A certificate of insurance looks reassuring at a glance. Whether the target's actual coverage survives the deal, and covers what the fund thinks it covers, is a different question.
Key takeaways
Insurance review is easy to treat as a box-ticking diligence item, and it is exactly the kind of gap that does not surface until a claim does. As treadstonelaw’s own guidance on the subject puts it, “a certificate of insurance looks reassuring at a glance,” but the actual policy behind it often carries coverage misaligned with the target's real operations by the time a fund is buying it.
The relevant coverage on a Canadian business acquisition typically spans commercial general liability (third-party injury or property damage), property insurance (buildings, equipment, inventory), business interruption (lost income after a covered event), professional liability or errors-and-omissions coverage (service-related claims), cyber and data-breach coverage, and product liability (defective-product claims). A diligence review that only confirms a policy exists in each category, without reading what it actually excludes, misses the point of the exercise — the gaps that matter are almost always in the exclusions, not in whether a category is covered at all.
This is the single most consequential structural fact in the review. Per treadstonelaw’s guidance, “a claims-made policy only responds to claims made while it’s active (or during an extended reporting period),” unlike an occurrence-based policy, which responds to an event regardless of when the claim is made. A target’s professional liability or E&O coverage is frequently claims-made — which means that if the policy lapses or is not renewed at closing, and no tail or extended reporting period is arranged, a legitimate claim arising from work performed before closing can go entirely uninsured, simply because the claim itself was not made until after the policy ended. See warranty and indemnity insurance for a related but distinct tool that responds to a breach of the purchase agreement's own representations, not to this kind of operating-coverage gap.
On a share purchase, the insured legal entity does not change, so existing policies generally continue — subject to any change-of-control notice provision many commercial policies carry, which a diligence review should specifically check for rather than assume away. On an asset purchase, the acquiring entity is a different legal person entirely, and the seller's policies simply do not transfer with the purchased assets: treadstonelaw's checklist is explicit on this point: “Arrange your own coverage to be effective exactly at closing in an asset purchase.” See choosing between a share deal and an asset deal for how that same structural choice plays out across the rest of the closing.
Treadstonelaw's own guidance names five specific patterns worth checking for by name, rather than assuming a general read of the policy will surface them: coverage that “hasn’t kept pace with the business” as it grew into new locations, products or services; the claims-made gap already described; underinsured property, where the policy limit reflects an outdated valuation rather than current replacement cost; exclusions that apply directly to the target's actual operations rather than a generic description of its industry; and claims-history patterns that themselves signal an operational risk the policy review would otherwise miss — a cluster of prior claims in one category being the clearest sign that a category everyone assumed was adequately covered may not be.
Treadstonelaw's own list is direct and worth following as written: request the actual policies, not certificates; obtain a multi-year claims history rather than a snapshot; confirm claims-made versus occurrence status for every policy in force; verify property limits match current replacement values rather than an outdated valuation; and have a broker assess the coverage against the target's actual current operations, not the operations the policy was originally written for. A certificate alone confirms none of this — it confirms only that a policy of some kind exists.
A buy-and-build programme — see where roll-ups most often go wrong for the other recurring failure modes — often folds a newly acquired add-on directly onto the platform's existing master insurance programme, on the reasonable assumption that broader, better-negotiated coverage is automatically an upgrade. It is worth checking specifically whether the master programme's exclusions were written with the platform's original operations in mind, and genuinely extend to what the add-on actually does. Treadstonelaw's own gap — coverage that “hasn't kept pace with the business” — describes an organic mismatch inside one company; the roll-up version of the same gap is structural, introduced the moment a business with a different risk profile is folded into a policy written for someone else's operations.
A platform is acquiring a professional-services add-on by way of a share purchase. Its errors-and-omissions policy is claims-made, and its diligence review confirms a five-year claims history with no prior E&O claims. Because the deal is a share purchase, the existing policy continues past closing — but the deal team still confirms the policy's change-of-control notice provision has been satisfied, since failing to notify the insurer of the ownership change could itself jeopardize coverage regardless of the claims-made structure. The purchase agreement separately negotiates an extended reporting period sized to track the survival period of the seller's representations and warranties, so that a claim arising from pre-closing work, but not made until after that survival period would otherwise have run, still has somewhere to land.
Generally yes, since the insured legal entity does not change -- but confirm the policy's change-of-control notice provisions have been satisfied, since many commercial policies require notice of an ownership change to keep coverage intact.
An extended reporting period purchased for a claims-made policy, so a claim arising from work performed before the policy ends can still be made and covered afterward. It matters most where a claims-made policy is not being renewed past closing, or on an asset purchase where the seller's policy will not continue at all.
No -- W&I insurance responds to a breach of the purchase agreement's own representations and warranties, layered on top of or instead of a seller indemnity. Tail coverage responds to the target's own pre-closing operating liabilities under its existing policies. They solve different problems and a deal may need both.
Not automatically -- confirm the master programme's exclusions were written to cover the add-on's specific operations, not just its industry description in general terms. Folding a business onto a broader policy without that check can introduce the same coverage gap a standalone review is meant to catch.
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