October 14, 2021 by Jason Contant
Private equity firms should consider partnering with one carrier who is able to handle multiple lines of insurance for both the private equity firm and its portfolio companies, a mutual insurer told Canadian Underwriter.
“We’ve seen benefits of having the same insurance carrier for both the private equity firm as well as portfolio companies’ D&O policies, as both can be dragged into the same suit,” said Sandy Norton, assistant vice president of financial institutions and professional services with Liberty Mutual Canada. “One carrier who’s providing coverage to both the portfolio company and the private equity firm will benefit from avoiding two insurance companies arguing over coverage.
“So, there’s certainly benefits to placing multiple lines with one carrier not just from an expertise and knowledge [standpoint], but also when it comes to the actual claims.”
Traditional private equity firms will often buy a controlling stake of a company and will be an active owner in that portfolio company. For example, some directors and officers from the private equity firm may sit on the boards of those portfolio companies. In situations like this, they may be looking for private D&O insurance.
“You can see that they would want the personal benefit and comfort of knowing that they’ve got a standard coverage that’s broad, with an insurer that’s reputable, and that’s there across all their different portfolio companies,” said David Barry, vice president, head of financial and professional services at Liberty Mutual Canada. “Because they do have personal liability; their personal assets are exposed.”
Portfolio companies can obtain private D&O insurance policies that will also cover the private equity fund as a co-defendant, Barry added. “You can actually set up a private D&O insurance policy for a portfolio company, and add coverage to name the private equity owner as a co-defendant.”
The consistency of providing coverage to serve all the needs of the portfolio companies is important, Norton added. “That private equity firm can rest assured knowing that there’s consistency across those firms,” he said, so there’s not, for example, five different policies with five different terms and conditions. “It can be really complicated when you don’t have everything with one carrier,” Norton said.
Consistency also comes in handy in the event of an acquisition, when the private equity firm needs to pull together private D&O or representations and warranties insurance very quickly. “If a seller has a deal with a buyer that has a reps and warranties insurance policy, the seller can avoid or reduce the amount of funds tied up in escrow post sale of the business,” Barry said. “They get more of their money right away, and that’s going to be a much more attractive offer.”
What should brokers and private equity firms take into account when selecting an insurer?
Some considerations would be to look at the industries, size of companies, and geographic exposure where the insurer has experience. For example, does the insurer have an appetite for U.S. exposure? Are they focusing on companies that are zero to 10 million dollars in revenue, or are they focusing on companies that are more than 100 million dollars in revenue?
“Those are things that come to mind that I would encourage private equity funds and brokers to think about as you decide to select your partner insurer, and a clear understanding of what their capabilities are across all lines of P&C,” Barry said.
Feature image by iStock.com/Worawut Prasuwan