Why I Evaluate Insurance Coverage in Every Acquisition

When I buy a business, I know that insurance coverage can quietly make or break long-term success. Over time, I’ve learned that insurance isn’t just a compliance checkbox, it’s a financial shield that protects the company, its employees, and me as the new owner. Too often, small businesses underinsure themselves, either to save money or because they don’t fully understand the risks they face. That creates hidden liabilities that surface only when it’s too late.

Now, I make insurance due diligence one of my priorities in every acquisition.

Why Insurance Matters in Acquisitions

Insurance matters because it:

• Protects against catastrophic financial losses
• Covers liabilities tied to employees, customers, or property
• Builds lender and vendor confidence
• Ensures compliance with contracts and regulations
• Strengthens transferable value by reducing buyer risk

Without proper coverage, even a small incident can spiral into a financial disaster.

My Early Mistakes

In one acquisition, I didn’t dig deep enough into coverage limits. When an employee was injured, the policy was inadequate. The business had to cover costs out of pocket, draining reserves.

In another deal, I overlooked that the company carried no cyber liability insurance despite storing sensitive customer data. That gap created both legal and reputational risk.

Both mistakes taught me that insurance diligence must be thorough, not superficial.

How I Evaluate Insurance Coverage

During diligence, I ask for:

• Current policies and coverage limits
• Claims history over the past five years
• Industry-standard insurance benchmarks
• Specific coverages such as workers’ compensation, general liability, property, auto, cyber, and key person insurance
• Exclusions that could leave gaps in protection

Signs of Strong Insurance Coverage

• Comprehensive policies across all major risk areas
• Adequate limits relative to industry standards
• Clean claims history or well-handled claims
• Policies transferable to new ownership
• Proactive risk management by the company

Signs of Weak Insurance Coverage

• Bare-minimum policies to save cost
• Coverage limits far below exposure
• Frequent claims indicating unsafe practices
• Policies tied to the owner personally, not the business
• No coverage for emerging risks like cyber threats

How I Protect Myself

If insurance is weak, I:

• Require sellers to update policies before closing
• Adjust valuation for uncovered risks
• Budget for immediate policy upgrades post-closing
• Negotiate warranties or indemnities in the purchase agreement

Why Insurance Impacts Valuation

Businesses with strong insurance are worth more because risk is reduced. Weak coverage makes the company less attractive to buyers and lenders, lowering valuation.

Final Thoughts

I’ve learned that insurance coverage is one of the most underrated parts of acquisitions. It doesn’t show up on P&L statements, but it protects everything that does.

That’s why I evaluate policies, fill gaps, and make insurance part of my risk management strategy. Because in the end, profitability doesn’t matter if one uninsured event can wipe it all away.

I continue sharing my acquisition frameworks and strategies at drconnorrobertson.com, where I document how I protect deals from hidden risks.