When two charities are considering a merger, the insurance implications of coming together are unlikely to feature high on their list of priorities.
But mergers can throw up a range of insurance issues, ranging from who covers legal expenses if staff contest decisions to make them redundant to what happens if historical cases of abuse arise after the merger. Martyn Turner, charity and faith niche underwriting director at Ecclesiastical Insurance, says it is important that a charity discusses the insurance implications with their broker or insurer "early in the process".
He says that common insurance implications of mergers or takeovers include the taking on of new activities with different levels of risk and buildings becoming temporarily empty as a result of a staff restructure. "It's really important to get into a dialogue with your broker or underwriter as soon as you can," says Turner.
There are some basic insurance tasks to be completed in any merger, including replacing two separate policies with one. This can often lead to an overall reduction in the insurance premium against the total of what the two organisations were paying separately.
Lucy Rumming, business development executive at the brokers firm Unity Insurance Services, says that if the two old policies are not replaced with one, there can be delays because the two underwriters will have to decide which one should meet any claim. The new policy will need to reflect the fact that the merged organisation will have more staff and a wider range of activities than the two, individual charities.
But if one of the charities is much larger than the other, the insurance implications might be minimal. Paul Ward, acting chief executive of the Terrence Higgins Trust, which has merged with many charities, says: "If we merge with a very small organisation, that will probably not make a material change to our insurance, unless it means we are expanding into a new area of activity."
HR issues are often a key focus for insurance after a merger because there might be restructuring and redundancies. If any staff are being transferred through the Transfer of Undertakings (Protection of Employment) regulations, known as Tupe, the charities in a merger should definitely consult their insurers or brokers, says Rumming.
She says: "Tupe transfers are relevant for legal protection expenses cover and employment protection liability, because employee disputes often arise from Tupe - claims of constructive dismissal, for example." She says the charity needs to make its broker or underwriter aware of any disputes because the insurance might not cover staff transferred under Tupe, or only cover them after a certain time.
How the charity and its insurers will handle historical issues, such as abuse that has only recently come to light, also needs to be clarified when looking at insurance for the merged organisation. Certain kinds of insurance, such as trustee indemnity cover and the element of public liability that covers allegations of abuse by charity staff, have a retroactive nature so that the charity has some protection against claims relating to contracts or alleged incidents in the past.
But if a charity merges or is taken over and a claim is made against it relating to an incident that occurred several years earlier, things can get complex, says Rumming. She advises that the charity being taken over should have a "run-off" insurance policy in place - a type that is often used to protect an organisation that has ceased trading. This kind of policy states that the insurer will provide cover for any claims against the charity going back several years.
Some of these issues seem complicated, but Rumming says that, for the most part, mergers should not cause significant insurance problems for charities. The key is for a charity to have an early dialogue with its broker or underwriter to make sure there are no nasty surprises.
Case study: Terrence Higgins Trust
A well-prepared merger can significantly reduce insurance costs, according to the sexual health charity the Terrence Higgins Trust, which has been involved in more than 30 mergers.
The charity's acting chief executive, Paul Ward, says it is essential to carry out a thorough assessment of risks relating to the prospective merger partner. These include contracts and leases as well as risks to future income, such as a major contract coming to an end.
"We take a view on whether the risks we've identified can be mitigated," says Ward. "We look at contracts and the leases of the partner charity to check that it is not tied into any excessively long agreements. If it is, we might use the leverage of the partner organisation going bankrupt to renegotiate the contract and insert break clauses."
According to Ward, the main insurance issue to consider before a merger is whether there will be a material change in the charity's work or the risks it faces. For example, THT's merger with London Lighthouse Aids hospice increased its size by a third, which was clearly a material change.
Ward says THT discusses a merger with its insurer if it means it will be involved in a new activity. "The merger with Crusaid meant we took on its central London shop," says Ward. "This was our first experience of retail, so we needed to arrange appropriate cover."