Buying Another HVAC Company: The Insurance Due Diligence Checklist

Insurance due diligence on an acquisition tells you what liabilities you're buying along with the HVAC company, and what they'll cost the combined business after close. Before you sign, pull the target's claims record, workers comp mod, open claims, and the contracts its policies were written to satisfy.

This is the buyer's checklist, the mirror of what happens when a fund buys you. If you're on the sell side instead, our guide on selling your HVAC company to private equity runs the other direction. Here you're the acquirer, sizing up a competitor before the deal closes.

What does insurance due diligence on an acquisition cover?

Insurance due diligence on an acquisition is an assumed liabilities insurance review: it prices everything that sets the target's future cost and hidden risk. That covers the claims record, the workers comp experience modification rate (EMR), open reserves, and any claims-made policies that need tail coverage. You're pricing the risk you're about to assume before it prices you.

Treat the document request as your buying HVAC company checklist, and ask for these before you get deep into price negotiation:

• Five years of loss runs across general liability, commercial auto, and workers comp
• The current EMR worksheet and the two prior years
• A schedule of open claims with current reserves and status
• Every active policy with limits, retentions, and claims-made or occurrence status
• Assigned customer contracts, labor warranties, and the bid backlog with their insurance requirements

Does an asset or stock deal change the liabilities we inherit?

Yes, and it's the first thing to settle. In a stock purchase you buy the legal entity itself, so you inherit its whole history: past claims, its EMR, and its occurrence policies covering old work. In an asset purchase the liabilities generally stay with the seller, though successor liability can still attach for certain claims tied to work the target already finished.

Courts recognize four exceptions where an asset buyer inherits liability anyway. You expressly assume it, the deal is really a merger in disguise, your company is a mere continuation of the seller, or the sale was structured to dodge creditors. That list comes from successor liability doctrine.

Occurrence-based general liability follows the policy in force when the work was done, per IRMI. So a callback on a job the target finished two years ago lands on that old policy. Where those assumed liabilities sit is what the deal structure decides.

How do we review the target's loss runs, EMR, and open claims?

Start with five years of loss runs and read them against the EMR, the multiplier comparing the target's claim history to similar HVAC shops, per IRMI. Look for open claims with reserves the seller hasn't fought down, frequency patterns in one crew or one truck, and any large loss that hasn't hit the mod yet. An open workers comp claim keeps pushing the EMR up until it closes.

A target doing $6M can look clean on premium while two open injury claims sit with reserves high enough to push its mod toward 1.15 at the next rating. That mod hasn't fully landed, so today's premium understates what the account will cost you next year. An owner who reads the loss runs early can dispute stale reserves before they price into a deal.

Will the target's EMR combine with ours after we buy it?

Often, yes. Under NCCI's experience rating rules, commonly owned entities get combined for the mod, so the target's payroll and losses fold into a single experience calculation with yours. That single mod then drives both books. Model the combined EMR before you close, so the first renewal doesn't surprise you.

Carriers multiply base premium by the mod every year. A combined mod of 1.15 adds 15% to the merged workers comp line, so on $250,000 of premium that runs about $37,500 a year. That charge repeats every renewal until the mod comes down, so our guide on what an EMR above 1.0 costs is worth running before you agree on price.

Who buys tail coverage on the target's claims-made policies?

The seller usually buys tail coverage on their claims-made lines, but you negotiate it in the purchase agreement, and a gap here becomes your problem. Three claims-made lines usually carry the tail risk. Errors and omissions (E&O) and employment practices liability (EPLI) are the usual ones, along with management liability. All of them stop covering new claims the moment those policies cancel at close. Tail coverage, formally an extended reporting period (ERP), holds the reporting window open for claims tied to work done before the sale.

Tail on a claims-made policy runs 100% to 300% of the expiring annual premium. If nobody buys it, a design-error suit or a wrongful-termination claim filed after close can land on the combined entity with no policy behind it. General liability and commercial auto sit on an occurrence basis, so they already cover the target's past work. Put tail coverage acquisition terms in writing as an explicit closing item, and name who pays.

What contracts and certificates should we review before closing?

Each assigned contract carries its own insurance requirements. Review the target's service agreements, warranty obligations, and open bid backlog, because a national account might demand a $5M umbrella, additional insured status, and a waiver of subrogation. Additional insured status names the general contractor on your policy. If your program can't match the certificate the target promised, you inherit a breach the day you take over the contract.

After the deal, the two insurance programs fold together at the next renewal, the same review our HVAC company insurance program guide covers for a standalone shop. For larger deals, representations and warranties (R&W) insurance can cover breaches of the seller's promises. It's priced around 2.5% to 3% of the limit, per CBIZ, and is increasingly available on smaller mid-market deals. Coverwatch runs the insurance diligence on the target and integrates the two programs at the first combined renewal across its network of 60+ carriers.

An HVAC acquisition is won on the file you read before you sign. Run the loss runs, model the combined mod, settle the tail, and match the target's contract requirements against your own limits. Coverwatch handles that diligence and folds the two programs together as part of its flat-fee contractor insurance practice, and the HVAC contractor insurance guide covers the lines underneath the deal.