M&A Insurance & Risk Management

Merger and acquisition (M&A) insurance products are designed to manage potentials risks and liabilities that arise in the course of an M&A deal. Used strategically they can enhance a negotiation position and improve the final outcome of the deal.

Transactional liability insurance is designed to manage potential risks and liabilities that arise in the context of an M&A transaction. Our services include insurance due diligence and M&A insurance solutions, such as warranty and indemnity insurance (W&I) and tax liability insurance.

We work with a wide range of clients including private equity houses, real estate, infrastructure funds and corporations. Our team combines due diligence, transaction solutions and insurance coverage placement to mitigate risk during a transaction.

Operating on a global platform, our M&A team brings depth and breadth of expertise across diversified industries and geographies.

KEY SECTORS

WHAT WE DO

Our focus is within clearly defined industry and risk sectors where we have become a leading global market performer, providing our clients with insurance and risk management services. We have experience working clients from the aviation, construction, CommTech, marine, real estate, financial lines and energy sectors.

Our M&A team places warranty and indemnity (W&I) policies that are used to give protection against financial losses suffered as a result of an unexpected breach of warranty, or claim under a tax indemnity in a sale and purchase agreement or tax deed. Buyers and sellers can purchase a policy, and parties regularly use W&I insurance as a strategic tool when structuring and negotiating deals.

We have some of the most experienced M&A brokers in the London market, a number of the individuals in our team have been practicing in the field since the early 2000s when the marketplace was in its infancy, breaking into new geographical territories and pushing product boundaries.

As a result of this experience we have significant market influence and the know-how to execute for every transaction and get the best terms for clients wherever the deal is.

FAQs

Premiums are usually in the region of 0.75% - 1.5% of the policy limit with a minimum premium cost of circa £50k to £75k. The premium rates will depend on various factors such as the nature and jurisdiction of the target, governing law of the acquisition agreement and scope of warranties. The premium is a one-off payment, due at the start of the policy.

The process can be completed within one week. There are two stages to the process:

Stage one:
Our M&A team will seek non-binding terms from insurers. This will take 2-3 working days. In order to do this we will require:

  • The most recent draft of the sale and purchase agreement (SPA)
  • Background information on the target and an overview of the transaction
  • The accounts of the target (if available)

Stage two:
An insurer will be engaged to undertake full underwriting. Some insurers may charge a fee at this stage. However, this will often be waived in the event the insurance is purchased. This will take approximately 5 working days. The insurer will require:

  • Access to the data room
  • Up to date versions of the SPA and disclosure letter
  • Access to the Buyer’s due diligence (if it is a buyer’s policy)
  • A short underwriting call with the deal team

During this stage the Insurer will issue a bespoke policy which will be negotiated.

The average limit of insurance taken out in 2017 was 34% of the enterprise value (EV). However, there is variance for smaller deals, and the limit vs. EV percentage tends to decrease as deal size increases.

Insurers will expect to see comprehensive externally produced due diligence (DD) reports undertaken by the buyer’s external advisors (legal, financial and tax at a minimum). The DD exercise should encompass all areas covered by the warranties and in all jurisdictions being warranted.

The policy will match or extend the limitation period of the Transaction Documents (usually 2-3 years for general warranties and 7 years for fundamental and tax warranties).

The measure of damages in the policy will usually match the sale and purchase agreement (SPA) and the duration of cover will mirror the agreed limitation periods (unless the policy is used by a buyer to extend the period of protection).

Insurance does not replace the need for a thorough deal process. Insurers expect robust negotiation of warranties, good disclosure and sensible due diligence (DD).

W&I insurance will usually exclude matters that are known to the insured, including matters disclosed by the seller or within DD reports. Forward looking statements (including projections, forecasts and collectability of debts), certain fines and penalties, pension underfunding and post completion purchase price adjustments. In some circumstances insurers may exclude certain warranties and/or apply other policy exclusions (e.g. transfer pricing). This will depend on the insurer and the underlying transaction.

