INTRODUCTION
M&A insurance is special products of insurance products designed for the protection of the risk in mergers, acquisition, and corporate transactions faced by both a buyer and a seller.
The nature of Merger & Acquisition insurance plays a very critical role in the due diligence process of M & a where specific risks related to financial, operational, and legal liabilities become payable after the closing of the deal. Such specific uncertainties would, therefore, be mitigated by M&A insurance in order to proceed with greater confidence.
Indeed, with such types of products, coverage can take many different forms, including representations and warranties insurance, tax liability insurance, and environmental liability insurance, all aimed at providing comprehensive protection for parties involved in a transaction.
RISK COVERAGE
Representation and Warranty Insurance also known as RWI in abbreviation. In this case, its insurance aims to cover losses arising from breach of the seller’s representations and warranties in any purchase agreement.
For instance, it can assist the buyer from suffering a financial loss whereby the seller fails to comply with the purchase agreement citing incorrect business revenue records and hidden expenses even after the seller indemnifies such risks.
Tax Liability Insurance: This one focuses on compensating the taxed individuals and/or entities for tax risks that might come up as a concern for them post transaction closure.
Contingent Liability Insurance: These are claims that arise from the prior to disposal and could have been in the operation of a business previous to acquiring it, for example, the claims of environmental maintenance or outstanding court cases.
KEY CONSIDERATIONS
Underwriting Process: The underwriters here will take a survey of all the other elements of the transaction and this will entail looking at the client’s books of accounts, legal papers and assessing the client’s business operational issues.
Policy Limits and Retentions : The purchaser is expected to appreciate the retention limits that is, the maximum amount of the policy for which he may be held responsible, the policy duration and the period within which claims shall be made usually several years after the transaction.
Exclusions: They may include any ‘known’ defects or perils that are present at the time of acquisition, intentional misrepresentation and the like.
Cost: The cost implied in the policy is mainly influenced by the size of the transaction, the intricacy of the transaction and the level of risk involved in the transaction. Just like other types of insurances, M&A insurance coverage can therefore help ease the process of negotiations but not more than this.
BENEFITS TO SELLER
1. Speed in Sale and High Price
Guarantees nothing is given during the actual closing of the deal; therefore, it becomes pretty smooth with quick negotiations and deal closure. Greater insurance given to the buyer in the form of indemnity may make the deal alluring to accept at a higher price by him. This will further minimize the perceived risks relating to his sale to them.
2. Reduce and minimize contingent liabilities:
Contingent liabilities of the sellers can be reduced with the help of M&A insurance post the date of execution. Sellers may pass on performance risks associated with a business sold to an insurer and thereby obviate the risk that future claims are brought against them with the same buyer, making them an attractive deal for potential buyers.
3. Protect Passive Sellers
M&A insurance acts as a safeguard for the sellers such that they do not lose the control over the disclosure process. It safeguards the sellers from liabilities or issues undisclosed or arising afterwards from the sale. This makes the sellers feel comfortable with the deal.
BENFITS TO BUYER
1. Protect the Deal and Relationships with Important People:
M&A insurance covers more than representations and warranties. It, therefore, enables a buyer to ensure essential relationships with stakeholders of the target firm remain intact with minimal disruption that could emanate from liabilities unknown to the buyer.
2. Provide Purchase Price Certainty:
Insurance can protect buyers from unforeseen future costs arising from hidden liabilities. Seller-specific risk coverage for buyers allows the buyers to be sure of the financial consequences of the deal, thus better enabling those buyers to have a lay of the land, so to speak-to plan their finances and invest.
3. Extend Representations & Warranties period:
Sometimes the term of M&A insurance runs out beyond the escrow period and would protect the claims for a period after expiry of escrow; that is, it would provide protection to the buyer for a much longer period of time and transfer the risk of post-transaction liabilities.
4. Easier Claims Collection:
It is easier to collect against a big established insurance company when there is a claim than against the seller, who may not have the liquidated capacity after selling. Often, if an insurance company is the counterparty, claims-resolution and compensations-process will be much more efficient for valid claims.
CONCLUSION
In this general sense, M&A insurance becomes an important resource to the buyer and seller sides by bringing both increased transactional security and better negotiations leading to more favorable results for the parties themselves.