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Understanding EPLI in Mergers and Acquisitions

Thursday, May 2, 2024
Mike Richmond
In today's corporate landscape, Employment Practice Liability Insurance (EPLI) plays a crucial role in safeguarding businesses against various risks associated with employment-related claims.

In today’s corporate landscape, Employment Practice Liability Insurance (EPLI) plays a crucial role in safeguarding businesses against various risks associated with employment-related claims.

Whether in the context of mergers and acquisitions (M&A) or day-to-day operations, having a comprehensive understanding of EPLI is essential for mitigating potential liabilities and ensuring smoother transitions during business transactions.

What is EPLI and Why is it Important?

EPLI provides coverage for claims arising from wrongful acts or alleged wrongful acts committed by management within a company. These acts can range from discrimination and harassment to wrongful termination, negligent hiring, and wage and hour violations. It’s crucial to note that EPLI covers claims brought by employees and extends to claims brought by third parties such as customers or vendors.

Addressing Risks in Mergers and Acquisitions

During M&A transactions, EPLI policies come into sharp focus due to their implications for both buyers and sellers. One key consideration is the “claims made” nature of EPLI policies, which necessitates coverage to be in place when the wrongful act occurs and when the claim is brought. Failure to address this adequately can leave parties vulnerable to significant liabilities post-transaction.

Navigating Change in Control Provisions

A critical aspect of EPLI in M&A deals is the change in control provision, which automatically terminates the policy upon acquisition. This termination can leave the acquiring entity exposed to potential claims stemming from preexisting wrongful acts. To mitigate this risk, tail coverage or extended reporting period endorsements can be obtained to continue coverage for pre-closure liabilities. This is critical as EPLI matters are among the most common post-close claims we see.

“Naked Tails” When Coverage is Not in Place at the Target

If the target company does not have current EPLI coverage that can be tailed via an extended reporting period endorsement, then “Naked Tails” can be obtained from the market instead. Several insurance carriers have started offering these, and they only require a completed application and supporting documentation.  While naked tails can be more costly than typical extended reporting period endorsements, they are crucial to protecting investments.

Tail Coverage in Asset Deals

The need for tail coverage remains paramount, even in asset transactions. Despite not directly assuming the liabilities of the seller, the buyer is acquiring the employee base and the culture that goes along with it.  EPLI tails will provide the company with expert legal guidance, assistance in managing the employment claim, as well as funding settlements for employees in the event there is a legitimate loss.  This will remove the need to rely on escrows and sellers dealing with employment claims while simultaneously assisting to maintain a positive employee culture.

The Role of Experienced Brokers

Partnering with experienced insurance brokers, such as Horton’s M&A team, can make a significant difference in navigating the complexities of EPLI in M&A transactions. With a deep understanding of employment-related risks and access to tailored solutions, brokers can assist in identifying appropriate coverage options and negotiating favorable terms for clients.

Key Takeaways

  • EPLI tail coverage is essential for mitigating employment-related risks in M&A transactions.
  • “Naked Tails” are a great solution if the target company does not have EPLI coverage.
  • EPLI tails aren’t just for equity transactions and should also be obtained in asset transactions.

Understanding and effectively managing employment-related liabilities are critical for deal success in the dynamic M&A landscape. By leveraging the insights and expertise of seasoned insurance brokers, businesses can confidently navigate the complexities of EPLI, safeguarding their interests and fostering smoother transitions during periods of change.

By incorporating these key insights and leveraging the expertise of experienced brokers, businesses can effectively manage employment-related liabilities and ensure smoother transitions during M&A transactions.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.