Reps & Warranties

Here’s Why Reps and Warranties Insurance in a Health Care Merger Is a Must

Insurers are increasingly willing to offer R&W coverage for health care mergers, but they’re paying close attention to areas at high risk for exposure.
By: | September 28, 2018 • 5 min read

Highly regulated and prone to litigation, health care companies are considered risky purchases. So much so that, for a long time, the insurance market refused to provide coverage for deals in the industry.


But health care is also one of the most active parts of the economy for mergers and acquisitions. The frenzy of activity since the end of the Great Recession has been such that underwriters are now offering representations and warranties insurance for most M&A deals in the sector.

R&W protects buyers from future liabilities that can emerge from a company they have purchased. With the overall M&A market on a roll, players such as private equity companies and others have increasingly opted to use the coverage to facilitate deals. The health care industry, where transactions have ballooned in recent years, has lately caught up with the trend.

Consultancy Kaufman Hall estimated that there were 115 health care M&A deals in 2017, amounting to $63.2 billion in transacted revenues. In 2016, the numbers were 102 and $31.3 billion, respectively, and the party continues to go on.

Aaron Zeid, vice president, Gallagher — Chicago

Preliminary reports compiled by The New York Times and Thompson Reuters indicate that health care M&A transactions amounted to $315.7 billion in the first half of 2018, compared to $154.9 billion in the same period of 2017.

The number of deals where participants employ R&W insurance as a tool to facilitate an agreement is on the rise as well, according to insurers and brokers.

“Every week we see an increase in the number of health care deals that come across our desk,” said Joseph Laws, the head of M&A Insurance at XL Catlin.

With good reason. The purchase of a hospital, specialized clinic or pharmaceutical company entails a degree of risk that has derailed many a deal in the past. Acquired companies may face litigation due to past malpractices by its medical staff. Anti-kickback regulation that forbids employees to make referrals to services or products, a common practice, has been severely enforced by the authorities. Payments from government programs such as Medicare and Medicaid are often the targets of overbilling or even fraud that can result in expensive future charges on buyers.

“Health care exposures are a combination of statutory penalties and prosecutorial discretion,” explained Kris Kemp, an M&A expert at the Bass, Berry & Sims law office in Nashville.

The Department of Justice reported that, in the fiscal year to September 2017, it recovered $2.4 billion in settlements and judgments related to fraud in the health care sector. The list of potential liabilities that can generate enforcement actions is a long one, and sometimes due diligence teams are not able to spot them among the avalanche of regulatory, financial and compliance documentation involved in a deal.

“The health care sector encompasses a broad range of risks but generally the internal and external risk factors it faces mean that the likeliness of the claims is much higher in health care services than in other businesses.” — James Swan, head of Americas, Liberty Mutual Global Transaction Solutions

It is not surprising then that insurers and brokers have reported a significant spike of interest for R&W policies. And finally, availability is catching up with demand.

“Demand has always been there, but heavily regulated industries, such as health care and financial institutions, have been more challenging for R&W underwriters due to the severe fines and penalties that can quickly add up for a target’s non-compliance with rules and regulations,” said Aaron Zeid, a vice president at Gallagher in Chicago.

“More recently, some markets have brought in health care specialists to help underwrite these deals, and at least six are aggressively seeking new business in the space.”

But health care companies should be ready to pay more dearly for their coverages than M&A participants in other sectors of the economy. Navine Aggarwal, the head of M&A Insurance at Ethos, estimated that, while R&W insurance rates amount to between 2.5 percent and 3 percent of the limit purchased for deals in manufacturing, they will be usually 0.5 percent higher for health care companies.

It also varies by health care subsector. Laser eye clinics do not involve government payments and tend to pay lower premiums. At highly regulated hospitals, however, premiums can get as high as 4 percent of the limits acquired.

James Swan, head of Americas, Liberty Mutual Global Transaction Solutions

“The health care sector encompasses a broad range of risks but generally the internal and external risk factors it faces mean that the likeliness of the claims is much higher in health care services than in other businesses,” said James Swan, head of Americas, Liberty Mutual Global Transaction Solutions. “So R&W rates can be variable based on risk factors, although rates have fallen significantly in recent years.”

Carriers remain reluctant to venture into some high-risk subsectors, such as pain management clinics, which have come under government scrutiny due to the current opioid crisis. Pharmaceutical manufacturing can also meet resistance from underwriters, as companies are exposed to too many compliance and filing risks as well as class-action suits and latent litigation that is hard to spot with due diligence. Durable medical equipment, outpatient clinics and assisted living facilities are other examples of sectors that insurers still find hard to swallow.

Concerns With R&W Coverage for Health Care

In most other parts of the health care industry, however, a widening range of potential liabilities are being taken on by R&W insurers, although some exclusions remain. Some may balk, for instance, at the idea of taking Medicare and Medicaid billing risks, which are linked to the possibility that the targeted companies have overcharged the government for treatments provided under those programs.

“Some health care providers have been known to overbill insurance,” Aggarwal said. “It can result in claims on their insurance policies for overbilling, and there has been much enforcement action from the government within certain areas of the health care sector.”

Underwriters are also paying attention to patient data privacy. They will want to see the underlying cyber coverages and data protection policies in place at the targeted company before they agree to underwrite a deal.


“Depending on the nature of the risk, it can be possible to provide the buyer with coverage for breaches of warranties given by the seller caused by prior violations such as HIPAA, subject to receipt of a recent IT security assessment and appropriate underlining cyber security coverage,” Swan said. “We also expect clean due diligence from the buyers’ lawyers on the target’s data privacy policies, notification procedures and audit practices.”

Medicare and Medicaid billing and HIPAA violations are risks that give carriers the most pause, said Kemp. “And those risks represent a large portion of the issues a buyer will be concerned about.”

Therefore risk managers and compliance professionals from both buyers and sellers have their hands full helping transactions succeed.

“R&W insurance isn’t designed to be a substitute for appropriate due diligence,” Swan said. “As underwriters, we look to see that the buyer has conducted reasonable diligence of the deal.”

He noted that the list of documents that insurers will be particularly keen to check include contracts signed with providers and partners, which can reveal the risk of infringements of anti-kickback rules. &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.


Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”



Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.


“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.


“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.


Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.


But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.


Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]