Protecting Buyers and Sellers

M&As Fuel Reps and Warranties Coverage

Representations and warranties policies evolved into an efficient and effective capital solution.
By: | March 24, 2016 • 4 min read

Demand for representations and warranties coverage is on the rise for a number of reasons: increased M&A activity, a continued seller-friendly market, and the increased acceptance of the insurance product by deal makers, including law firms and investment bankers.

Kirk Sanderson, senior vice president, transactional risk, Equity Risk Partners

Kirk Sanderson, senior vice president, transactional risk, Equity Risk Partners

When the product became available about 10 years ago, buyers primarily purchased R&W as supplemental indemnity coverage when they were unable to get sellers to provide what they considered to be adequate indemnification protection under the transaction agreement, said Kirk Sanderson, senior vice president, transactional risk at Equity Risk Partners in New York City.

Sanderson’s firm was recently acquired by HUB International Ltd.

But in today’s market, sellers are essentially mandating that buyers take a reps and warranties policy to remain competitive in an auction scenario while providing very limited indemnification and zero escrow to buyers, Sanderson said.

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“Private equity firms and their outside counsel have really pushed the envelope over the past three to four years on developing the R&W insurance policy into a highly efficient and economically favorable capital solution,” he said.

Renee Szalkowski, senior vice president and transaction liability practice leader at Lockton in New York City, agreed. Sellers in prospective M&A deals now have more leverage to demand that buyers take out R&W policies to suit their own purposes, she said.

“They are dictating terms, including providing little or no indemnity in deals where they don’t have to set aside a large percentage in escrow for 12 or 18 months,” Szalkowski said.

Renee Szalkowski, senior vice president and transaction liability practice leader, Lockton

Renee Szalkowski, senior vice president and transaction liability practice leader, Lockton

Moreover, there is greater acceptance of the product because pricing — at 3 percent to 4 percent of limits purchased — is more reasonable, and the underwriting process more streamlined, she said.

The manuscripted polices are now underwritten by ex-M&A attorneys and are more insured-friendly, based on “actual knowledge” definitions, with limited subrogation against sellers and an increased appetite for certain types of damages, she said.

The “actual knowledge” exclusion in older vintage policies was much more expansive, said Matthew Heinz, managing director at Aon in New York City, and a 2016 Power Broker® in the Private Equity category.

He said the current exclusion is much narrower and makes it harder for the carrier to prove that the insured had actual knowledge of a breach at binding and to prove that the exclusion should apply.

In general, Heinz said, reps and warranties coverage terms have gotten a lot better, and are closer to the traditional indemnity provided by sellers in transactions.

Some exclusions, such as those limiting the breadth of recoverable loss for consequential damages or diminution in value, are frequently removed, providing the buyer with coverage terms that more closely approximate the types of loss the buyer would seek to recover from the seller if there is a breach.

An example would be the availability of consequential damages in connection with a seller’s breach of a regulatory compliance representation.

“If a target company was not compliant with some regulation and must pay a fine and shut down a portion of its operation as a result, the buyer would seek to recover not just the immediate financial impact of the breach (i.e., the fine), but also any consequential damages resulting from the shut-down, including lost profits,” Heinz said.

“Today’s policies allow for this coverage,” he said.

Using R&W Strategically

Matthew Heinz, managing director, Aon

Matthew Heinz, managing director, Aon

Reps and warranties policies are also more strategic now, as opposed to being driven by concern over heightened risk, Heinz said.

“Clients are strategically incorporating policies into the front end of deals, rather than when an issue comes up,” he said. “Sellers have been able to exit deals more cleanly by pushing buyers to obtain insurance coverage.”

Without insurance, sellers might have to indemnify the buyer up to 10 percent of the deal size, and potentially leave an escrow in place up to that amount, Heinz said. But now the seller may only need to put 1 percent or less in escrow, with the remainder of risk allocated to the insurance market in the form of a buy-side reps and warranties insurance policy.

Premiums have also come down from a range of 4 percent to 6 percent pre-2008, to the 3 percent to 4 percent range in the current market, he said.

Szalkowski and her team expect reps and warranty insurance will continue to be in high demand over the next year as the M&A landscape remains competitive.

