The surge of energy sector consolidation, exemplified by Diamondback Energy’s $4.08 billion Double Eagle acquisition, highlights a critical aspect of M&A that dealmakers often underestimate: insurance planning. While executives focus on valuation models and synergy calculations, gaps in insurance coverage can derail even the most strategically sound transactions. For energy companies managing complex operational risks, from well control to environmental liabilities, proper insurance structuring stands as a crucial pillar of deal success.
Key Insurance Considerations in M&A
Change in Control Provisions
When major ownership changes occur, such as Diamondback’s acquisition of Double Eagle’s assets, existing insurance policies may be affected by change in control provisions. These provisions can automatically terminate or modify coverage upon a change in ownership. For energy companies, this is particularly critical given the complex nature of operational risks and environmental liabilities.
Insurance professionals must review all policies for change in control clauses and notify insurers well in advance of the transaction. This ensures continuous coverage through the transition and prevents gaps that could expose the company to significant risks.
Due Diligence on Target Company’s Insurance
Thorough insurance due diligence is essential when evaluating target companies. For instance, in an asset-heavy acquisition like Double Eagle’s Midland Basin properties, buyers must carefully assess:
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Historical coverage for environmental risks
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Current operational insurance programs
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Claims history and loss runs
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Coverage limits and sublimits
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Policy exclusions and endorsements
This review helps identify potential exposures and informs decisions about additional coverage needs post-closing.
Run-off and Tail Coverage
For energy sector M&A, run-off insurance (also known as tail coverage) is particularly important due to the long-tail nature of environmental and operational risks. This coverage protects against claims that may arise after the transaction closes but relate to events that occurred before closing.
Types of Insurance Relevant to M&A Transactions
Representations and Warranties (R&W) Insurance
R&W insurance has become increasingly popular in energy sector deals, providing protection against breaches of seller representations and warranties. For transactions like Diamondback’s Double Eagle acquisition, R&W insurance can:
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Bridge gaps between buyer and seller expectations
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Facilitate faster closings
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Protect against unknown environmental liabilities
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Cover title and mineral rights issues
Premium costs reflect deal complexity and risk profile, with energy sector transactions typically commanding higher rates due to environmental and operational risk factors.
Directors and Officers (D&O) Liability Insurance
D&O coverage becomes particularly complex during M&A transactions. Key considerations include:
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Run-off coverage for the selling company’s directors and officers
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Integration of D&O programs post-closing
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Coverage for claims related to the transaction itself
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Adequate limits for the combined entity’s expanded operations
General Liability and Other Operational Insurances
For energy companies, operational insurance programs must address:
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Well control and drilling operations
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Environmental liability
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Property damage and business interruption
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Worker’s compensation and employer’s liability
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Cyber risks and technology systems
Insurance Strategies for Different M&A Structures
Asset Sales vs. Stock Sales
The Diamondback-Double Eagle transaction, structured as an asset purchase, illustrates specific insurance considerations:
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Limited transfer of historical liabilities
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Need for new insurance programs for acquired assets
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Importance of environmental insurance for transferred properties
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Coverage for transitional operations
Mergers
In merger scenarios, like Diamondback’s combination with Endeavor Energy, insurance considerations include:
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Harmonizing different insurance programs
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Managing overlapping coverage
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Addressing gaps in historical coverage
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Consolidating risk management practices
Post-Transaction Insurance Management
Updating Policies and Notifying Insurers
After closing, immediate steps should include:
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Formally notifying all insurers of the ownership change
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Updating named insureds on all policies
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Reviewing and adjusting coverage limits
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Implementing new risk management procedures
Consolidating Insurance Programs
Program consolidation opportunities may include:
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Combining property schedules
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Standardizing liability limits
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Unifying risk retention levels
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Streamlining insurance administration
Best Practices for Managing M&A Insurance Risks
Engaging Insurance Professionals Early
Early involvement of insurance professionals helps:
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Identify potential issues before they become problems
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Structure appropriate coverage solutions
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Negotiate favorable terms with insurers
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Ensure smooth coverage transition
Negotiating Insurance Provisions in M&A Agreements
Key insurance provisions in transaction documents should address:
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Responsibility for maintaining insurance through closing
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Allocation of deductibles and premiums
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Requirements for tail coverage
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Access to historical policy information
Looking Ahead
The Permian Basin’s ongoing consolidation wave, marked by Diamondback’s strategic moves, sets new precedents for insurance planning in energy sector M&A. These transactions demand sophisticated insurance solutions that extend beyond standard coverage models. Successful deals hinge on early, thorough insurance planning that anticipates both immediate transition risks and long-tail exposures unique to oil and gas operations.
For companies eyeing their next strategic transaction, the lesson is clear: insurance strategy deserves a seat at the deal table alongside financial and operational planning. The complexity of modern energy operations, combined with evolving environmental regulations and operational risks, makes comprehensive insurance planning not just a deal requirement, but a competitive advantage.
Expert Support for Your Next Transaction
The M&A specialists at Watkins Insurance Group bring decades of experience in structuring insurance programs for energy sector transactions. Whether you’re planning an asset acquisition or contemplating a merger, our team can help you navigate complex insurance considerations before they become roadblocks to your deal’s success. Contact our Watkins team at (512) 452-8877 or visit WatkinsInsuranceGroup.com to schedule a confidential consultation about your upcoming transaction.
