Reps & Warranties Insurance

Guest Profile

T.J. Noonan is Managing Director of the M&A Transaction Solutions Practice with Hylant. T.J. has several areas of expertise, including account management and M&A experience with a Fortune 50 company, where he served in a variety of roles before joining Hylant. At Hylant, T.J. is part of the M&A and Transaction Solutions (MATS) team focusing on reducing valuation uncertainty and optimizing return on capital during a transaction. The MATS team advises clients by developing customized, value-added solutions to ensure investments are safe while maximizing financial returns.

• Company: Hylant
• Location: Findlay, Ohio
• LinkedIn: www.linkedin.com/in/t-j-noonan-80711518/
• Website: www.hylant.com/
• Phone: (419) 348-3349
• Email: tj.noonan@hylant.com

Highlights

• Insurance policies only continue in a stock transaction.
• No two transactions are the same – most insurance policies are very flexible.
• Many private equity firms require reps & warranty insurance (R&W insurance).
• 75% of all PE transactions have R&W insurance.
• 50%-60% of all mid-market M&A transactions have R&W insurance.
• The insurance company often relies on the buyer’s due diligence.
• The standard coverage amount is 10% of the purchase price.
• The seller and buyer usually split the premium.
• The typical minimum transaction size is $30 million, which equals $3 million in coverage, although some insurers will go as low as $10 million.
• 20% of R&W insurance policies see a claim.
• Claims are paid out based on the transaction multiple.
• Claims are paid out to the insurance policy holder, which is almost always the buyer.
• R&W insurance DOES cover fraud.
• Most common claims by the numbers:
  • Financial statement accuracy – 20%
  • Tax liabilities (income, payroll, etc.) – 18%
  • Compliance with laws (e.g., minimum wage, etc.) – 15%
  • Material contracts (e.g., all customer contracts are in good standing) – 13%
  • Miscellaneous – IP, litigation, operations, environmental, fundamental, etc. – 34%
• There is no subrogation for R&W insurance, with the exception of fraud.
• R&W insurance costs the seller approximately 2% of the transaction size.
• The buyer and seller’s legal teams are much more comfortable expediting the negotiations of the reps and warranties if R&W insurance is in place.
• Most insurance companies can perform due diligence in seven days.
• There are currently approximately 20 to 25 R&W insurance carriers.
• Not offering R&W insurance should constitute malpractice, according to one national law firm.

Topics Covered

• What types of insurance are relevant to M&A transactions? [3:30]
• Can you insure against tax-related risks? [4:35]
• Why can’t a buyer rely on the seller’s existing insurance policies? [5:50]
• Does the seller need to continue the policies after the closing? [7:00]
• Change of control clauses [8:00]
• Does insurance cover successor liability-related risks? [9:10]
• How efficient is the market for pricing M&A-related risks? [11:50]
• Overview of reps & warranties insurance [13:10]
• To what extent does the insurance company need to perform due diligence? [16:40]
• How does the insurance company become involved in deciding the basket (minimum or deductible), cap (maximum), knowledge qualifiers, and other terms in the purchase agreement? [18:10]
• Who pays the premium? [21:55]
• Does the cost increase on a pro-rata basis for smaller transactions? [23:30]
• How long are most R&W policies? [26:00]
• What are the most common claims? [28:00]
• How does the definition of knowledge affect coverage? [35:20]
• What should the seller know about R&W insurance? [40:00]
• How do you quantify the amount of the claim? [42:45]
• How involved is the insurance company in performing due diligence and negotiating the purchase agreement? [44:40]
• Are carriers industry specific? [47:10]
• What other types of M&A insurance do insurance companies offer? [49:00]
• What is a risk profile assessment? [54:30]
• Insurance benchmarks by industry [57:45]
• The future of R&W insurance [1:04:00]

Learn More

• Asset vs. Stock Sale
• M&A Reps & Warranties
• Escrow Holdbacks in M&A Transactions
• M&A Due Diligence | Checklist & Overview