Using insurance capital to enhance deal terms & allocate risk
July 15, 2016
PitchBook Dealmakers Column
The M&A landscape continues to transform rapidly in the use of transactional risk insurance products.
Representations & Warranties Insurance (“R&W Insurance”) has gained widespread acceptance among sellers seeking a low-indemnity (or even no-indemnity) structure. R&W Insurance is frequently used by buyers seeking to reduce their purchase price (or otherwise enhance their bid) by reducing the escrow and indemnity ceiling. The R&W Insurance policy typically has a policy period that far exceeds the typical time frame for an escrow and may exceed the time period for the survival of representations for purposes of indemnity. Some policies have detailed claim provisions that assure prompt evaluation and fair resolution of claims. These are powerful incentives to use R&W Insurance.
Essentially, R&W Insurance requires the insurance underwriter to satisfy itself that representations are not inherently too ambiguous, overbroad, or complex to be properly diligenced, that due diligence has taken place, and that heightened risks have been identified and either excluded or thought to be within the retention, etc.
Products such as tax insurance, litigation buyout and contingent liability insurance begin with the premise that a heightened risk exists. The insurance underwriter spearheads a focused diligence on transferring such risk via a policy tailored precisely for such risk. These products complement R&W Insurance. The suite of transactional risk insurance products, in their entirety, allows insurance capital to enhance M&A deal terms and allocate all risk—whether known or unknown, heightened or banal.
These products, however, still sit in the shadows of R&W Insurance as many advisors remain unaware that they exist; this article briefly introduces tax, specific litigation and other contingent liability insurance. Click here to read the full article.