Spotlight On: Financial/Legal

In financial and legal lines of commercial insurance, the Canadian property and casualty insurance market has shown a greater willingness to serve clients who are engaged in mergers and acquisitions (M&A).

Representations and warranties (R&W) insurance is a type of financial-legal insurance used when one company is buying another in a merger or acquisition. It is intended to protect the buyer if a statement made by the seller turns out to be false. False or misleading statements during the M&A process can lead to a loss for the buyer if it assumes unanticipated liabilities.

In a brochure on R&W insurance, American International Group (AIG) Inc. cites an example of an unnamed U.S.-based buyer facing allegations of price fixing by employees of the firm that it had just acquired. The allegations surfaced after the deal had closed.

R&W “used to be so specialized, it was getting underwritten out of London or New York,” says Brian Kelly, Montreal-based managing partner for risk management at BFL Canada Risk and Insurance Services.

But recently the R&W market in Canada “has really expanded,” Kelly says. “There are more insurers and we are also able to do bilingual deals.”

One issue with R&W is that the underwriting “gets very, very intense as the deal draws to a close,” Kelly observes. This is because there is a lot of “back-and-forth” involving the broker, client and underwriter.

The underwriter needs to know what “representations” the seller is making about his or her company. So if the underwriter is based in London, England – six hours ahead of Eastern Standard Time – and the deal is taking place in Canada, someone needs to be on the phone either early in the morning or late at night.

Other financial and legal lines of insurance include crime coverage. Social engineering, a type of cyber crime, is normally covered under a crime policy. An example is when a fraudster impersonates someone at a company, and thereby convinces an employee to transfer money to a fictitious supplier.

“For smaller and medium-sized organizations we see a benefit to actually including [social engineering] under a cyber policy as well,” Kelly says. “Computer hacking is a highly lucrative business. It’s a lot easier to commit a cyber crime than to rob a bank, and it can be a lot more lucrative.