When it comes to risk mitigation in M&A transactions, it should be no surprise that over the last few years the growth of reps and warranties insurance has been astronomical.
“I think buyers and sellers have realized that allocating breach of rep risk to the insurance market, as opposed to trying to manage it through the deal in between the parties to the deal, between the principles, is just more efficient and a better use of capital and a better use of everyone's time,” says Matthew Heinz, senior managing director at Aon Transaction Solutions.
He says M&A transactions that feature reps and warranties insurance as the main or only source of recovery for breach of representation has grown significantly in the past 10 years. Along with tax insurance and litigation insurance, these products are allocating some risk out of a deal to the insurance market with an upfront premium to address that risk initially, as opposed to dealing with it through a deal or transaction mechanism. And they’ve become more popular for it.
As the M&A market has slowed down and far fewer deals are happening compared with a year ago, carriers had to modify the way they're approaching deals and the way they were accepting risk within a deal based on the onset of a global pandemic and the change in the way people were doing business. That’s also a result of the way people are doing diligence and approaching transactions.
“So, we did see a swift and ultimately manageable response from the insurance marketplace around COVID and around how we can address COVID-related risk and policies,” Heinz says. "But there was certainly a period where we had to figure out where the carriers were zigging and zagging and then articulate that zigging and zagging to our clients and make sure that they knew on the front end exactly what they were signing up for and exactly the extent to which we could push a carrier to cover the usual breath of reps and warranties in a deal despite the global pandemic and despite the impact on supply chains and employees and work from home features and protocols and everything. So, really a tumultuous time.”
Carriers, he says, were initially determined to have a very broad-based, all-encompassing exclusion related to the pandemic or any subsequent iteration of the pandemic touching all aspects of the business. And that was not workable.
“Something that broad that you can drive a truck through does not provide any certainty to our clients,” he says. “It was not really helpful.”
So there was some investigation and a little pushback with carriers to find a way to do it a little bit more sensibly and a little bit more effectively.
Once the base and carrier coverage stance was established, it was time to talk with law firms to get them up to speed on the market, what they should be telling their clients and how they should think about this risk.
Much of the challenge was around the gap between signing and closing because there is so much that could happen over that period, given where the country has been with the pandemic.
“It's hard for anyone to take a bet on what the world will look like 30 days from now, if you go back to March 30th,” he says. “Some of them were saying, ‘Look, we're closing a deal or signing a deal in this environment. We understand it. We're trying to make some deal modifications to address it, perhaps give ourselves more outs.’ But all in all I think there were fewer deals, but I think everybody worked pretty collaboratively to try to address that risk.”
Heinz offered more details on the insurance side of M&A when he spoke on the Smart Business Dealmakers Podcast.
Listen to the podcast