Key Diligence Hotspots in Business Acquisitions

When evaluating potential acquisitions or assessing existing portfolios, understanding where challenging or “above average” risk exposures are concentrated is crucial. These exposures can influence the overall risk profile and impact insurance pricing, especially in Property & Casualty (P&C), Employee Benefits and Retirement Planning.

This article provides an overview of key risk factors to consider, highlighting areas that may require additional scrutiny or tailored risk management strategies.

Property & Casualty Risks: Identifying High-Risk Areas and Exposures

Certain geographic regions and industry sectors are associated with elevated insurance costs and underwriting challenges. Recognizing these can help in strategic decision-making and risk mitigation.

• Litigious States: Higher than normal rates and less favorable underwriting conditions are common in states with a reputation for litigation, including:
  • New York (especially the 5 boroughs)
  • California
  • Georgia
  • Florida
  • Louisiana
  • Illinois
  • Massachusetts
• High Property Rates & Catastrophe Exposure: Areas prone to natural disasters often face increased property insurance costs:
  • Florida
  • California (certain regions)
  • Gulf Coast (particularly south of Interstate 10)
  • Atlantic Coast (from Florida to New York)
• Industry-Specific Risks: Certain sales and product mixes can lead to heightened underwriting scrutiny:
  • Cannabis and related products
  • Imported goods
  • Medical and home healthcare services
  • Food and food ingredients
  • Aerospace, defense, and nuclear sectors
  • Consumer products
  • Real estate sectors, specifically habitational, hospitality, and senior living heavy
• Loss Sensitive Insurance Programs: Structures such as captives, retro programs, or high-deductible plans can complicate risk assessment.
• ESOP Transactions: Trustee relationships and indemnification issues, along with specially designed insurance policies, are critical considerations.
• Integration Challenges: Merging targets into existing platforms is increasingly complex, depending on industry, geography, and loss history, making integrated pricing projections more difficult.
• Fire & Safety Measures: Inadequate fire suppression systems and alarms can significantly elevate risk.
• Regulatory & Compliance Risks: Non-compliance with DOT, OSHA, and other regulations can lead to penalties and increased liability.
• Cybersecurity & Underreported Exposures: Lacking cybersecurity controls and underreported property values, sales, or payrolls can distort risk profiles.
• Coverage Gaps & Past Losses: Missing coverage in areas like D&O, fiduciary, EPL, crime, or product recall, along with prior losses in workers’ comp, auto, property, or liability, can impact future insurance costs.
• Contractual & Legal Risks: Breach of contract issues and non-compliance with vendor or customer agreements may indicate underlying risk.
• Tailored Recommendations: Considerations for tail coverage in liability lines, who bears the cost, and the adequacy of existing policies are essential for comprehensive risk management.

Employee Benefits & Retirement Planning: Key Risk Factors

Employee benefits and retirement plans also present specific risks that require careful evaluation.

• Medical Insurance Integration: Differences in plan design, costs, and employee disruption during mergers or acquisitions can impact overall benefits strategy.
• Self-Funded Plans: Issues related to stop-loss coverage, contract terms, and mid-year underwriting need attention to prevent unexpected costs.
• Regulatory Compliance: Ensuring adherence to 5500 filings, PCORI fees, wrap documents, POP/Section 125 plans, and executive reimbursement plans is vital.
• Cost & Claims Management: Rising prescription drug costs and claims issues can strain benefits budgets.
• Retirement Plan Fiduciary & Investment Risks:
  • Fiduciary liability considerations, including 3(38) versus 3(21) management.
  • Investment design choices such as low-cost index funds, target-date funds, and automatic enrollment.
  • Transparency in investment costs, including revenue sharing and share class selection.
  • Default investment options (QDIA) and financial wellness initiatives support plan health and participant engagement.

Final Thoughts

Understanding and identifying high-risk exposures across P&C, Employee Benefits and Retirement Planning is crucial for effective risk management and strategic decision-making. It’s important to note that the list above is not intended to suggest avoiding the acquisition of a company with any of these exposures. Instead, being aware of these common areas of concern allows for more informed assessments.

In-depth due diligence, tailored risk mitigation strategies and ongoing monitoring are key to navigating these challenges and optimizing the organization’s risk profile for sustainable growth. By proactively addressing these factors, companies can better manage potential liabilities, control insurance costs and ensure compliance across their operations. Recognizing diligence hotspots empowers more informed decisions and supports long-term success.

For guidance on managing these exposures during your M&A process, please reach out to our M&A team.