NU Online News Service, April 12, 3:02 p.m.EDT

With a rise in mergers and acquisitions expected to continuethrough 2011, unseen regulatory, legal and other risks can doom apotentially sound arrangement, according to an expert at ACEUSA.

Following a merger or acquisition, the buyer—a company orprivate-equity firm— typically absorbs the liabilities of theacquired entity, Seth Gillston, senior vice president, ACE USAMergers & Acquisitions Industry Practice, writes in his report,“M&A Risk Management: Avoiding Pitfalls, FindingSolutions.”

If a company has acquired numerous organizations through theyears, some of which may no longer exist, these successorliabilities can be daunting from a risk-management standpoint, henotes.

Making things worse, he writes, is that the acquired company’sinsurance policies generally either cease to provide coverage, orconvert into run-off mode, essentially providing coverage for ashort period of time. The adequacy of these insurance policies interms of absorbing prospective and retrospective financial lossesalso comes into play.

If these successor liabilities are not identified, assessed, andmitigated, he writes, they can create latent issues for theacquirer. They also may create situations not accounted for in thepurchase and sale agreement.

Understanding the self-insured/deductible obligations, accrualsand collateral requirements of the target company is essential, henotes, adding that insureds with multiple captives after theacquisition, or that are looking to exit self-insurance, will findbenefits in a loss portfolio transfer (LPT). The LPT can be used asa mechanism to close out the captive(s) or exit self-insurance forthe retroactive liabilities.

When inheriting liabilities from global mergers andacquisitions, acquirers may want insurance to address the potentialinadequacies of the target company’s local or admitted insurancepolicies issued, he writes. Are there certain internationalexclusions in the current program that need to be addressed? Acertified master insurance policy (CMP) closes perceived gaps incoverages and/or financial limits, while at the same timemaintaining the local insurance policies in force.

This may provide tax benefits, since locally paid premiums andinsured losses are often tax deductible. A CMP also assures theefficient coordination of foreign insurance policies under oneroof, with potential premium savings and additionalcost-effectiveness from economies of scale, Gillston notes.

Questions M&A dealmakers may want to ask before finalizing atransaction include:

• How is the M&A team positioned to address insurance itemsin the purchase and sale agreement?
• Are there potential liabilities that will affect the overallpurchase price or items that are delaying the transaction?
• Do insurance partners understand the broader relationship?