October 24, 2018 by Greg Meckbach
If your mid or large-sized commercial clients are involved in mergers and acquisitions, there are risks involved and insurance to address those risks, but it’s not like selling fire insurance.
“It is not a simple case of saying, ‘Fill out this application and we will get you a quote,’” said Charles Fogden, national director for Canada at Aon M&A and transaction solutions. Fogden was referring to representations & warranties (R&W) insurance and other coverages intended to address the risk a client faces when buying another company.
In an M&A deal, R&W is intended to protect the buyer if a statement made by the seller turns out to be false – meaning the buyer ends up assuming liabilities that the buyer did not originally think he or she was assuming.
In its recently-released Global M&A risk in Review Report, Aon plc reported an increase in demand for products such as R&W insurance and tax liability insurance.
The “addressable market” involves deals with a value of US$25 million or more.
R&W insurance buyers are looking for customized products because every deal is unique, every business that is being sold is different and each purchase or sale agreement is different, Fogden said in a recent interview. “The insurance applies to breaches by the seller in the representations and warranties made in the sale and purchase agreement.”
For example, the company being bought is in the business of selling lead paint, but says it has no environmental liabilities.
Brokers can help their clients if they have access to a “deep level of expertise” in M&A – such as investment banking and corporate law.
In the commercial insurance industry, most R&W underwriters are former M&A attorneys, said Jason Stone, vice president of transaction solutions at Aon Canada.
To help place transactional insurance, Aon uses former investment bankers, former M&A attorneys as well as lawyers specializing in tax, healthcare and oil and gas.
In the discussions leading to issuing an R&W insurance agreement, the broker is typically dealing with the client’s M&A attorney. So it is a competitive advantage for the broker to be able to “speak the same language” as M&A attorneys, Stone added.
The London market started writing R&W insurance in the late 1980s and 1990s but the underwriting process is much faster now than it was 25 years ago, Fogden said.
“It used to take 10 to 12 weeks to get from beginning to end in a discussion with insurers because they had to outsource every question,” Fogden said. But in recent years, brokers and insurers have started to put experts on their teams. As a result, they are able to compact a “very long and tedious process into something that meets the needs and timeframe of a transaction,” sometimes five working days.
In its Global M&A risk in Review Report, released Oct. 18, Aon estimates about a third (34%) of the addressable market, in North America, used R&W insurance in 2017. This is up from 20% in 2016. One reason for the increase in more insurers are offering R&W and other transactional risk coverages.