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Demand for Transaction Insurance Continues to Surge

Steven C. Lee, Esq January 10, 2024
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Dealmakers are increasingly turning to transactional insurance products as risk mitigation tools in mergers and acquisitions. While successful private equity buyers have been using representations and warranties insurance to distinguish their bids in auctions for many years, a growing percentage of corporations are buying in.  

Corporate acquirers are typically more cautious about the amount of warranty protection they require in a transaction than their private equity counterparts and often lose out on a deal because of this aversion to risk. Through the use of transaction insurance, corporate buyers are having more success in winning sought-after assets, especially overseas targets, while satisfying their board’s requirements for risk mitigation in the deal. 

The surge in popularity is also being fueled by sellers who are increasingly building representations and warranties insurance into the M&A process from the beginning to minimize their post-closing exposure, while also maximizing purchase price. 

Strategic private equity sponsors are using insurance policies to maximize the efficiency of capital structures and insuring off the remaining tail liabilities for the portfolio companies in a particular fund, enabling an earlier distribution or redeployment of fund proceeds. 

Deciding factors 

Several other factors are contributing to the growth in demand for transaction insurance.  

  • In general, dealmakers are more risk-averse today.   
  • The terms of the insurance products themselves have improved significantly since they were first introduced to the market.  
  • The coverage has improved, there are fewer standard exclusions, the pricing has come down and the underwriting process has been expedited.   
  • Technology and a higher level of sophistication are enabling insurers to complete their underwriting and be in a position to issue a policy within the timeframe of the overall deal negotiations. This process is commonly completed in two to three weeks.   
  • A history of successful claims under these policies has eliminated the early skepticism expressed by some. 

While representations and warranties insurance is the most commonly used transactional insurance product, contingent liability, tax liability and litigation buyout insurance are increasingly being used. They help overcome obstacles in the deal that the parties are unable to resolve through traditional contractual indemnification. 

The experienced team at Transactional Risk Advisors is here to help you determine the coverage needed to protect your potential investment. Contact us at 216-777-6100 or slee@oswaldcompanies.com.