Avoiding Common M&A Mistakes

Business Risk Partners, a specialty underwriter based in Windsor, Conn., participates in broker mergers and acquisitions in the errors and omissions space. Lisa Doherty, chief executive officer for BRP, outlined common problem areas that parties encounter when trying to put a deal together.

Question: Should insurance agencies that want to merge follow similar best practices?

Answer: Absolutely. The question is whose best practices, because when you bring two agencies together, each is going to think that they have the best practices. One of the interesting things for those two organi2ations is to figure out who really is doing it well. Chances are neither has exclusivity on best practices. For a truly successful combination, if the agencies can work together to take the best practices from Firm A and the best practices from Firm ? and merge them, they will emerge as a much stronger organization.

Q: Does that speak to the culture of each organization?

A: As a starting point you need to make sure the cultures really match before you even contemplate an acquisition or a merger. I can tell you, speaking from personal experience, I've been involved in three major acquisitions. In two of the cases, the culture fit was pretty good. In the third, the culture fit just did not mix from the start and I'd say that was a failed merger in a lot of ways because ultimately [regarding] the acquired firm, most of the staff left. And in most of these acquisitions that's what you're buying- the staff and the personnel. If the culture doesn't fit, you're not going to be able to retain them, you're not going to be able to retain your clients, and you're going to put yourself in a situation of great turmoil.

Q: Should the parties discuss things like renewal procedures prior to closing or wait until after?

A: You want to have some general conversations about it. I don't think it's realistic that principals of two firms are going to know the nitty-gritty of the renewal process. But [they should] philosophically understand what they're going to do and agree, for two reasons. One, once the news gets out, you're going to want to get to your clients and talk to your clients about what your expectations are. But the other people who are going to be talking to your clients are your employees and they're going to have more questions than your clients. If you have some idea of how these things are going to work and the principals can come together to the combination of employees and say 'this is the vision, this is how we generally see renewals, this is who's going to be leading the charge in that regard,' that's going to go a long way in reassuring your employees and that's reassuring to clients.

Q: Should the buyer's underwriters be as proficient in areas as the company being acquired?

A: If you're acquiring to add new expertise to your firm, it's unrealistic that the acquirer is going to be able to get proficient enough quickly enough. But you want to make sure that what you're acquiring does have the level of expertise that you would expect. You might look to get that from other sources. Perhaps they've had audits done of their underwriting that you could look at. Perhaps you could interview their clients and make sure that they are at the same level. But it's probably unrealistic to think that you're going to get yourself up to speed enough in an area where you don't have expertise to be able to evaluate. And a lot of these acquisitions frankly, are people bringing in skill sets to their firm that they don't already have, so they need to make sure that the skill sets that they're acquiring are at a level of sufficiency that they would expect.

Q: Which licensing requirements should be in place?

A: You want to make sure that they have all the licenses that they need to operate in the places they're operating. One of the things we've found is if you have a problem in a particular geographic region, and then you find out that they're not licensed, the plaintiff or the client who has a complaint will go to the department of insurance and say 'they're not licensed.' The underlying issue then becomes secondary about whether there was a mistake in the placement. It becomes [that] you were doing business in a state where you weren't licensed. Now you've compounded your problem. So make sure you have those licenses and that you're adequately licensed in the states that you're operating in. It's incredible that people keep their licenses in the states where they're domiciled, but they may have a client in Ohio who's also doing business in Michigan, or has operations in Michigan, and they may be placing business related to that in Michigan that requires a Michigan license. So really understand those requirements, and when you're operating outside of your state's bounds and whether it does require a second license.

Q: What other E&O risk scenarios do you commonly see?

A: Documentation is by far the single biggest problem that we see- that the file is not documented in a way that the customer service rep or the agent or the producer would have expected it to be. So,'I told him to buy higher limits,' ? told him that he needed this particular coverage' is all coming after the fact when you're in deposition and there's nothing in the file reflecting that. [With] email'OK,you told me you didn't want that $2 million,"OK,you told me you didn't want this particular coverage' - you have some documentation. I think the other thing to understand, when you're in an acquisition mode in particular, is are you acquiring just the assets of a firm or are you acquiring the assets and the liabilities? If you acquire the liabilities, there may an uncovered wrongful act that occurred 18 months ago that is going to lead to an E&O daim down the road and if you don't buy tail coverage for the acquired company, or if perhaps the tail cover was only for 12 months and now you've got a claim, you may be uncovered because it's not covered under the new company. Or you may expose your own limits to a claim from something that happened before you made the acquisition. So really understand what's in that pipeline and how their business procedures and risk management procedures were, to make sure you're not exposed to past liabilities.

Q: Can you just buy the book going forward and leave the liabilities behind?

A: You can sometimes just purchase the assets and leave the liabilities behind. The two things to consider there are making sure the sellers buy tail for a three-year period or a five-year or even for an unlimited [period] so that if something does come out and you do get dragged in, that you know you can push it back to the tail policy. Because if there's a pile of money to solve these problems, then the acquirer doesn't become the pile of money. The second issue is when they acquire a book, if there are poor policies and procedures in that book or if there's a mistake that has already been made, you may renew that policy with inadequate coverage and now it is under your watch. So you need to look at that book of business as if it's a first time, starting fresh to really make sure it's handled the way you want it handled, because you could be compounding an error that is already there and now it becomes your potential liability.