Entities engaged in any form of asset-switching transaction, from mergers and acquisitions to flotations, management buy-outs, buy-ins, joint ventures and other strategic alliances, will invariably be exposed to a multitude of risks and liabilities which could have a severe impact on investment in a target company.

The due diligence process to identify and deal with any pitfalls prior to completion is critical.

Insurance and related risk management due diligence, as a means of identifying hidden or understated liabilities and exposures, has been a low-key priority.

It is often carried out at the 11th hour and frequently limited to a rudimentary review of the target company's existing insurances -- a case of 'too little, too late'.

In an asset-switching transaction, the parties can open a Pandora's box of insurance and risk management-related problems.The significance of insurance and risk management due diligence should not be underestimated.

It covers a wide spectrum of disciplines and, if conducted early in the negotiations, it can add a practical and complementary dimension to other arms of the due diligence process.Legal advisers to buy-out teams, joint venture parties, or other clients involved in acquisitions, should give serious consideration to the issues that due diligence addresses.

The ability of lawyers to access a wide range of capabilities spanning various disciplines -- to provide a 'one-stop-shop' of insurance, risk management, environmental, and actuarial due diligence -- can ensure that an overall risk and insurance profile of the company or assets target is built up.

This can be used to the maximum effect by solicitors in negotiating the best deal for their clients.

The following are snapshots of the impact of due diligence in this area.-- The audit of a target's exis ting risk transfer arrangements is the most common form of insurance due diligence.

It is an important area, particularly where the acquiring company does not intend to integrate the target into its own existing insurance programme upon completion of the transaction, but would rely on the target's existing insurances to protect its investment for a period of time.

The adequacy of existing covers in such cases is a fundamental consideration.

Where a target company is part of a larger corporation, it may benefit from lower insurance costs achieved through the vendor's bulk-buying power and any group self-insurance mechanisms in place, such as captive insurance companies.

On completion of the sale the cost of insurance can increase dramatically.

This may be an important consideration when fixing the price of the transaction.-- The past activities or discontinued product lines of a target company are an area where an acquirer can potentially be exposed to unexpected risks.

It is important for an acquirer to investigate these issues thoroughly.

This will help to determine the extent of any potential exposures which the acquirer might assume and to determine the existence of any insurance cover capable of mitigating any adverse exposures.

This would include commenting on the potential additional insurance costs which may need to be borne by the acquirer.

A review of the past and present product range of a particular target company in, for example, an apparently low-risk business may identify an element of high risk products.

If the target company has no existing or past insurance in respect of high risk products, the exposure they represent can be sufficiently great, and the cost of retro-active insurance cover so high, that the exposure may be considered an effective deal-breaker.-- An acquirer's legal advisers will compile a schedule of outstanding litigation against the target company.

It is equally important for the acquirer to determine the existence of insurance cover capable of responding to potential future awards made against the company; the adequacy of limits of indemnity under any applicable policies; and the existence of any material exclusions or gaps in cover which might affect the sums recoverable.

This analysis can help the acquirer budget more accurately against future liability; determine what proportion of the cost of any potential award will need to be self-funded; and define how much can be indemnified through existing insurances.-- The protection of a target company's assets will be critical to any acquiring company.

The assets can take any of a number of forms, from buildings and other property, through to personnel.

It may be prudent for acquirers to satisfy themselves by means of relevant site surveys that the assets they intend to purchase are properly protected, or that adequate steps are taken to avoid a loss to the company through the death or disability of key personnel.

A pre-acquisition loss control survey of a target company's premises can help discover unknown exposures which may increase the long-term risk to an acquirer.

It can also provide an insight into potential future costs to the acquiring company, such as the cost implication of upgrading the physical protection systems where they are insufficient.-- The identification of historical covers by means of insurance archaeology will be important when trying to calculate long-tail exposures, as their existence can play an important part in mitigating any potential cost to the acquirer from future claims arising out of such exposures.INSURANCE AND RISK MANAGEMENT DUE DILIGENCE CAN HELP:-- identify a potential deal breaker;-- focus the contractual warranties and indemnities on key issues;-- identify hidden costs;-- assess the viability of the transaction.