M & A Transaction Facilitation Insurance Products

  • 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