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“Sellers are retaining post-closing equity positions more frequently and selling management is staying involved,” she said.

“This will result in buyers continuing to use reps and warranties policies to protect these relationships post-closing.”

However, clients should not expect prices to fall further in the near future just because “quite a few” carriers have entered the R&W insurance market, Szalkowski said.

“Notwithstanding increased supply and given increased demand, the fact that insurers that have been around for a while are paying claims means that overall pricing is holding steady,” she said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

After 20 years in the business, Navy Pier’s Director of Risk Management values her relationships in the industry more than ever.
By: | June 1, 2017 • 4 min read

R&I: What was your first job?

Working at Dominick’s Finer Foods bagging groceries. Shortly after I was hired, I was promoted to [cashier] and then to a management position. It taught me great responsibility and it helped me develop the leadership skills I still carry today.

R&I: How did you come to work in risk management?

While working for Hyatt Regency McCormick Place Hotel, one of my responsibilities was to oversee the administration of claims. This led to a business relationship with the director of risk management of the organization who actually owned the property. Ultimately, a position became available in her department and the rest is history.

R&I: What is the risk management community doing right?

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The risk management community is doing a phenomenal job in professional development and creating great opportunities for risk managers to network. The development of relationships in this industry is vitally important and by providing opportunities for risk managers to come together and speak about their experiences and challenges is what enables many of us to be able to do our jobs even more effectively.

R&I: What could the risk management community be doing a better job of?

Attracting, educating and retaining young talent. There is this preconceived notion that the insurance industry and risk management are boring and there could be nothing further from the truth.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

In my 20 years in the industry, the biggest change in risk management and the insurance industry are the various types of risk we look to insure against. Many risks that exist today were not even on our radar 20 years ago.

Gina Kirchner, director of risk management, Navy Pier Inc.

R&I: What insurance carrier do you have the highest opinion of?

FM Global. They have been our property carrier for a great number of years and in my opinion are the best in the business.

R&I: Are you optimistic about the US economy or pessimistic and why?

I am optimistic that policies will be put in place with the new administration that will be good for the economy and business.

R&I: What emerging commercial risk most concerns you?

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The commercial risks that are of most concern to me are cyber risks, business interruption, and any form of a health epidemic on a global scale. We are dealing with new exposures and new risks that we are truly not ready for.

R&I: Who is your mentor and why?

My mother has played a significant role in shaping my ideals and values. She truly instilled a very strong work ethic in me. However, there are many men and women in business who have mentored me and have had a significant impact on me and my career as well.

R&I: What have you accomplished that you are proudest of?

I am most proud of making the decision a couple of years ago to return to school and obtain my [MBA]. It took a lot of prayer, dedication and determination to accomplish this while still working a full time job, being involved in my church, studying abroad and maintaining a household.

R&I: What is your favorite book or movie?

“Heaven Is For Real” by Todd Burpo and Lynn Vincent. I loved the book and the movie.

R&I: What’s the best restaurant you’ve ever eaten at?

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A French restaurant in Paris, France named Les Noces de Jeannette Restaurant à Paris. It was the most amazing food and brings back such great memories.

R&I: What is the most unusual/interesting place you have ever visited?

Israel. My husband and I just returned a few days ago and spent time in Jerusalem, Nazareth, Jericho and Jordan. It was an absolutely amazing experience. We did everything from riding camels to taking boat rides on the Sea of Galilee to attending concerts sitting on the Temple steps. The trip was absolutely life changing.

R&I: What is the riskiest activity you ever engaged in?

Many, many years ago … I went parasailing in the Caribbean. I had a great experience and didn’t think about the risk at the time because I was young, single and free. Looking back, I don’t know that I would make the same decision today.

R&I: What about this work do you find the most fulfilling or rewarding?

I would have to say the relationships and partnerships I have developed with insurance carriers, brokers and other professionals in the industry. To have wonderful working relationships with such a vast array of talented individuals who are so knowledgeable and to have some of those relationships develop into true friendships is very rewarding.

R&I: What do your friends and family think you do?

My friends and family have a general idea that my position involves claims and insurance. However, I don’t think they fully understand the magnitude of my responsibilities and the direct impact it has on my organization, which experiences more than 9 million visitors a year.




Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]