Key Stats

M&A Insurance
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WHY JLT

  • Our M&A team combines experienced insurance professionals and corporate and tax lawyers with former W&I underwriting experience
  • JLT gives you a tenacious and highly experienced global team that are used to working at the speed of the deal 24/7
  • Our coverage experts continue to rigorously test our products and exclusive JLT wordings. We consider both the coverage and claims perspective and our claims team play an active role prior to binding policy wordings to ensure that you get the broadest protection available
  • We involve our dedicated claims management experts at the outset for their insights when designing insurance programmes. We use their expertise to avoid any ambiguities in the wording and we work with markets that are claims responsive
  • We will speak to you in a language you will understand and we will explain any complexities so that you know exactly what service you are getting and what you are covered for. We can explain the particulars of your cover in a clear and concise way for your peace of mind.

Case Studies

M&A insurance

STAPLING INSURANCE TO THE DEAL

A mid-market UK fund was one of several bidders in a competitive auction process for a Netherlands target. Buy-side W&I insurance was a necessity on the deal on account of a very diverse shareholding base (of over 200 individuals).

Our client was required to provide comfort as part of their final bid that a fully underwritten buyer’s W&I policy had been arranged to enable signing and completion to take place within two days of exclusivity being granted.

We worked with insurers based on the vendor due diligence (VDD) and red flag buy-side top-up reports to arrange a policy that mirrored the sale agreement warranties and provided additional protection through a synthetic tax deed in the policy (despite one not being offered by the seller).

The seller achieved their goal of maintaining competitive tension until the very last moment, with our client successfully winning the auction and completing the deal on time.

M&A insurance

AWARENESS SCRAPE

Our client, a large international fund was involved in a secondary buyout from management and the exiting venture capital fund. The exiting fund made it clear that the only available recourse in the event of a breach of warranty would be against the management sellers, who were taking very little from the deal.

The management sellers reluctantly agreed to provide a set of warranties, but on the condition that a blanket awareness qualifier would be applied and that their maximum aggregate liability would not exceed the sale agreement basket amount (0.5% of the deal size).

We worked with W&I insurers with a specific private equity focus to structure a policy giving protection up to 25% of the overall deal size with a tipping retention of 0.5% of deal size. JLT negotiated a policy “awareness scrape” to switch-off the general awareness qualifier for the majority of the warranties where it would be market to receive an absolute warranty. The result meant that the buyer would not need to pursue the management sellers should a breach of warranty arise, protecting the future working relationship.

INSURANCE SOLUTIONS

Our M&A insurance products are designed to cater for the potential liabilities which could arise from a transaction.

Our policies can be purchased by either the buyer or the seller depending on the deal’s structure. We provide tailored solutions for known and unknown risks. Policies are also regularly used strategically to enhance a negotiating position and improve the final outcome of the deal. M&A insurance covers risks under the following two categories - known and unknown.

Unknown risks

Warranty and indemnity (W&I) insurance is one the most commonly used M&A insurance solutions. It offers protection against the financial loss incurred in the event of an unexpected breach of warranty or a tax indemnity claim under a sale and purchase agreement (SPA).

Known risks

This option includes matters identified by the buyer in due diligence, or established by the seller from the outset. It could result in a potential liability for the buyer after completion of the deal, with tax exposure being an example of this issue.

OUR PRODUCTS AND SERVICES INCLUDE:

Often termed tax opinion insurance, this is a highly bespoke form of transaction insurance. It’s used regularly when an expert, conducting diligence on behalf of a buyer, identifies and scopes a potential future tax exposure- stemming from specific tax treatment in the target business. If the tax treatment were to be challenged by the tax authorities post completion, the tax liability would either fall to the account of the seller (if a suitable indemnity was provided in the SPA). It can also apply to the buyer (if they are not able to obtain an appropriate indemnity from the seller during negotiations).

Uncertainty around litigation, which is pending, ongoing or threatened in a target business, could be the undoing of an M&A transaction. A buyer may be unwilling to acquire with litigation on the horizon and a seller may be unable to exit with the cloud of litigation hanging over their business. Similar in concept to tax liability insurance or contingent liability insurance, litigation buyout insurance can transfer the potential financial downside of litigation to an insurance policy.

The broad category of contingent liability insurance represents a bespoke insurance solution for the hugely variable, transaction-specific risks, which could transpire in any M&A situation.

We manage the insurance and employee benefits due diligence to help clients evaluate risk, insurance and benefits programmes for a target acquisition or disposal. We've worked on more than 400 deals over the past 20 years, so we speak the language of M&A advisors, delivering output within deal timelines, with creative solutions when required.


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