Determining the right price to pay in corporate transactions requires careful due diligence and consideration by the buyer of ways to effectively transfer risks associated with known or potential liabilities. This is certainly true when the buyer is purchasing select assets, or the purchase involves a company in bankruptcy. Whether the relevant assets constitute machinery, real, intellectual or other property, one fact is constant: Claimants often will try to transfer liabilities with the assets. The seller's pretransaction insurance can be an essential post-transaction resource to pay for such liabilities, especially if they exceed expectations. As a result, the existence, scope and possible availability of the seller's insurance policies may be a critical component of an asset deal that can impact valuation. Key insurance considerations that should be a part of every due diligence include: (i) protecting policy rights; (ii) minimizing competing interests in the policies; and (iii) deciding who will pay for existing or future claims arising out of purchased assets.

Whether a seller's pretransaction insurance policies will protect the buyer against post-transaction liabilities will depend upon several factors, including applicable law, specific policy language and the terms of the deal. For example, many policies contain provisions that can hamper a buyer's ability to access policies in times of need. Finite policy limits may have been impaired by other claims, or other parties may seek coverage under the same insurance policies. However, buyers have several options available to protect themselves.

Many general liability insurance policies contain "anti-assignment without insurer consent" and "change in control" provisions that insurers often try to use to avoid coverage for claims against the buyer related to the purchased assets. If the seller's policies contain such provisions, the most certain way to protect future policy interests is to require the seller to assign its rights and obtain the insurer's consent before the deal is done. But insurers are not always quick to consent, especially when the seller has a bad loss history or an insurer's appetite for risk has changed since it issued the policy. Although situations differ, the buyer's loss record and relationship with relevant insurers may help convince an otherwise unwilling insurer to consent. Moreover, to avoid an insurer later claiming that its consent was not "informed" because material information was not provided to it, the buyer should be careful to ensure that when consent is sought all impacted insurers are at least told about known liabilities that predate the transaction.

Assignments are not, however, always necessary. Whether to seek an assignment depends upon a variety of factors, including choice of law provisions, the laws of potentially applicable jurisdictions, the nature of the risk and the structure of the transaction. For example, a buyer might structure the deal as a stock transaction instead of an asset purchase. This leaves the original entity intact and, as a result, might not require an assignment of the policies. And, in many jurisdictions, courts will not enforce a "consent to assignment" clause unless the assignment materially increases the insurer's risk. So, for example, where a loss already has occurred, at least in certain states consent may not be necessary.

In the bankruptcy context, before assets can be transferred, parties with a financial interest in the assets often must have an opportunity to object to the transaction. Thus, if the relevant insurers are involved in the proceedings, bankruptcy court approval may overcome the need to obtain affirmative insurer consent.

When a transaction involves purchase of only some of the seller's assets or affiliates, the buyer should consider whether its ability to access coverage under the seller's pretransaction policies might be impaired by other parties' pursuit of coverage. For example, other buyers of the seller's assets may also have rights to and seek to pursue coverage under the seller's policies. Alternatively, a bankruptcy trustee may wish to retain policy rights to help offset the estate's liabilities. In these scenarios more than one party will claim interests in policies that provide only limited coverage.

Thus, even with an effective assignment and consent, competing interests can adversely impact the policies' value, which can be a serious issue for a buyer that considers the seller's insurance a critical component of the deal. This can be addressed during negotiations. For example, the buyer can demand that the seller (1) agree to transfer all policy rights exclusively to the buyer and (2) relinquish, on behalf of itself and all entities that it owns and controls, any interests they might have in the policies. Structuring the deal in that manner may also help the parties to obtain insurer consent to assignment of the policies because such a transaction could significantly reduce an insurer's potential exposure under the policies, thereby "sweetening" the deal for the insurer(s). If a bankruptcy court is involved, however, issues may arise because such a "relinquishment" could reduce the value of the estate's other assets.

Due diligence should include research into whether claims against the seller already exist, or may be pursued. If claims (or potential claims) exist, notice could be an issue. The "notice" question has at least two components. First, if the seller was aware of claims when it bought the policies and the policy applications sought information about such claims, but if the seller did not report the claims, future coverage under those policies could be impaired. The seller should therefore also consider reviewing all relevant policy applications.

Second, policies often contain language regarding when notice of claims (or potential claims) must or can be given. Depending upon the jurisdiction, failure to provide timely notice can impair coverage. Where claims may already be known, the buyer should review the relevant notice provisions and determine what information has been or should be provided to the insurer. At the very least, the buyer should seek to transfer to the seller the risk of a failure to comply with policy conditions, or consider reducing the price of the deal if sufficient warranties or information cannot be obtained.

The terms of the policies themselves, and the nature of pre-existing claims, are also likely to impact the policy limits that are available to the buyer (and the value of the deal). For example, whether pre-existing claims constitute "one" or "multiple" occurrences under the policies could significantly reduce available insurance. The seller should consider the extent of policy deductibles or retentions and the likely size and nature of potential claims to ascertain if the occurrence issue may present future problems. If multiple future claims are likely, but each has an estimated value that is lower than the applicable policy deductibles, the seller's coverage might never be triggered. If no single claim exceeds the policy deductible, the buyer could end up paying for each claim without the benefit of insurance. Alternatively, if all such claims are a single occurrence, the buyer would likely have an easier time satisfying a deductible and triggering coverage.

Apart from the "trigger/occurrence" question, depending upon the nature of pre-existing or potential claims, one or many policy exclusions might apply. Thus, when evaluating the deal, the buyer should understand both the nature of possible claims and the policy language that may affect coverage for such claims.

Finally, in assessing the value of the seller's policies, buyers should confirm whether significant claims for coverage have been made by the seller (or any insured entity) against the policies. If prior claims have been made, and the insurers made payments, the policy limits may have been reduced, thus making fewer insurance dollars available for future claims. Naturally, this can impact the value of the assets being purchased.

Select asset transfers — especially those involving bankrupt entities — involve certain challenges but also unique solutions. Securing insurance policy assignments, examining policy applications and a company's claim history prior to purchasing assets are valuable steps to maximize the advantages of asset purchases. Incorporating these aspects into the due diligence of a transaction requires relatively minimal effort, but the foresight to do so can reap maximum benefits.

Linda D. Kornfeld is the managing partner of Dickstein Shapiro LLP's Los Angeles office and a partner in its insurance coverage practice. Joseph D. Jean is counsel and Rachel M. Wrightson is an associate in Dickstein Shapiro's insurance coverage practice.