly, they arrange meetings, sign contracts and the deal is done. Nothing left to do but enjoy the payoff, right?
Not so fast. The assumption that “bigger is better” can lead to disaster if the agency’s focus is on growth alone, with no attention to E&O risks.
What if the agency you’re acquiring made a few missteps that escaped attention? When those mistakes finally come to light, how can you ensure your agency isn’t stuck footing the bill? Here are a few steps to keep in mind.
- Learn about the acquired agency’s policies and practices as soon as you can. Multiple locations increase exposure to professional liability claims: The larger the agency, the more people involved, and the greater the opportunity for error.
- Establish a plan regarding each employee’s responsibilities. This should include a review of current responsibilities and training on how to handle business the acquired agency previously procured.
- Actively integrate successful, well-established procedures into the merged agency. Meet with new employees and educate them on procedures and expectations. Consistent and uniform utilization of policies and procedures is imperative as an agency grows.
- Before the deal is finalized, the acquiring agency should confirm that the purchase contract includes indemnification language protecting it from claims related to the negligence of the acquired agency, in case it committed a wrongful act prior to the acquisition. Similarly, the acquired agency should purchase tail coverage for its own protection.
- Notify your E&O carrier about the acquisition. Acquiring another agency typically means a change in risk, so E&O policy language commonly requires reporting of all mergers & acquisitions within 90 days. But not all E&O policies are created equal: Effective Sept. 1, Swiss Re Corporate Solutions will add an enhancement to its policy which increases the maximum reporting time to 120 days.
Bigger can be better, but only if you take the proper steps to learn about the new agency, install your culture, educate your people and clearly document that your firm is not taking on the liabilities of the acquired agency for past mistakes.
What might a typical E&O scenario look like in an M&A?
Consider the following example: A successful agency, “Buyer,” reaches an agreement to acquire a smaller firm, “Seller,” whose principal is retiring. Some, but not all, of Seller’s employees will move to Buyer. The contract includes indemnification language, and Buyer makes Seller an additional insured on Buyer’s E&O policy, with a retroactive date reflecting the date of acquisition. Seller terminates its E&O policy as of the date of the acquisition, but purchases tail coverage. So far, so good.
Here’s what Buyer doesn’t know: Seller had procured workers compensation coverage for a longtime client, Widget Co., which had multiple facilities and locations. At renewal, but before the acquisition, Widget Co. requested a separate workers comp policy for one of its out-of-state facilities. Seller went to the state workers comp pool to procure coverage. Afterwards, Buyer completed its acquisition of Seller.
The Widget Co. account had still not been reassigned when, several months later, one of its employees was injured on the job. At this time, it comes to light that the pool never issued the policy, but instead returned the premium. The precise timing of the returned premium and notification of “no issuance”—right around the agency acquisition date—is a matter of dispute between the two agencies’ employees.
Seller’s employees claim it was Buyer’s responsibility to complete the follow-up and issue the policy, and if not, advise the client. Buyer’s employees disagree, arguing that their agency planned to perform a review prior to the next renewal. Regardless, Widget Co. was never informed that the policy was not issued, much less refunded the premium. The client has little choice but to file a lawsuit against both agencies, after which it will find a new broker.
If Buyer and Seller clearly articulated procedures and responsibilities and notified all employees, someone may have caught the fact that the policy was never issued and the premium had been returned, and the agencies could have taken corrective actions in a timely manner. Instead, a client went without coverage—and two groups of employees who are meant to be on the same team ended up pointing fingers at each other. —B.R.
Reprinted with permission from IA Magazine.
About the author
Barbara Rocco is an assistant vice president and claims specialist at Swiss Re Corporate Solutions and teleworks out of the Chicago office. Insurance products are underwritten by Westport Insurance Corporation, a member of Swiss Re Corporate Solutions