Whether considering the acquisition of a Florida insurance agency or the merger of two Florida insurance agencies, fundamental principles of risk management must be incorporated. Proper evaluation of essential, insurance-specific regulatory and unique compliance issues must be completed prior to any agency merger or acquisition. Otherwise, the possible negative legacy regulatory issues could severely and dramatically impact the purchaser or surviving entity in a merger.
There are numerous issues involved in an agency merger or acquisition that would apply equally to other types of non-insurance entities. Fundamental structural issues relating to whether assets or an ownership interest should be acquired are among the considerations in a proposal transaction. If an ownership interest is acquired, all the existing known and unknown liabilities and other compliance issues of the target agency will be assumed by the acquiring party. This process requires thorough investigation and evaluation.
While unique issues relating to the acquisition of ownership of a licensed Florida agency require special attention, standard due diligence that should always be addressed includes: Corporate governance and non-financial internal controls; legal matters, such as litigation and contract issues; operational matters, such as systems integration and premium processing; financial issues, such as accounting, tax, financial internal controls, and asset and debt management; and human resource issues, including policies and procedures and employment benefits. All of these broad subjects include numerous subsets of documents and information also requiring evaluation — typically during a due diligence period — in order to assure there are no material concerns related to the acquisition or merger.
Start With the Basics
Initially, it is important to determine the status of the licenses applicable to the target agency. Until 2006, Florida insurance agencies were not required to be licensed. In 2006, the Legislature passed a law providing that all agencies had to be either registered or licensed, depending upon the particular scenario involved.
A fundamental issue relates to whether the target agency is registered or licensed and whether it has the appropriate licensure or registration as required under the circumstances. The failure of an agency to be properly licensed can result in a fine of up to $10,000.
Whether the license or registration was properly acquired also must be considered. A material misstatement in an application can be grounds to revoke or suspend a license. Appropriate licensure for the target agency and its agents should be evaluated for all agency locations, as well as all other states in which it transacts business.
Appointment contracts entered by the agency are an important consideration. Each contract with any insurance carrier should be carefully reviewed during the due diligence process. It is important to confirm that all of the agents for the agency are properly appointed by each carrier for which they are performing agent services. Failure to do so can result in administrative sanctions.
Furthermore, each insurer contract needs to be carefully reviewed to determine whether it is conditioned upon the ownership or control of the agency by certain individuals, and whether it provides for termination or other rights upon a change of agency control. Often, the insurer will have the right to terminate the agency agreement or take other action if there is a change of control of the agency. The acquirer must fully understand the dynamics with regard to insurer contracts that may or may not continue after closing.
Because policy expirations may constitute a significant agency asset, their status should be carefully reviewed and addressed with the applicable carriers. Normally, the insurer appointment contract will address who is entitled to the policy expirations upon termination of the agreement. All contract provisions should be reviewed in light of the circumstance involved to assure there will be no basis — substantive or technical — to affect any rights related to policy expirations.
Uncover Any Potential Problems
A detailed due diligence process should be undertaken to assure that the agency and its licensed professionals are operating in accordance with applicable law and regulation. Numerous issues can arise with regard to agency operations that can create legacy issues that will be inherited by the acquirer unless they are properly addressed prior to closing.
A careful review of all agency records should be undertaken in order to assure that any complaints, audits or examinations conducted by the Florida Department of Financial Services or other applicable regulatory authority have not revealed any issues. If so, these issues should be addressed to the satisfaction of the regulatory authority.
Of course, operational issues such as premium handling, advertising and solicitation of insurance, and proper use of all personnel, licensed and otherwise, among other matters, must also be carefully considered.
The unique issues of surplus lines licensees also should be evaluated, including the appropriate remission of quarterly reports, maintenance of all required records, and the collection and payment of appropriate premium taxes and fees. Any failures or deficiencies, especially if they are systemic, can result in substantial exposure to administrative fines, costs, or even suspension or revocation of agency licensure.
With the consent of the target agency, due diligence investigations should include appropriate notice to, and discussion with, the applicable regulators. Often, discussions with regulators at the appropriate levels may reveal certain issues that may not have been otherwise disclosed, thus assisting in the identification of any possible legacy problems. While not necessarily foolproof, this provides a further level of assurance that the agency will not have any lingering regulatory issues post-closing.
Numerous insurance-specific issues, which will be multiplied by the number of states in which the target agency is doing business, need to be carefully vetted as part of the merger and acquisition process.Because these issues extend beyond those typically applicable to a merger or acquisition of an unregulated entity, it is extremely important to direct particular focus on them at the early stages of the process. Any regulatory or compliance issues that survive the acquisition or merger will become the problem of the new owners.
In addition, post-closing regulatory obligations and requirements need to be satisfied. Depending on the nature of the issues involved, significant regulatory sanctions may be imposed.
(The information in this article is based upon Florida law, is not based upon the laws of any other state, is intended only as a general summary of some of the issues which may arise, and should not be relied upon as legal or regulatory advice. All parties should always retain legal and regulatory counsel to address the specific issues involved.)
Fred E. Karlinsky is a shareholder in the law firm of Colodny, Fass, Talenfeld, Karlinsky, Abate. Richard J. Fidei is a partner in the firm. Karlinsky may be reached in the Ft. Lauderdale office at 954-332-1749 or fkarlinsky@cftlaw.com. Fidei may be reached in the Ft. Lauderdale office at 954-332-1758 or rfidei@cftlaw.com. The firm, which also has offices in Tallahassee, specializes in insurance, legislative, regulatory and transactional law, commercial and civil litigation, governmental consulting and administrative law. Its litigation practice group handles commercial, civil rights, employment discrimination and child advocacy matters in both trial and appellate levels. More information is available at www.cftlaw.com.
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