Merger & Acquisition Insurance (M&A Insurance) (known in the US as Representation & Warranties Insurance or Warranty & Indemnity Insurance) is a specialized insurance product designed to cover breaches of representation, warranties or certain indemnities (including) when selling or acquiring a business.
Mergers and Acquisitions (M&A Insurance) act as a "catalyst", facilitating and helping negotiations to proceed more smoothly, especially in seller auctions or when discussions have stopped.
What does Merger & Acquisition Insurance cover?
Merger & Acquisition Insurance (M&A Insurance) covers losses arising from breach of warranty and tax-based claims (and, in some cases, other equivalent provisions) in connection with a corporate merger or acquisition transaction. The guarantees contained in the sale and purchase agreement (SPA) play an important role in the transaction.
Covers financial losses from breach of contract and guarantees.
Concealment of information or fraud on the part of the seller.
Merger & Acquisition (M&A Insurance) on the buyer side is especially important when the buyer has doubts about the seller's financial condition after the transaction closes or the seller limits his exposure to a lower level or insists on a shorter period of receivables than the buyer is willing to accept.
Specific scenarios in which the buyer can seek coverage include:
the seller (s) consists of either: individual sellers’ shareholders, a financial investor such as a private equity investor, employee trusts or liquidators. The seller or sellers may be reluctant (for example, a financial investor) or unable to take responsibility for a certain nominal amount for breach of commercial guarantees given.
the seller requires a "zero recourse" policy to offset all of his contingent liability. In a "zero recourse" policy, the overrun / maintenance (listed below) still applies, but the buyer will not be able to recover these amounts from either the seller or the insurer (the buyer will only recover any claims exceed the amount of excess / maintenance).
the seller is only willing to provide the guarantees for a limited period of time (eg 12 months) and the buyer requires / wishes to have a longer period of time to detect and report problems he may identify at the target.
the sellers represent the management of the target company and the buyer wishes to protect the ongoing business relationship after closing. the additional convenience of adequate guarantee coverage is required for lenders in a transaction.
a potential buyer wants to appear more attractive in a bidding process for the target. Warranty coverage on the market side leads to less exposure on the sales side and would therefore be beneficial to the target seller.
Why do I need Merger & Acquisition insurance (M&A Insurance)?
The following table describes the insurance incentives:
Protection, when buying from a seller unwilling or unable to give resource for warranties.
Cleaner exit, freeing up sale for distributors to investors.
May replace breach of warranty actions against continuing management warrantors and retain their focus on the business.
Bridges the warranty gap left by the financial sellers.
Extension of warranty period and the warranty cap.
Helps avoid long tail liabilities left outstanding.
Reassure shareholders and other investors/lenders by reducing risk of deal and preserving value of transaction.
Enables higher sale price by transferring the risk to insurer
Concern over seller’s financial status / enforceability of seller’s indemnity.
Prepares “cleaner” targets for auction process
Examples of Requirements
Taxes: Most claims are tax related. After the acquisition of a company, the buyer learned that the goods and services tax had not been paid. The matter was not disclosed by the seller to the buyer prior to the acquisition agreement which resulted in the buyer overestimating the company to purchase. The buyer managed to settle the tax debt but inflation had resulted from inflation of interest, taxes, devaluation and depreciation.
Compliance with the law: A buyer was insured for the acquisition of a construction company. Following the agreement, government inspectors closed the plant due to breaches of the law. The buyer was forced to transfer production to an outside supplier and reset the plant. The buyer found that the factory did not comply with the regulations for a long time and the inspection came as a result of a previous inspection that had revealed compliance issues.
Multiple Claims: Two years after the acquisition of a pharmaceutical company, a tax audit revealed that the company was not eligible for funding because there was a tax debt imposed on a key component of production. The tax authorities claimed the tax due together with the corresponding interest. The claim in the insurance concerned both the tax and the violation of the legislation, the licenses and the guarantees of consent.
Financial Statements: Shortly after the acquisition the buyer learned that a basic production machine was not operating at the declared capacity. Second, the company had not complied with the benefits and salary program it had declared, and so the law required them to pay the highest bonuses to all employees. Third, the company presented tax receivables / receivables as fixed in its financial statements but did not keep sufficient documentation and documents to get the company back these amounts.
Fundamental Guarantees: Following the acquisition of an energy and other services company, the buyer was faced with a claim from former shareholders of the company for the share he was entitled to from the sale of the company.
Why ZIA INSURANCE?
Specialization and experience in Merger & Acquisition Insurance (M&A Insurance)
Tailor – made insurance cover based on your needs and requirements
Proper and immediate guidance on a possible claim
Cooperation with high rated and most reliable insurance companies in the world