Many publicly traded companies are opting to split in two or spin-off large units in efforts to streamline operations, mollify activist shareholders or cash in on a bullish stock market, but the moves also raise risk management challenges.

Poorly planned or misconceived splits can result in fraud allegations if liabilities are incorrectly apportioned, or other liabilities may arise if the separated entities go on to post differing financial results.

And routine risk management tasks, such as ensuring coverage and expertise is in place for all units, becomes significantly more complex during and after a corporate split.

While risk managers may be familiar with the internal and external risks inherent in mergers and acquisitions, they also need to be aware of the risks involved in getting smaller. Splits can subject a company to disputes over existing insurance contracts as well as lawsuits aimed at directors and officers, experts say.

The trend of corporate divestiture has gained steam recently and is especially pronounced in the technology sector, said John Orr, San Francisco-based managing principal in the management risk practice for insurance broker Integro Ltd. “A lot of this is investor-driven as they see greater potential for profitability,” Mr. Orr said.

The number of corporate splits has tripled in the past five years.

For example, in September online retailer eBay Inc. said that it would split its auction and payments businesses into two publicly traded companies after being publicly pressured to split by activist shareholder Carl Icahn. Likewise, technology giants Hewlett-Packard Co. and Symantec Corp. each said in October that they would split into two publicly traded companies. In August, media company Gannett Co. announced that it would split its print operations into a separate company from its broadcast and digital operations.

“There is always going to be risk in transactions in which you are splitting large companies,” Mr. Orr said, adding that newly independent companies face operational risk because they lack the “safety net” of being part of a larger conglomerate that can offset poor performance in one division with profits from another division.

Steven Boughal, New York-based vice president, chief underwriting officer at Hartford Financial Products at The Hartford Financial Services Group Inc., said underwriters will closely scrutinize the manner in which a spinoff is being transacted.

“After a major transaction such as a spinoff, we need to know that the new companies will have the abilities to manage themselves on a day-to-day basis,” he said.

Companies contemplating a split will need to make sure that the division of assets and liabilities is equitable, said Will Fahey, Chappaqua, New York-based senior vice president in Zurich North America's management liability group.”If one company was saddled with all the pension liabilities and set up to fail, you could get fraudulence and conveyance claims,” he said.

A legal settlement announced earlier this year showed how expensive corporate splits can be if liabilities are loaded into one entity, said Kevin LaCroix, an attorney and executive vice president at RT ProExec, a division of R-T Specialty L.L.C., in Beachwood, Ohio.

In April, Anadarko Corp. paid $5.15 billion to settle a fraud lawsuit that was triggered by the way in which a company Anadarko acquired, Kerr-McGee Corp., had overwhelmingly allotted environmental liabilities to a spinoff business, Tronox Ltd., in 2006. A bankruptcy judged ruled that Kerr-McGee had acted improperly when spinning off Tronox, which filed for bankruptcy in 2009 due to environmental cleanup costs.

“Where you will see problems is when a split causes a good company/bad company structure,” Mr. LaCroix said.

Jeffrey Schulman, a New York-based partner in the insurance practice at Dickstein Shapiro L.L.P. said that companies can insert clauses into the contract language to help protect directors and officers from lawsuits.

“When it comes to mergers and acquisitions or a spinoff, most of these transactions will provide for a continuation of the discovery period under the existing insurance policy for up to a six year period,” Mr. Schulman said. “The idea behind this is to indemnify the directors and officers for actions take place prior to the transaction.” 

In addition to existing liability issues, risk managers involved in corporate splits and spinoffs need to be especially attuned to how insurance policies are apportioned, said Carol Fox, Cincinnati, Ohio-based director, strategic and enterprise risk practice at the Risk & Insurance Management Society Inc. For example, if the named insured on a policy is the name of the unit being spun off, the remaining entity, even if it was the unit that bought the coverage, may find itself with insurance, she said.

“From an insurance perspective, you really have to look at which insurance asset belongs to which entity,” Ms. Fox said.

Brad Wood, senior vice president-risk management for Marriott International Inc. in Bethesda, Maryland, agreed that divestitures present a unique challenge to risk managers. Marriott has been through several divestitures as well as acquisitions over the past several years, including a deal to spin-off its timeshare unit, Marriott Vacations Worldwide, in 2011. Mr. Wood said that a “close and methodical review and analysis” of assets and liabilities is critical to the success of the transaction and assembling a diverse team is key.

After a risk manager of a company undergoing a split assesses future insurance needs, he or she might be in for some sticker shock, said Brian Cochrane, Chicago-based executive vice president and global leader of Aon Risk Solutions' M&A practice. “The cost of two insurance programs for stand-alone businesses will without a doubt be more expensive than for a single large entity,” he said.