Ben Brindle, Director at Risk Capital Advisors talks to Lawyer Monthly about different types of transactional risk insurance and how it helps to facilitate M&A deals and why warranty and indemnity insurance is important.
What makes Risk Capital Advisors (RCA) unique in the M&A insurance market and what experience do you bring to the organisation?
RCA is a specialist insurance broker focused solely on transactional risk insurance for M&A. What differentiates RCA from other M&A insurance brokers is our wide-ranging deal experience and insurance expertise. RCA has an unparalleled understanding of, and a relationship with, the global underwriters and insurance markets who specialise in transactional risk insurance and it is this unique position that enables RCA to secure exceptional outcomes for its clients.
Every insurance placement that we work on is led by one of our seven directors, who between them have more than 100 years of experience in M&A insurance. RCA has worked on deals of all sizes, across all sectors, and with many different dynamics and jurisdictions. We have also worked on some of the higher-profile claims in the M&A insurance market. We have offices in London, Hong Kong, Melbourne, Sydney and Melbourne and have secured insurance for more than 400 transactions across over 30 countries in Europe, Asia Pacific and Africa.
Having worked in the M&A insurance market since 2002, there are very few situations that the team has not seen before in the context of a deal.
Tell us about transactional risk insurance and how it can facilitate M&A deals.
Transactional risk insurance can take a number of different forms.
Warranty and indemnity (W&I) insurance is the best known and most widely utilised of these solutions and is now almost commonplace on private market M&A transactions in the Europe, Australia, New Zealand and the US.
W&I insurance transfers the potential liability created by the warranties and indemnities in a sale agreement to an insurer. It provides cover for the insured party for financial loss arising from a claim for breach of an insured warranty or indemnity. This insurance is a cost-effective alternative to the traditional means of addressing transaction risks such as purchase price adjustments, escrows, hold-backs or parent company/bank guarantees.
Tax liability insurance
This type of insurance provides an effective method of enabling a taxpayer to either reduce or completely eliminate financial loss arising from the tax treatment of a particular transaction, investment or other activity in circumstances where the legal conclusions underlying the tax treatment may be subject to challenge by the relevant tax authority.
The policy is crafted to cover the specific financial exposure of the insured in the event of an unfavourable determination by a tax authority, including:
- the primary amount of tax payable;
- interest and insurable fines and penalties; and
- defence costs, including the expenses involved in engaging legal or tax advisers.
The popularity of tax liability insurance has grown in recent years, both the use of the product by a party to an M&A transaction and as a stand-alone solution to transfer tax-related risk from a company’s books to an insurance provider.
Environmental liability insurance
The key feature of this type of policy is the provision of long-term protection against identified environmental risks as well as unknown sudden, accidental, gradual and historical pollution liabilities that have not been identified by the parties during an M&A transaction.
Cover under the policy typically includes the following:
- clean-up costs;
- third party bodily injury and property damage;
- business interruption expenses; and
- legal costs.
Like W&I insurance, environmental liability insurance can be taken out by either party to a transaction and is a cost-effective and elegant solution to ring-fence any future financial exposure related to environmental risks.
Contingent liability insurance
These policies are designed to cover a particular financial exposure of the insured in the event of an adverse outcome in the resolution of the contingent liability, including:
- damages or settlement costs;
- defence costs, including the expenses involved in engaging legal or other professional expert advisers; and
- cover for other potential liabilities that might arise in the context of a particular dispute.
The key feature of this product is that the insured can transfer the risk of actual or potential contingent claims to an insurance policy, but it can also release potential opportunities for sale or acquisition that might be precluded by a particular dispute or risk.
The policy can be tailored to the needs of the insured, regardless of the subject matter or jurisdiction and the type of insurance cover can range from something as simple as a breach of a supply contract or dispute with an employee through to highly complicated intellectual property or product liability litigation.
Who uses W&I insurance on deals?
Any party to a private market M&A transaction can take advantage of W&I insurance for their deal, whether they are the buyer or seller of the target asset or company as the insurance policy can be taken out for the benefit of either side of the transaction.
Users of the product include corporates, real estate, infrastructure and private equity funds. The transactions that we have secured insurance for vary in size from several million pounds to several billion. It is also common for sellers to make W&I insurance into a deal by making it the recourse for a buyer for breach of warranty claim that would otherwise brought against the sellers.
W&I insurance can be used on a wide variety of transactions, including the sale of shares, single or multiple asset sales as well as entire portfolios. The product can be utilised in competitive auction processes or proprietary deals and the geographic appetite of many W&I insurers is wide-ranging.
Why take out W&I Insurance?
The reasons why parties of a deal might take out W&I insurance are many and varied. For example, it may be important for a seller to achieve a “clean exit” following completion of a transaction. The use of a W&I policy can enable real estate, infrastructure and private equity sellers to close their funds after the disposal of the target without the need to provision for future breach of warranty and indemnity claims.
Another motivation for a buyer to take out W&I insurance is to ensure harmony amongst management in the event of claims for breach of warranty. For instance, if some or all of the selling management of a target is staying on with the company post-sale, and a breach of warranty claim arises after completion, the attempted resolution of that claim could lead to conflict. Where recovery is available under a W&I policy, this potential conflict is effectively removed and the business relationship between management of the target remains intact.
In recent years, there has also been a significant increase in the use of W&I insurance in the context of auction processes, where multiple bidders are vying for the same target. Prospective buyers can reduce or eliminate the seller’s liability for breach of warranty and indemnity claims by procuring a buy-side W&I insurance policy as part of the transaction and make themselves a more attractive bidder by doing so.
Perhaps the most compelling reason why W&I insurance is so popular is the fact the pricing, available capacity and policy terms are the best they have ever been, and insurers are increasingly flexible in their approach to deals meaning that there has never been a better time for buyers of W&I insurance to take advantage of this versatile product.
1 King Street, London, EC2V 8AU, United Kingdom
Ben spent almost 12 years with AIG (in London, Paris and Sydney), 9 of which were spent in the M&A Insurance Group. Ben also managed the AIG London Commercial management liability team, responsible for underwriting D&O, Pension Trustee, and Public Offering insurance. Before AIG Ben was a lawyer at Nabarro. Ben established the London office of RCA in 2014 and is regarded as one of the most experienced individuals in the Global M&A insurance market.
Founded in Australia in 2011, and with offices subsequently opened in London and Hong Kong, RCA is a leading global M&A insurance broker. We are a highly-experienced and hands-on team, providing expert, technical advice on all aspects of M&A insurance.