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03.01.2017

Mergers & Acquisitions Insurance Can Offer Strategic Advantage

Rowan Bamford - Global Head, Mergers & Acquisitions and Tax - Ironshore International

Lloyd’s of London has been a leader in the Mergers and Acquisitions insurance market for the past 15 years.  M&A insurance is on the rise as both buyers and sellers increasingly recognize that third-party insurance protection offers a valuable strategic advantage to facilitate complex, domestic or cross-border transactions. Ironshore’s Lloyd’s Pembroke Syndicate 4000, with deep merger and acquisitions expertise, leverages the strength of the Lloyd’s platform to customize programs for a variety of transactional risk exposures in jurisdictions worldwide.

M&A insurance is, in essence, the allocation of transactional risk through third party insurance programs.  Policies are structured to address specific terms and conditions of the sale and purchase agreement, including post-closing sale contingent liability throughout the duration of the survival time period, which is typically seven years.  M&A insurance products encompass specialist areas, such as Warranty & Indemnity, Representations & Warranty, Tax Liability Insurance and tailored policy solutions for specific transactional risks.  The insurance protection is customized to reflect the contractual agreement between the parties to insure and, thereby, compensate the buyer or seller for potential financial loss incurred under the terms of the agreement.  Policy reimbursements provide for coverage of defense costs, settlement protection or warrantor default on payments, as examples.  Buyer and seller policies can be underwritten to align with the respective liability time limits set forth in the transaction documents.

Warranty & Indemnity coverage is often required for private transactions when there are no indemnification obligations on the part of the seller without any recourse.  W&I insurance often serves to bridge a gap in expectations between the parties on risk allocation thereby smoothing the path to agreement on the overall transaction and/or providing the prospective buyer with additional source of support to sweeten its offer in a competitive purchase process.  Insurance also can satisfy lender concerns by providing assurances that the seller has received a satisfactory purchase price for the mutually-agreed upon terms and conditions and that any loss due to liability risk can be resolved through the insurer.    

Equally notable, third party protection may eliminate the need to establish an escrow account, which translates into the seller having access to more cash on hand post-closing.   Many sellers, whether business owners or private equity firms, may utilize sale proceeds to repay loans or satisfy an investor exit strategy, which may be difficult if they have significant warranty and indemnity obligations. Insurance removes the liability surrounding such risk.  M&A insurance can offer a competitive advantage in a bid process by eliminating an escrow account requirement and empowering the stakeholders to negotiate the most optimal terms and conditions.   

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