Corporate and Transactional Insurance Coverage

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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. Continue Reading Tailoring insurance to protect transactions and contingent risks

If an insurance company owes a duty to defend, the dispute should be decided promptly, on the pleadings. Any delay undermines the duty to defend. The scope of the duty to defend should be adjudicated on the pleadings as quickly as possible to give policyholders the true value of their policies and the benefit of their contracts.

The value and purpose of the duty to defend

The duty to defend is one of the most valuable components of an insurance policy. Like it or not, American society is litigious. Companies cannot prevent lawsuits through good conduct, laudable intentions, or strong compliance programs.  Refuting liability and damages is expensive even if the core facts are undisputed or the case is frivolous.

For a single company or individual, the frequency and size of litigation generally is unpredictable, making budgeting for defense costs a difficult task.  In any single year, the risk of litigation is low, but when a claim does come in, defense costs can be significant.  This litigation landscape is a problem for legal departments trying to budget or reserve for litigation costs.

The duty to defend addresses this problem using the principles of risk transfer and risk pooling.

  • Risk transfer: the risk and costs of defending litigation is transferred to the insurance company in exchange for a premium payment.
  • Risk pooling: the insurance company takes the collective risks of litigation against all policyholders in a pool large enough that aggregate defense costs can be statistically analyzed and predicted on an annual basis.

This way no one has to assess the risk that any individual company is sued or anticipate those defense costs. Policyholders can include insurance premium costs in their legal budgets, and shift covered defense costs onto the insurer. The insurance company underwriters can evaluate the aggregate defense spend at a gross systemic level and charge premiums to cover those costs (with a healthy profit margin).Continue Reading The duty to defend requires an early judgment

Faced with mounting claims for insurance coverage as a result of the novel coronavirus (COVID-19) outbreak, commercial insurers are likely to search for any policy provision that they think will enable them to avoid paying virus-related claims.  One provision that insurers ultimately may invoke in an attempt to deny such claims is the so-called “pollution exclusion” – an exclusion that can be found in both commercial general liability (CGL) insurance policies and property insurance policies.  Policyholders should anticipate such an argument and should not walk away from insurance claims just because of it.  Although the exclusion is often broadly worded, there is generally good reason not to read it to preclude coverage for third-party claims and/or first-party losses involving viruses, including COVID-19.

While the exact language of the pollution exclusion may differ from one policy to another, it typically provides that there is no insurance for “bodily injury” and/or “property damage” that “would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of ‘pollutants’ at any time.”  Again, while its precise definition can vary among policies, “pollutant” is typically defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.”Continue Reading Pollution exclusion should not preclude coverage for virus-related claims

It should go without saying that when a business purchases any insurance policy – including, but not limited to, a commercial general liability (CGL) insurance policy – the business expects the policy to provide coverage for its line of business and the specific risks it faces. Cannabis-related businesses are no different. However, they must be especially vigilant to make sure that what an insurance company gives with “one hand” (the coverage grant), it does not take away with the “other” (an exclusion). Remarkably, marijuana-related exclusions may still be found in CGL and other insurance policies marketed and sold to businesses in the cannabis industry.

To better illustrate the concern, consider the following non-cannabis-related scenario: When purchasing insurance, a swimming pool manufacturer would, of course, want to make sure that its CGL policy will provide coverage in the event that a third-party sues the manufacturer for bodily injury allegedly arising out of the use of one of its swimming pools. Conversely, that manufacturer would not want to purchase a CGL policy that excludes coverage for any bodily injury arising out of the use of its swimming pools. While, in that latter situation, the CGL policy may still provide the manufacturer some coverage for certain, limited types of claims, the policy would not provide the manufacturer coverage for the real risks that it faces — that is, those arising out of the use of its swimming pools. Such coverage, therefore, would essentially be illusory coverage. In other words, it would be basically no coverage at all.Continue Reading CannaBeware: Make sure insurance actually covers the risks your business faces

A rare lawsuit concerning coverage under a reps & warranties policy presents two issues of interest to M&A lawyers:

  1. If the insured under a reps & warranties insurance policy fails to obtain the insurer’s consent to a settlement, coverage for that settlement is forfeited, even if the settlement was “panicked” and on a short timeframe.
  2. Sell-side policies do not cover allegations of seller fraud. This is why buy-side policies are preferred – they cover the buyer’s losses resulting from seller fraud.

Continue Reading Reps & Warranties Insurance Case Highlights the Need for New Expertise and Old-Time Common Sense

The New York Court of Appeals, the state’s highest court, recently rejected an attempt to apply the “common interest doctrine,” an exception to the general rule that communicating privileged information to a third party waives the attorney-client privilege, to situations where separately represented parties communicate attorney-client privileged information in connection with transactions or other circumstances other than in anticipation of litigation. Ambac Assur. Corp. v. Countrywide Home Loans, Inc., No. 80, 2016 WL 3188989 (N.Y. June 9, 2016). As this case shows, companies should be mindful of what information they share outside the litigation context, because the common interest doctrine may not be available to protect that information.
Continue Reading ‘Sorry, But You Have Nothing in Common’: The New York Court of Appeals’ Recent Rejection of the ‘Common Interest Doctrine’ Outside the Context of Litigation

On August 20, 2015, the California Supreme Court issued its landmark decision in Fluor v. Superior Court, overruling its prior holding in Henkel Corp. v Hartford, which precluded successor entities from tapping into their predecessors’ insurance assets for inherited long-tail liabilities.  In Henkel, the Court held that a contractual assignment of insurance assets…

1. Representations and Warranties insurance has quickly risen to become a standard topic of discussion in many merger and acquisitions transaction negotiations.

2. Representations and Warranties Insurance is not a new product – but until recently its use has been limited because of prohibitive premium pricing and buyer concerns as to whether insurers would actually pay on claims. The insurance market is working to bring prices down and establish a payment history.
Continue Reading Top Ten Things to Know about Representations and Warranties Insurance