Risk Benefits to Using Transactional Insurance in M&A Transactions
I’ve been a transactional lawyer for 13 years, and the first time I encountered transactional insurance was in 2011. Until that point in time, the concept was only known to me based on mostly academic books, which depicted a rather skeptical picture of the instrument as a whole.
Dr. Ákos Mátés-Lányi, Counsel, Head of M&A and Transactions, Noerr and Partners Law Firm.
However, when I dug into the details, I realized that transactional insurance is, indeed, very useful and believed firmly at that time that it would have a significant impact on the M&A industry. Nevertheless, when I am talking to brokers and underwriters, we usually agree that the real breakthrough is still to be waited for. Transactional parties still have concerns about the timing perspective and the costs of putting transactional insurance in place and they prefer the traditional methods instead (e.g. involvement of a guarantor).
We must emphasize that taking out transactional insurance results in additional protection for both parties. Warranties are often heavily discussed and form one of the most contentious parts of the transaction where emotions frequently come to the surface. The tension is explainable, if factual matters are overlooked during the disclosure process that could lead to a claim of potential warranty.
The practice of underwriters has changed a lot in the past couple of years, since they moved their standards to the market’s requirements. The overall period to put transactional insurance in place has dropped to two-to-three weeks, during which period the underwriter needs to understand the transaction, the nature of the negotiations regarding the warranties and the thoroughness of the disclosure and due diligence exercise. As to the pricing, Gergely Juhász, a liability insurance specialist, adds: “The pricing of transactional insurance has also changed advantageously; this usually represents 1-2% of the limit of liability placed on a transaction, but it is lower still in the case of real estate transactions (approximately 0.75%). Special risks can also be covered, but in this case the pricing is higher at 2-5%.”
Critics argue that transactional insurance will not offer complete protection against all costs that may be involved in bringing a claim under the policy and there are a number of exclusions which should be investigated carefully. Typically, insurance policies do not include: bribery and corruption; certain environmental issues; certain regulatory issues; and financial warranties. However, positive developments have already been seen and can also be expected in this respect.
Hopefully, the above thoughts will intrigue interest on the side of M&A specialists, brokers and underwriters and a real discussion can start about the future trends of the transactional insurance.
The information contained in the article is for informational purposes only and should not be considered legal advice, legal statement or interpretation.
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