The UK retail market continues to be a hotbed of mergers & acquisitions – with reports of new acquisitions, divestitures and flotations appearing almost daily.

As part of this process, a company will often undertake what is known as insurance due diligence; this is a comprehensive analytical review of the value, capacity and cost-effectiveness of the past and present insurance protection that the company to be acquired or merged with has in place.

But in the pressures of a deal situation, the need for insurance due diligence can all too easily be overlooked, or confined to the bottom of a pile of other issues and this could lead to problems, post acquisition.

The purpose of insurance due diligence is to highlight any unexpected areas of financial loss that could be “deal breakers” or add to the price of the proposed acquisition. An insurance due diligence exercise can cover all aspects of general insurance, as well as employee benefits, risk management processes and retirement liabilities.

A key part in this process is the analysis of past claims to determine whether they will be settled appropriately and if there is a claims pattern that should make the purchaser wary. All of this then forms part of the wider risk management report.

Floating a company on the stock market can also create new risks and exposures for both the company and its directors. For example, in the lead up to a flotation, if a director is aware of a problem, but the admission document they submit to apply M&A activity and the need for professional insurance due diligence for floatation status fails to highlight this and if afterwards the share price falls as a result, the investors may have cause to make a legal claim.