2013 M&A deal activity highlighted an increase in the use of various M&A insurance policies, specifically representations and warranties insurance (RWI), which provides coverage for losses arising from unintentional and/or unknown breaches of a seller’s representations and warranties made in an acquisition or merger agreement. RWI is often used to replace or supplement an escrow and provide buyers an insurance product to call upon in the event of a breach of seller representations and warranties. Sellers have also begun to look favorably upon RWI policies in order to close a transaction, achieve a “clean exit” and keep more of the deal proceeds.
Part of the increased use of RWI and other M&A insurance can be explained by a decrease in premium pricing and retention/deductible levels. Additionally, deal professionals have seen that RWI policies can mitigate concern about the financial ability of sellers to meet indemnification obligations, provide solutions when indemnification is not available and provide buyers’ lenders additional collateral and protection.
As more insurers enter the market, M&A insurance policies will likely continue to rise in both popularity and use. In addition to RWI policies, other types of coverage used in the M&A context includes tax liability policies, litigation/contingent liability policies and environmental insurance. Any party contemplating an M&A transaction should consult with experienced counsel concerning the desirability of these forms of coverage.
The private equity practice group at McGuireWoods LLP is dedicated to keeping clients advised of new legislative and business developments as they occur and, as part of its ongoing Deal Buzz Series highlighting current trends in the M&A marketplace, is hosting a seminar for private equity professionals to discuss RWI policies with insurance professionals from McGriff, Seibels & Williams, Inc. If you have any questions regarding these issues, please feel free to contact your primary attorney at McGuireWoods, or either of the authors.