Greg Doherty of Poms & Associates
Guest Post: Greg Doherty of Poms & Associates Insurance
Deals in the supplement space are heating up. That’s why it’s important to remember to pay attention to details like Extended Reporting Provision (“ERP”) or “tail” coverage options available in insurance policies that can protect the business going forward in the event of claims.
Liability insurance for supplement raw materials suppliers, contract manufacturers and retailers is offered on a “claims made” basis almost exclusively. When a dietary supplement company is acquired, the Seller–and the Buyer– need to be aware of the uniqueness of how the claims made coverage must be structured around the transaction, so as to protect both of them after the deal closes.
Central to understanding this subject is the coverage trigger for claims made insurance. A policy has to be in effect when the claim is made against the supplement company, not necessarily when the claim actually occurred. Often there is a long delay between when a claim happens and when a lawsuit is filed. With claims made coverage if no claims made policy is in force when the claim comes in, there is no coverage, regardless of when it occurred.
Many M&A deals are “assets only” acquisitions these days, reinforcing the importance of covering the Seller, who is left with past liabilities as part of the transaction.. That means the Seller retains the liabilities—including future claims that come in from something that happened when he DID own the company, This is usually backed up by an indemnity agreement from Seller to Buyer in the agreement of sale.
The first inclination of the Seller is to cancel his liability policy on the closing date because ostensibly he doesn’t need it anymore. Not so with a claims made policy. If Seller does that and does not exercise the Extended Reporting Provision (“ERP”) or “tail” coverage option in his policy, he will have no policy if a claim comes in, and thus no coverage.
Let’s use an example an injury that happened pre-close but is not made until six months after close. Remembering that it is the making of the claim that triggers the coverage, NOT when the injury occurred, at if the ERP coverage is NOT purchased by Seller:
-At the time the claim is made, the Seller will have no insurance coverage , and
-Neither will Buyer as their policy is going to effectively bar any claims that happened before the acquisition.
So in the absence of ERP coverage, neither party will have any insurance coverage for the claim. This is also why savvy Buyers will often require the Seller to purchase ERP coverage as part of the overall transaction, the fear being that if Seller is long gone and without coverage, the courts will assign him liability anyhow, in spite of the contractual agreement in the sale document that the claim should be paid by Seller.
ERP coverage for Sellers in a M&A deal should not be overlooked by either Seller or Buyer.
