Buyers seeking an edge in a merger or acquisition deal may be surprised to learn that there are insurance vehicles to help make the deal happen instead of losing it to the next bidder, according to experts at an insurance brokerage.
Speaking during a Webcast yesterday, two executives with Chicago-based Aon offered insights into five insurance vehicles they said can be utilized by negotiators to help facilitate the closing of a deal.
The products they discussed provide protection for a number of possible financial exposures a buyer or seller may fear. The covers include representation and warranties insurance, tax opinion insurance, litigation buyout insurance, environmental insurance and bankruptcy-insolvency distribution.
According to Gary Blitz, managing director of Aon financial solutions, and Allyson Coyne, vice president of Aon private equity and transaction solutions, the coverages can take care of liability concerns and free up capital that would otherwise be tied up in escrow or indemnification accounts.
The importance of this coverage, Ms. Coyne noted, is underscored by "a large uptick in deal activity that is expected to continue through the end of the year."
Under a representation and warranties insurance policy coverage is provided in case of a breach of contract. Ms. Coyne said it can allow the buyer to free up cash (which could sweeten the deal), and the terms of the policy can cover as long as six years, providing a degree of security that might otherwise not be there.
Ms. Coyne said some assume that putting a policy in place is time consuming, but this is not the case. Coverage can be secured within two-to-three weeks, and policies are "manuscripted" to the risk.
Mr. Blitz added that this is no longer neophyte coverage and there are now approximately 400 deals employing the program.
Tax opinion insurance, explained Mr. Blitz, protects the buyer from adverse Internal Revenue Service rulings that may arise after a deal is completed. He said the policies are simple and specific, dealing with unresolved tax implications that otherwise may keep a deal from moving forward. The policy usually covers risk until the statute of limitations expires, he said.
Litigation buyout insurance is coverage that Mr. Blitz described as "insuring the house when it is already on fire." He said it is primarily used to cover situations where there is ongoing litigation and liability related to product liability and environmental issues.
"It is a way of taking something and putting it into a box, getting it out of the way of the negotiations," Ms. Coyne noted.
Mr. Blitz said it is impossible to find insurance to cover asbestos risks, but with environmental insurance, it can serve to provide coverage and exposure caps to the buyer for known cleanups and other legacy issues related to pollution.
While it is not possible to cover asbestos risks, Mr. Blitz said this policy can provide coverage mechanisms to cover credit risks and protect the current owner from responsibility for legacy issues through the original owner's indemnity.
Under bankruptcy-insolvency distribution, the insurance vehicle essentially allows payments to those who have made claims in a bankruptcy, allowing the buyer to go ahead with a deal and not be worried over the financial responsibilities of the sellers, explained Mr. Blitz.
Aon's presentation is available on the Web for 90 days at www.aon.com/us/about/events/web_seminar.jsp.
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