M & A Transaction Facilitation Insurance Products

Diversified Insurance Group is focused on providing insurance brokerage, risk management and benefits consulting services to Utah’s deal community. With an entire practice dedicated to serving high growth organizations and the capital providers supporting them, Diversified Insurance understands the risk issues associated with growth, M&A, dealmaking and IPOs. 

Description

  • Deploys insurance capital to respond to legal exposures that may prevent consummation of a business transaction
  • Programs can be designed to address both known and unknown exposures
  • Removes doubt and provides piece of mind
  • Underwriting process moves quickly to conform to transaction timeline
  • Due diligence fee typically charged
  • Insurance Providers: varies by product, but includes AIG, Ambridge Partners, Hartford, London and IronPro
  • Cost: 3% to 15% of the limit (varies by complexity of the deal and product involved)
  • Deductibles: negotiable, but typically a percentage of the deal size
  • Policy Duration: negotiable, but at a minimum will track the Agreement
  • Due Diligence Fee: an upfront fee is typically charged, with the amount varying by product and complexity

Reps and Warranty Insurance

  • Designed to cover financial loss due to a breach
  • Can use used to address disputes over the amount of an escrow or holdback
  • Can be used to replace an escrow or holdback, thus allowing for quicker return of proceeds to the limited partners or redeployment to new ventures
  • Can be structured to provide coverage on a blanket basis or for specific representations or set of representations
  • Does not cover covenants or known liabilities and certain types of reps, such as environmental
  • Can be placed on either a Buyer or Seller basis
  • Increasingly viewed as a strategic tool by Private Equity firms, particularly in bid situations

Buy-side Considerations

  • Seller unwilling (or unable) to provide indemnity
  • Indemnity provided is inadequate either in terms of the amount provided or the duration of the guarantee
  • Guarantees proceeds will be available in the event of a breach
  • Facilitates collection process
  • Protects against seller fraud
  • Often used as a differentiator in auction situations

Sell-side Considerations

  • Avoiding Contingent Liabilities — Allows Seller a “clean break”
  • Strategic Considerations — Insurance may expand the list of the potential buyers, thereby possibly increasing the value of the sale
    • Liquidity Concerns — Seller avoids placing cash in escrow
    • Due Diligence Considerations—Insurance offers further guarantee against potential unintentional non-disclosures or other due diligence issues

Loss Mitigation Services

  • Designed to address existing litigation or liability
  • Quantifies potential exposures from third-party claims, assisting in valuation of transaction; premium may be tax deductible
  • Program Options:
    • Excess of existing insurance or a self-insured layer
    • Can apply to judgments only, defense costs only, or both
    • Premium Commutation: incorporates a return premium element of any self-insured component in the event no claim is paid
    • Premium Option: allows insured to purchase an option that locks in place the insurance program, requiring payment of full premium only if the policy becomes necessary
    • Loss Scenarios: securities litigation, IP litigation, ERISA Liability, other

Tax Indemnity

  • Designed to guarantee tax treatment set forth in an underlying tax opinion
  • Provides certainty in situations where a Private Letter Ruling cannot be obtained or is insufficient
  • Underwriting issues:
    • Is there a valid business purpose
    • Was an opinion issued and by whom
    • Is the deal a function of the transaction
    • Who is the client and what is the history of the tax opinion