by Rickard Jorgensen, FCII, ACIArb., ARM
Some of the following coverage options may not be available to all insured firms, and the final decision on how the merger will be covered is left to the insurer concerned.
One policy: new policy for Firm AB providing Prior Acts coverage for Firm A and Firm B by an appropriate Retroactive Date.
The new firm (AB) takes out a new policy with a retroactive date providing Prior Acts coverage for each of the old firms (A and B).
- Coverage for all firms is “bundled” and easy to find.
- Expenses are reduced as there is only one policy premium to pay.
- Works well for new firms where the Prior Acts are not extensive because policy limits are not as likely to be impaired by errors and omissions of the old firms.
- Firms A and B have coverage for prior work as long as Firm AB continues coverage (also a drawback).
- The Prior Acts for the old firms A and B are shared by the new Firm AB.
- If you combine coverage for two or more firms under one policy, claims made against any of the insured entities will deplete coverage limits for the other entities.
- If you combine coverage for two or more firms, allocation of premiums to cover the prior entity’s past work is difficult to separate from premiums charged to the “new” firm.
- It is the responsibility of the current holder of the policy to notify all interested parties of any changes or alteration to coverage. In other words, the firm has an obligation to current and/or prior owners of the covered firms to notify them if coverage is dropped or materially changed. CAMICO will not assume the responsibility for contacting current or prior owners.
- Coverage for prior work is based on the current firm’s size. If the current firm is significantly larger than the prior firm (or experiences significant growth), the cost to cover prior work will increase.
- Coverage of prior work for Firm A and B depends on Firm AB continuing coverage. (Also a benefit).
- Once a decision is made on how to cover the firms, it is considered irrevocable and permanent. (For example, if coverage is combined under one policy for all three entities, and subsequently there is a falling out between partners, coverage cannot be “un-attached” from the policy.)
Two policies: new Firm AB becomes an insured under the policy from old Firm A and continues insurance for Firm AB each successive year; old Firm B takes out ERPC (tail) coverage.
New Firm AB keeps the old policy from one of the old firms. The other old firm converts its old policy to ERPC (tail) coverage.
- Works well when a larger firm (A) is merging with (or acquiring) a smaller firm (B).
- Having two policies means that the premiums for this option are usually higher than they are for Option 1, but usually lower than they are for Option 3 (below).
- Prior Acts are only partially shared through the continuation of old Firm A’s policy.
- Firm A has coverage for prior work as long as Firm AB continues coverage (also a drawback).
- Firm B has coverage limits that cannot be depleted by claims made against Firm A or AB.
- Firm AB is sharing Firm A’s Prior Acts, but Firm AB is not sharing Firm B’s.
- Claims against Firm A will deplete the available coverage limits to Firm AB, and vice versa.
- Coverage of prior work for Firm A depends on Firm AB continuing coverage (also a benefit).
Three policies: new policy for Firm AB with separate ERPC (tail) coverages for Firm A and Firm B.
The new firm takes out a new policy, and the old firms each take out ERPC (tail) policies.
- New Firm AB does not have to share Prior Acts with old firms A and B.
- Claims made against one of the firms will not impact the available coverage for the other firms.
- Firms A and B control their individuals coverage and do not have to rely on Firm AB to cover past work.
- The total premiums paid will usually be higher due to three policies being in place.
An additional Option
There is also a variation on Scenario 1 where one firm (A) decides to continue their current coverage and the other merged firm (B) is added to Firm A’s coverage as an additional insured. This can only take place where Firm B has the full trust of the partners of Firm A. Firm A’s policy provides full prior acts coverage for both firms. An agreement over the apportionment of the deductible and the costs of the premium is advisable.
Whenever you make an ownership change to your firm, completely review and understand both the current and long-term implications to your insurance decision. In most cases, once prior coverage is commingled, it is difficult to reverse. CPAGold™ recommends having a written merger agreement reviewed by the attorneys and risk advisors for both firms.
Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or firstname.lastname@example.org