Transaction liability insurance is a valuable tool to help buyers and sellers facilitate mergers and acquisitions (M&A). It means the sellers carry the risk for any liabilities which occurred when they owned the company. If these issues are then discovered after the transaction is completed and causes financial loss, the seller could be found to be financially responsible.
Representations and warranties are statements of fact. In an M&A transaction, the seller will represent and warrant certain facts about the company which they are selling. An indemnity is a legal promise to be responsible for a third party’s loss if a certain event is to occur.
Representation and warranty insurance is available to both buyers and sellers, but Acquirecover sells only to the sell-side. While the rights of the policy belong to the seller, the buyer can be added as a Loss Payee. In this regard, the premium cost could be shared or paid by the buyer.
There are a number of factors that go into calculating premium, but it is based on a percentage of the limit sought (generally 0.7% - 1.5%) of the Enterprise Value (EV). Where EV makes a difference is if the limit sought is a small percentage of the overall deal size. As an example, if the client is seeking a $1m limit on a $15m deal, it will cost considerably more on a percentage basis than if they were insuring the full deal value.
The deductible (retention) is on an aggregate basis, not per claim. There is generally a $20k deductible for costs and expenses and a “nil” deductible for everything else. The nil deductible assumes that the “basket” or “threshold” (essentially a threshold within the SPA which buyer claims need to exceed in order to bring a claim against the seller) is at least 0.5% of the Enterprise Value. If this is the case, then from the sellers perspective, there is a nil deductible. If the basket is less than 0.5%, then the policy will respond in excess of 0.5%.
Yes. The insurer agrees to pay on your behalf all loss which you become legally or contractually obliged to pay as a result of a buyer's claim or tax indemnity claim first made against you during the period of the policy. They will also pay costs and expenses on your behalf.
Acquirecover is underwritten by Lloyd's of London.
We are licensed to provide all types of business insurance. For additional covers, please reach out to;
USA clients: Kevin Whaley
Canada: Craig Arnatt