Deal-driven insurance

17 May 2016

The use of merger and acquisitions (M&A) insurance as a deal negotiation tool continues to develop. We have seen the insurance market evolve to accommodate ambitious demands from our clients. As we approach the mid-point of Q2 we look back on these recent developments and new coverage solutions.

Decreasing retentions – in the final quarter of 2015 we wrote that, for the first time, insurers were offering 0% retention rates on certain “pure” real estate transactions. We note that this trend has continued and is now being used increasingly for real estate deals. Although insurers still struggle to hit this nil rate for other M&A transactions, there is sufficient competition in the market to drive down the insurance policy attachment point. Our end of year report illustrates the dropping attachment point/retention for almost all industry sectors. We see this decreasing retention trend continuing in H1 2016.

Increasing appetite for specific risk policies – as knowledge of the product grows; we have seen a notable increase in interest for specific risk policies. A potential sticking point for a transaction (such as a historic tax risk or threat of litigation) can put a deal in jeopardy. This is particularly the case where the seller is unwilling provide an indemnity for a matter and the buyer will not shoulder the risk. A seller may even decide that it is unable to begin a formal auction process with such a threat hanging over its company. Insurers are increasingly willing to look at creative solutions to such issues. A number of tax experts have been recruited as underwriters for this very reason. Points brought out in due diligence may have an insurance solution where, perhaps a year or two ago, they would not have been looked at. If a potential stumbling block has been discovered we highly recommend exploring insurance as a possible solution.

A new look at standard exclusions – a warranty and indemnity (W&I) insurance policy is designed to sit (as closely as possible) behind the warranties and tax covenant in the underlying transaction documents. But, as with other insurance policies, it will be subject to certain general policy exclusions. Examples of these include: issues relating to asbestos, uninsurable fines/penalties and pension scheme underfunding. However, insurers are now looking at coverage solutions to certain general exclusions that they may have previously considered uninsurable. We have successfully negotiated the inclusion of transfer pricing, environmental matters and product defects into W&I insurance coverage packages. We continue to discuss these exclusions with insurers and expect there to be more movement as the year progresses.

Potential new developments – as we head towards the second half of 2016, we anticipate the insurance market will continue to develop and that insurers will further improve the coverage available. Insurers are taking a proactive approach to clients’ needs and are driving the market to expand. Blended coverage solutions (incorporating environmental, title and cyber risks) are now being put forward. Our 2015 report showed a record year for almost all areas of M&A insurance and we see no sign of this slowing down.

This guidance should not be taken as legal/tax advice or as a substitute for reading your policy in full to understand your legal position. Our M&A team combines extensive transactional experience with a deep understanding of an evolving M&A market.

For more information please contact Ben Crabtree, Partner in the Financial Divisions team on +44 (0)20 7558 3824 or email ben_crabtree@jltgroup.com

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