M&A Insurance

M&A Insurance

At Vie we understand that negotiating the sale or purchase of a company or business can be a complex, lengthy and stressful process. This process is often made far more complex, with transactions delayed by negotiations over warranties and indemnities and the apportionment of risk between the parties, with some sellers (such as private equity investors) refusing to give warranties at all. With the risk being left to the non-institutional investors to assume, or the company being brought/sold at a discounted price. Many of the problems which arise over warranties and indemnities can be resolved by the use of warranty and indemnity insurance, which can be taken out by either the buyer or the seller.

What are warranties and indemnities
A warranty is a fact asserted by the seller to be true at the time of sale. A warranty usually covers assets, stocks and liabilities associated with the business being transferred. An indemnity is the clause that is triggered if the seller has made a false or inaccurate statement during the asset sale, known as a warranty breach, that causes the buyer a financial loss.
Warranty and indemnity insurance protects buyers and sellers from loss and litigation brought on by warranty breaches. Under warranty and indemnity insurance, the buyer claims against their insurer, rather than pursuing the seller. A warranty and indemnity policy will cover either party for a fixed amount, typically 10% of the acquisition price. Policies come into effect once the agreement has been settled and last three to six years. Statistically, most claims are made in the first two years following the sale.
Warranty and indemnity insurance offers numerous benefits, including: · Higher sales prices · Financial security for buyers and sellers · A cleaner exit for sellers · Complements private equity distribution terms · Protects the buyer and seller’s relationship · Better value for money than an escrow · Simplifies and speeds up negotiations
If you are considering a merger or acquisition, Vie’s team can find the best warranty and indemnity insurance product for you. Our industry knowledge means you will receive the most comprehensive coverage available at a competitive rate.
If you are contemplating warranty and indemnity insurance, there are some limitations worth noting. The Australian market caters for acquisitions valued between $5 million and $1 billion. However, it may not be financially viable if the sale is less than $10 million. A typical policy covers a fixed dollar amount for losses, therefore the Seller, depending on the terms of the relevant Sale & Purchase Agreement, may be liable for additional losses not covered by the policy (extraordinary losses). Coverage maybe limited by some standard exclusions and other specific exclusions, such as: · Breaches of which the buyer had prior knowledge · Some in-material risks, such as patent infringement · Some tax related issues · Liabilities related to asbestos or environmental issues · Revenue projections and other forward-looking speculations · Consequential losses or certain types of losses or multiple damages · Disputes related to wages and employee classifications You may be able to negotiate an excess coverage rider on some specific warranties.You are likely, however, to be charged an additional premium for this service. When considering any insurance product, it is best to seek professional advice. Our team will be happy to discuss with you and your legal team whether warranty and indemnity insurance is right for you.
Vie’s team will discuss your situation and develop your individual insurance profile. Your insurance profile includes the parties involved in the sale, the level of coverage required, the terms of your sale, your due diligence, and other relevant documents. Once we have a comprehensive understanding of your needs, our team will match you to the best products on the market. Your broker will assist you with an application to your preferred insurer. The insurer will also conduct their own due diligence. Finally, the specific terms of your policy are negotiated between you and the insurer with Vie’s advice. Warranty and indemnity insurance fees are typically calculated as a percentage of your sale price. Our team can discuss your individual needs and provide you with a estimated cost. · The premium is a one-time, upfront fee, generally calculated as a percentage of the coverage limit. Most policies have a minimum premium amount. This minimum fluctuates depending on the amount of policies on the market. · The insurer charges an upfront fee for completing a due diligence report as part of your application. · You may also be eligible for premium taxes, depending on your State or Territory.
A typical policy covers a dollar amount equal to 10% of the acquisition price. A retention of 1% is excluded from coverage. Policies last from 3 to 7 years, depending on your negotiated terms. As most claims occur within the first two years after transition, this provides adequate coverage for most people.