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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]