Mio© 3DF© and 2DF©: Explained

A Buyer-side Policy requires Due Diligence in Stages 2 and 3. This is achieved by uploading documents, completing a General information questionnaire, a 3DF^© (Digital Due Diligence Form) for the buyer-Side, along with a 2DF^© (Digital Disclosure Form) for the seller-side.

Once all forms are completed and all required documents uploaded, the forms can be signed.

What exactly is Due Diligence in insurance?

If you wish to know the definition, it would be "Due diligence - proper attention and caution. This term is regularly used when referring to a review of financial and legal documents in the process of merger or acquisition, but it can also apply to any decisions you make, whether it's related to insurance or self-insurance, or various other risk management decisions."

Anyone who has been involved in a merger or acquisition (M & A) knows that the due diligence part of the agreement is a significant process. There are countless requests for information from teams responsible for spending hours reviewing important documents. As with many enterprise transactions, a merger with another company carries a lot of risk as both parties bring their luggage with them. Therefore, identifying these risks and determining if and to what extent they can be mitigated is part of the due diligence phase. One of the many questions to consider is related to the debt of the target company and the insurance available for them. Here are some important things to consider regarding insurance due diligence:

Identifying Existing Liabilities and Potential Exposures

This is clearly the most important milestone and a continuous aspect throughout the due diligence process. Some of the company's responsibilities may be obvious, while others may not be so obvious and will only be discovered by doing some proper digging. Companies which are subject to due diligence are open to existing liabilities and need to support the due diligence team in identifying potential risks. In some cases, insurance may be insured to cover these existing or potential issues, but otherwise there may be major issues that prevent the transaction from closing.

Review Prior and Pending Insurance Claims

On top of reviewing liability and insurance coverage, the due diligence team must review if there were any past and unsettled insurance claims. This will benefit the team to recognize the type of problem they are having and the insurance they need. It also provides insight into how the insurer handled or may not have dealt with each issue. In addition, the billing adjustment process highlights potential proceedings and helps teams realize other potential outlays.

Examine the Impact of the Transaction on Insurance Coverage

In certain cases, the coverage of your company's insurance may change or even be terminated if there is a notable difference in your company or if some other situation occurs. For example, changes in ownership or business structure may be the type of changes that trigger these updates of the insurance coverage. This is one of several reasons why you need to scrutinize your policy before closing a deal. You may need to get an entirely new policy. Otherwise, there may be a risk that will not be covered if everything is closed.

A Seller-side Policy requires Disclosure in Stages 2 and 3. This is achieved by uploading documents, completing a General information questionnaire, and a 2DF^©  (Digital Disclosure Form.)

Once all forms are completed and all required documents uploaded, the forms can be signed.

What does Disclosure mean?

Disclosure is an essential element of the Merger & Acquisition process . It represents the complete and full revealing of data relevant to a specific issue. In the insurance context, it refers to each participant's responsibility to explicitly disclose pertinent information in an insurance agreement. It means that neither the insurer nor the party looking to be insured should withhold critical information when creating an insurance contract.

What does Non-disclosure mean?

Non-disclosure occurs when a participant fails to reveal key data to the insurance company while receiving a quote for a new insurance policy. When entering an insurance agreement, both sides have a responsibility to be truthful and straightforward with each other.

When an insurance contract is being made, legal consequences can follow if proper disclosure does not occur. For example, if a person seeking life insurance hides relevant medical information, such as the fact that they had a heart attack, it forces the insurer to take on a larger risk than they expect. Upon the discovery of this misrepresentation, it may result in termination of the policy with or without a refund of premiums. As insurance contracts are legally binding, each party has an obligation to be honest and disclose pertinent details.

Legal consequences can occur if proper disclosure is not made when concluding an insurance policy. For example, if an individual acquiring life insurance withholds important medical information such as the fact that they had a previous medical condition, poses a greater risk to the insurance company than they anticipate. If this misrepresentation is discovered, the insurance policy may be canceled with or without a refund of the premium. Insurance contracts are legally binding and each party is obliged to be genuine and reveal important details.

The duty of good faith represents the demand that both the insurance company and the client reveal all material facts associated to the insurance contract that they are going to sign. The insured, knowing more about the particular risk than the insurer, has an obligation to disclose all relevant material data regarding the risk which is to be covered.

How is disclosure relevant for a buyer?

The buyer decides to make an investment based on its perception of the target company, which is derived mainly from details about the target business disclosed by the seller (disclosed information). A judicious buyer will want to assure the presumptions underlying its investment resolution (investment assumptions) via representations and warranties. Disclosed records are consequently used to decide the extent of the representations and warranties.

The buyer should probe in full detail the disclosures made by the seller and all attendant documents to fully assess the impact of such disclosure on the target and accordingly assess the impact of such disclosure on the transaction.

The buyer should fully analyze the information provided by the seller and all the accompanying documents, in order to fully evaluate the influence of such a disclosure, and thus the impact of revealed information on the transaction itself.

For example, in the situation that the disclosure item has a critical impact on the target business, then the buyer may exercise the right to terminate the transaction or renegotiate the consideration.

How is disclosure relevant for a seller?

From the seller's point of view, it is relevant to make sure that all important data is provided in as much detail as possible. The mindset should be to disclose more, not less. If the seller provides the buyer with all relevant disclosures in advance, it can significantly reduce fraudulent or misrepresentation claims.

If the matter is not properly disclosed, the buyer may claim that the disclosure is inadequate and the opposite party may be liable for any breach of representation or warranty.

In addition to disclosing the facts, the seller should also ponder enclosing relevant files and records that further support the disclosure.

How is disclosure relevant for procedural / structural aspects?

The disclosed data will be of further help in the process of migrating the target company to the buyer group, such as defining requirements for migration services. Therefore, as part of due diligence, a cautious buyer will see if the target company can operate independently, to what extent, or if it is dependent on the services of the seller's group. Change of control clauses and other facts related to the structuring of transactions can also be derived from the revealed information.