M&A insurance
M&A insurance
What actually is M&A insurance?
Traditionally, buyers have shouldered the burden of risk under the principle of caveat emptor, or buyer beware. However, the evolution of M&A practices has led to a shift towards due diligence and negotiation of transaction documents to allocate risks effectively. Many an in-house lawyer knows the drill: how this involves complex negotiations between buyers and sellers regarding representations, warranties, and indemnities, and is often one of the major pain points of any transaction. Private equity sellers, in particular, may be hesitant to provide contractual protections, leaving buyers with limited recourse.
Enter M&A insurance: the purpose? To allows insurer to assume some of the risk typically borne by sellers.
Transaction insurance, particularly Warranty and Indemnity (W&I), is a well-established product providing protection similar to a seller's warranty on uninsured deals.
- W&I coverage has expanded beyond traditional M&A deals to include investment structures like preference shares, secondaries transactions, and minority investments.
- The contingent insurance market addresses identified risks arising during transactions or unrelated liabilities on balance sheets.
- Examples of contingent insurance cover scenarios like triggering a right of first refusal clause in a customer contract, allowing investors to mitigate risks and proceed with deals smoothly.
- The insurance is increasingly creative in deploying insurance capital to cover diverse risks.
When can it be useful?
- When you have a financial sponsor that doesn’t give warranties
- The seller suffering insolvency issues
- For buyers in competitive auctions, leveraging M&A insurance can enhance their attractiveness by providing assurance against unforeseen liabilities
A broker and underwriter can give more specific guidance on whether a deal is suitable for insurance
"We'll start with the principle of caveat emptor. So, buyer beware: if you're looking to buy or make an investment in a company, it's on you if there's something that goes wrong!"
David Wall, Partner at HWF, on the traditional burden of risk in M&A
Insurance providers - are they all the same?
There has been an influx of new entrants into the M&A insurance markets over the past couple of years. If you're unsure who to use, speaking to a broker can help you see who they trust and think are competent.
When it comes to picking one, you want a provider who is not just competent, but also quick and responsive. They often need to deliver insurance within tight deal timeframes, and you want to be sure that they will come through.
You also want to check that their claims process is smooth, and see whether they have paid out any key claims. You want to know that your claim will get paid out in the event that you need it! Ultimately, the value of insurance lies in its ability to provide execution certainty and smooth claims processing.
What we really want to know: is it expensive?
- Good news: M&A insurance costs are decreasing due to increased market competition and a slowdown in M&A activity over the past six to 12 months.
- Previously, insuring £10 million might have cost around £100,000, but now it's more in the range of £70,000 to £80,000, approximately 1 per cent of the insured amount.
- While cost is a significant factor, the panel advised that focus should be on coverage quality rather than solely on premiums.
- With approximately 30 insurers in London, competition mainly revolves around cost, but it's crucial to prioritise coverage quality to ensure adequate protection.
- Choosing the right insurer and broker is essential as their expertise and track record play a significant role in securing appropriate coverage aligned with the deal's terms and needs.
- Experienced brokers are invaluable in navigating the insurance market, negotiating contractual terms, and managing underwriter relationships, ultimately enhancing the deal process and mitigating risks effectively. If in doubt - have a friendly chat with a trusted broker!
Important things to note: what may or may not be covered?
The underwriting process involves reviewing various due diligence (DD) reports, such as legal, financial, and tax reports, to assess the risks associated with the warranties being requested for coverage. If certain areas of the warranties have not been adequately examined during diligence, they may be excluded from coverage.
Underwriters do try to take a balanced approach, considering the commercial significance of the uninspected areas. For instance, if a tech business with a single leased office lacks property diligence, it may not be deemed a significant risk, and coverage may still be provided. Ultimately, underwriters aim to align the scope of coverage with the identified risks of the business.