Healthcare lawyers may assist their clients with negotiating favorable terms in any merger, acquisition, asset purchase or other large-scale, entity-level transaction. We can craft an agreement that accurately reflects the parties’ intentions (i.e., what assets is the purchaser buying and what liabilities, if any, are coming along for the ride?). What health lawyers cannot always do, however, is provide the peace of mind that some insurance policies offer. As a result, many medical and dental professionals and practices are inquiring about the insurances available to protect them above and beyond what the contracts governing the transaction say. Following is a discussion of a few types of insurance coverage in addition to the common professional liability/E&O, general liability, property, product liability and workers’ compensation insurances with which most transactional and corporate attorneys and their clients are quite familiar. While the foregoing types of insurance get a lot of attention, there are lesser-considered policies that are worth your client’s attention.
Starting with what is most topical and therefore most likely on the minds of business owners around the world, cyber insurance—in the healthcare context—covers liability arising from data breaches of patient records. A company’s general liability insurance will often exclude breach-related liability, so cyber insurance coverage can be a critical gap-filler to consider. This is particularly true during a merger or acquisition because such transactions often require the transfer from one entity to another of sensitive medical information.
Data breaches can be very expensive, particularly when fines, settlements, and other penalties are stacked on top of the underlying costs of notification and remediation. While policies vary, insureds can negotiate the coverage of attorneys’ fees, patient notification, and expenses related to restoring, recovering, and repairing, as the situation permits, the lost or stolen information. As with any insurance policy there are numerous exclusions in cyber insurance policies (e.g., breach by the insured versus breach by the insured’s cloud provider) and strict limits that may not always cover the less-expected costs of a breach.
On the positive side, many carriers will offer higher limits if the insured uses carrier-preferred professionals (e.g., notification, public relations, and specialized legal services) and may even have arrangements with those professionals to provide your client with services at a discounted rate. As a final note on cyber insurance, it is important to emphasize to your client—particularly in the healthcare industry—that such a policy is not a substitute for the proper institution and enforcement of data protection practices.
Representations and Warranties Insurance
Serving as the enforcement mechanism behind typical representations (“reps”) and warranties provisions in many contracts is a separate indemnification provision establishing a sort of insurance for the reliant party. While the indemnification provision may satisfy most parties’ concerns regarding disclosures and misrepresentations, others will want an added layer of protection. Enter: reps and warranties insurance coverage.
Some may suggest that an insurance policy covering reps and warranties is redundant in light of indemnification, but such a policy can often allay concerns regarding payment after breach. Specifically, enforcing an indemnification provision may require a prolonged dispute and costly litigation after which your client may only have a paper judgment. This is particularly true with healthcare providers, which often employ the use of unusually complicated entity and ownership structures from which it can be difficult, if not impossible, to collect on a judgment. To better ensure actual payment to your client if the other party breaches this important provision, a reps and warranties policy may prove a more effective and prompt means of payment. While your client may be obligated to subrogate its claims to the carrier, the client is often in a better position than it would be having to chase the breaching party itself.
To be clear, these policies are not only for the indemnitee in a transaction. From the perspective of the indemnitor, this insurance can help defray its risks and costs by providing funding therefor.
Key Person Life Insurance
Key person life insurance, as most of you know, is a policy that a company takes on a key person in the organization. Given the importance of that person to the proper functioning of the company, her or his death may deal a severe operational and financial blow. As with other life insurance policies, it pays out upon the death of the key person (subject, of course, to the terms of the policy) and thereby provides the company with the funds necessary to better weather the personnel transition. Where some of the funding in a transaction is seller-financed and the retention and services of the seller (say, a dentist in a large dental practice sale) is crucial to the financial viability of the practice for the buyer going forward, such life insurance may put the minds of both parties at ease.
Despite the value of such a policy, people in organizations with key people are often hesitant to discuss the subject. Therefore, many smaller and closer-knit companies avoid the topic and fail to get what is arguably necessary coverage. This avoidance often disappears, however, during the due diligence phase of a merger or acquisition. It is often when a prospective purchaser casts an unsentimental eye on the company that the parties are able to talk about key person life insurance.
It is important to remember that details as to any of the foregoing types of insurance coverage may be a part of the negotiation. Rather than counseling your clients to seek out their own policies at their own cost, it may provide you and your clients with more bargaining chips to include the cost of coverage as part of the deal. For example, if a seller’s records leave much to be desired, the seller may offer to pay some or all of the premiums for the purchaser’s reps and warranties coverage to assuage the discomfort that such untidy or incomplete records may cause in the purchaser. When negotiations need that little cherry on top to finalize the terms, offering or demanding insurance coverage may make the difference.
In any healthcare transaction, the best tools are well-crafted contracts governing the rights and obligations of the parties. Some parties, however, prefer to have insurance policies backing some of the important elements of those contracts. If you represent one of those parties, we recommend contacting an experienced insurance broker to discuss what coverages are available and then doing a cost/benefit analysis to determine what is worth obtaining in order to put your client’s mind at ease.
[i] Vasilios (“Bill”) J. Kalogredis, Esquire is Chairman of Lamb McErlane’s Health Law Department. Bill has been practicing health law for over 40 years, representing exclusively physicians, dentists, group practices, other health care professionals and health care-related entities.
Andrew Stein is an associate at Lamb McErlane PC. He concentrates his practice at the intersection of health law and business law. He represents individuals and businesses with a primary focus on licensed medical and dental professionals, medical and dental practices, and other health care entities.