Case Study
“This is what insurance diligence looks like. When you skip it, the gaps don't disappear. They show up post-close as unbudgeted costs.”
Insurance Diligence For Investors
Acquiring A Roofing Company
The Discovery:
Two things jumped out immediately.
First, they were substantially overpaying for their General Liability insurance.
On new commercial work, the roofer was working as a subcontractor under a General Contractor who carried a wrap-up insurance program—meaning the GC's policy automatically covered everyone on the job site, including subs. The seller, nor his insurance broker, had any idea. He'd been paying premiums for coverage that was completely redundant. The overpayment was north of 40%, about $60K annually.
Second, Workers Compensation insurance was drastically under expensed.
In 2023, the company changed the tax status of its workers from W-2 to 1099 independent contractors and removed the associated payroll from the Workers Compensation policy. Resulting in a ~ $80K reduction in premium. While this can be an acceptable business practice, it requires (a) a subcontractor agreement with the 1099’s, and (b) the 1099s must carry their own insurance.
Both were absent.
So, when a worker injured his back lifting a roll of roofing material, the seller's Workers Comp policy covered the $80,000 claim. A claim that, with the right agreements in place, would never have been their responsibility. That claim will drive up the experience modifier, which means higher premiums going forward—a cost the buyer would inherit. On top of that, the insurer then charged premium for both Workers Compensation and General Liability because the 1099’s were uninsured, negating the expected premium savings from the change in tax status.
Neither of these showed up in the QoE. Both would have hit the buyer's P&L on day one.
How Our Diligence
Made A Difference
This is what insurance diligence actually looks like. It's not a policy checklist. It's asking the same questions you're already asking in business diligence—about operations, about labor structure, about contracts—and following them to their insurance conclusions. Every business diligence workstream has an insurance counterpart. When you skip it, the gaps don't disappear. They show up post-close as unbudgeted costs.
Operational Diligence
The roofer's GC wrap-up situation is a textbook example. Operations diligence asks: who does the work, and under what structure? The insurance mirror asks: who's actually covering the risk?
Quality of Earnings
Redundant premiums inflate operating costs. A $80K workers comp claim will impact the post-closing premiums. These aren't just insurance issues—they're earnings quality issues that belong in the financial model.
Transactional Risk
The W-2 to 1099 transition created a liability gap that went unnoticed. If the buyer had closed without addressing it, they'd have inherited a time bond (either increased premiums or uncovered claims) that likely would not have been addressed in the purchase agreement’s indemnification or working capital provisions.
That's not a policy issue that can be addressed by a generalist insurance broker—it's a deal structure issue that needs to be addressed pre-close by a specialist insurance advisor working alongside the deal attorneys.
The Takeaway
Insurance is unique among the diligence workstreams in that (a) it touches all facets of the business: legal, HR, accounting, and so on, and (b) the financial and legal ramifications straddle both sides of the transaction.
The reason the issues highlighted here often go undetected by legal and accounting advisors is not for lack of knowledge or care. Identifying these issues requires a strong working knowledge across legal and QOE diligence, deal structuring and commercial insurance.
Evaluating a deal?
We work with searchers, acquisition entrepreneurs, and private equity sponsors to independently evaluate insurance programs before close.