Due diligence, in the simplest way can be described as a general obligation to use adequate care prior to concluding any transaction. The due diligence procedure forms an integral part in every form of business and can prevent an individual or an entity from losing money.
Due Diligence in Civil Litigation
With reference to civil litigation, the process of due diligence means the judicious effort made by a person of ordinary prudence to comply with certain requirements before requesting for a relief. These can be described in the following manner:
Statute of limitation: Every State and Territorial law provides a statutory time limit within which legal proceedings should be initiated failing which the right to make a claim by an aggrieved person can be barred forever. Therefore, a person should not only take due care to file an application but should also use diligence in procuring service upon the other party.
Proper basis to make a claim: Due diligence should be taken by a person not to make a claim which are frivolous, vexatious and legally and factually inaccurate. A proper cause of action is the most important pre-requisite for making a claim For example while filing a bankruptcy petition, both the applicant as well as the Solicitor representing the applicant should engage in due diligence to determine that all the representations made in the petition are factually correct.
Disclosure of facts: The parties to the litigation are under an obligation to disclose to the Court all the necessary details relating to the case and thereby further the administration of justice. Wherever required by law, one party should disclose to the other, all the required information and/or documents that are essential to the resolution of dispute.
Refrain from misleading conduct: The parties to the litigation should not engage themselves in such conducts which are misleading or deceptive in nature and might abuse or cause unnecessary delay in the litigation process.
Due Diligence in Insurance
Insurance due diligence ascertains whether an entity is exposed to any financial loss or not before the entity can be merged with or acquired by any other company. Insurance due diligence procedure includes:
Understanding target business and identifying all relevant insurance policies: This involves reviewing and analysing the business profile of the company so as to identify the key risks, procuring and reviewing all the relevant insurance policies and checking current insurance programs against the list of coverage as per industrial norms.
Summarizing and structuring the insurance policies: This contains reviewing of main coverage terms and conditions of the insurance policies, summarizing key policy provisions and identifying potential issues in the coverage with suggested modifications.
Reviewing all previous and existing claims of the company: This comprises identifying and analysing all pending claims pertaining to the valuation, assessment of potential exposure and coverage analysis and assessing risk management for future claims.
Risk identification exercise: Conducting risk identification provides valuable information on insurable and non-insurable risks, all future and past liabilities to which a new entity will be exposed to and the appropriate actions that can be taken to mitigate the same.
Special Directors & Officers insurance issues: This involves assessing whether change-in-control of the directors and the officers will result in automatic termination of the insurance coverage, identifying potential cost savings by synchronizing the company’s insurance programs and determining whether directors and officers of the acquiring company need to have independent director liability coverage.
Risk management specialist conducting insurance due diligence should also include within the scope of its review, corporate governance practices, pending litigations, legal and regulatory compliances and relevant human resource matters.
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