Parties to business transactions frequently seek to protect themselves against specific financing, litigation and transactional risks through insurance. The types of insurance to protect business’s interests and risks in M&A is growing:
- Insurance for breaches of contractual representations and warranties have become increasingly common, both for buyers and sellers.
- Standard-form policies may provide coverage for physical property being conveyed.
- Bespoke policies protect significant deal assets with contingent value, such as litigation judgments or tax claims.
- Other policies protect against known contingent risks of a deal, such as pending litigation risk, fraudulent conveyance risk, tax risk, or successor liability risk.
These and other risk management techniques are tools to help sophisticated businesses reach agreement in valuing and exchanging assets. Where insurance coverage is available, parties have greater flexibility to allowing modification of key deal terms, including in valuing assets with uncertain future value, or in modifying or eliminating indemnification provisions, escrow requirements, and materiality caveats.
The assistance of both brokers and attorneys in the underwriting process is critical to obtaining optimal coverage. Brokers will access the insurance market and identify underwriters that will sell these and similar policies. Deal makers and counsel will first need to consider which party should purchase the necessary insurance, and who pays. In the context of coverage for representations and warranties, for example, the “buying” party is able to seek insurance against fraudulent representations and warranties by the seller, but the “selling” party cannot obtain coverage against its own fraud.
Policy terms and conditions to protect the policyholder or beneficiary should be negotiated with the help of insurance counsel. One of the most important enhancements is to require “prejudice” to the insurer from alleged non-compliance with policy conditions, such as notice and cooperation. It is also important to eliminate obligations to provide any information that could risk waiver of attorney-client privilege, to clarify how cooperation in a claim is anticipated, and to define how a disputed claim will be resolved. Significant coverage exclusions may also need to be revised or deleted in some cases.
After coverage is purchased, policyholders should take care to comply with the policy terms, to provide prompt notice of claims or losses, and to avoid settling claims without insurer knowledge and consent. In most cases, claims under these types of policies are subject to confidential arbitration—a process that we know very well. Our Insurance Recovery Team is able to help, from the term sheet through the resolution of an insurance claim.