Not-So-Risky Business

Not-So-Risky Business

Transferring risk without acquiring it.

According to Thompson Reuters, an information resource for business and industry, worldwide merger and acquisition (M&A) activity in 2011 totaled $2.6 trillion, a 7-percent increase from 2010 levels. The waste industry saw its fair share of this M&A activity and it appears to be continuing. In the first few days of 2012, reported on transactions including ReEnergy Holdings’ acquisition of five biomass-to-energy facilities from Boralex Inc. for approximately $88 million; Charlotte, N.C.-based ReCommunity Recycling’s purchase of Hudson Baylor Corp., based in Newburgh, N.Y.; and Longwood-Fla.-based Waste Pro USA’s acquisition of Acadian Waste Disposal Service of Geismer, La.

The risks of buying another firm are many. But what are they? Where do they lie? And what new exposures carry over to the new, bigger business? How these risks are handled will often determine the fortunes of the buyer and the seller, as well as helping to decide whether the new combined enterprise is a successful and profitable acquisition.

While insurance is just one aspect to consider, it’s a major one. In many cases, insurance can help assuage M&A concerns, allowing the deal to close. Through careful risk assessment and due diligence waste companies and their brokers and insurers can address potential coverage issues, including directors’ and officers’ professional liability and fiduciary concerns, assuring that all of a company’s properties are well protected.

Additionally, this due diligence can also turn up potential exposures and liability issues that may be addressed by available insurance coverages. For instance, in the past, environmental liabilities were well-known deal breakers. Most businesses didn’t know how to handle their own environmental liability issues, much less take on someone else’s. Environmental liabilities are a particular concern in waste industry transactions. Fortunately, with more widely used and available pollution insurance coverages, the presence or even the possibility of hidden environmental exposures is no longer squashing deals.

Environmental insurance is a growing loan requirement and is often used as added reassurance to buyers, tenants and others involved in a transaction to help bring the deal to a close. Today, transactional environmental insurance policies are available to protect against future environmental claims for both businesses. For instance, the buyer of a mining division would not be held accountable for pollution caused by the seller in the past.

Available coverage today offers first-party discovery and third-party liability protection to address possible pollution cleanups and also includes coverage for legal defense, third-party business interruption, contingent transportation and damage to natural resources. Coverage enhancements can be added to include other exposures such as risks of non-owned disposal sites, abandoned materials or “midnight dumping,” automatic coverage for newly acquired sites and excess indemnity coverage.

Another risk management consideration that is so often overlooked in M&A activity is the adequacy of a company’s liability limits. Acquisition is certainly a growth strategy, but not adequately growing your insurance coverage to fit the size of a growing business can lead to trouble. A company’s insurance coverage needs to match its risk profile. And that risk profile can change significantly for the larger or more diversified organization that results following M&A activity.

Another area that has to be evaluated is each company’s mutual commitment to risk management. One waste company may implement aggressive risk management strategies and then they purchase a company that does not live up to its high-risk management standards. Should an accident or other claim occur following the deal, it could result in quick losses that could eat into the company’s limits of liability. That’s why quickly integrating corporate cultures – including attitudes about risk management – is also an important part of managing the risks involved in M&A activity.

 While worrying about all the details involved in buying or selling a company, it is easy to overlook insurance needs, risking the profitability of the business. Insurance continues to be an important consideration in the process and a key tool in helping the deal move forward and stay a growth opportunity. 

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